I started learning about the business of real estate since May 2018 and recently closed on my first property in October 2018 and am about to officially become a landlord by signing my first lease in 2 days. BP has been a huge help to me along the way, greatly reducing the barrier to entry to this new venture and I wanted to post this in hopes it may help another new investor take that first step.
TL:DR: lessons learned are at the bottom!
Strategy
One thing that was apparent as I started to learn about real estate as a business, is there are dozens of ways to invest. In looking at just the numbers, I was initially most interested in multi-family as they seem to generally generate better returns. After speaking to a few friends that do REI as a side hustle, I decided I was going to manage the first property I purchase. I was terrified of this at first and initially planned to outsource to a property management company because I feel long term this is the path I need to take to scale. However I felt it would be good to learn the this part of the business as well such as setting rent, screening tenants, lease requirements etc. that will help me better vet and hold a PM company accountable when I do decide to hire one. With this requirement, I wanted to focus in an area within 20 minutes from my residence, and there is very limited multifamily inventory. So I narrowed my strategy to single family homes within two reputable school districts in my local area.
Execution
After I narrowed my focus on how I was going to invest, I found a realtor in the area and started sourcing properties. I leveraged the BP calculator to analyze any deal that met my criteria, and viewed many properties before I made my first offer. Going out and viewing properties is a time investment, but helped me better understand the market and better recognize a deal when it presented. Prior to making my first offer (which was not accepted) I had analyzed two homes that were "potentials" but I stalled (hard to make that first commitment) and they were gone fast. When the home I purchased came to market, I saw it immediately and submitted an offer the same day at asking price. A competing offer was submitted also and the selling agent requested "highest and best offer" which I simply added an "escalation" clause to the original offer and ended up getting it accepted for only $500 more than my original offer.
Going through the closing process, I utilized the in house services of the broker for settlement and financing, I’ll speak more to this in lessons learned. The house did appraise 3% higher than what I paid.
The house was in excellent shape except for the kitchen - it has a very poorly done remodel performed. I decided to replace the countertops, sink/faucet and backsplash. I went with a granite countertop which was a little more expensive (~$15/sqft), however it could be installed within 10 days opposed to a cheaper countertop from Lowes/HD which had an 8-10 week lead time. I wanted to get this rented as soon as possible to minimize my holding costs.
I listed the house and started showing it during the rehab. Ironically 2 other houses came on the market for rent on the same street as I was going through closing which concerned me. This did have an influence on how I set my rent, I went slightly less than where I had initially determined because there was more demand. I knew I had the better product and set the rent higher than the other homes, but I wanted to make sure I was landing the tenant that would potentially view these 3 homes.
To market the property I used Tenantcloud to syndicate the listing to Zillow, Trulia and a few other sites, duplicated the listing using Cozy to syndicate to Realtor, and created a Craigslist post. Within 5 days and 3 showings I had an application, screened the tenant using Rentprep, and had a holding deposit shortly thereafter!
Fortunately I have a great handyman whom completed all the work needed promptly and all the repairs to get the unit rent ready were completed within 3 weeks and the tenant will be moving in this weekend.
This unit will cashflow $500/month (part of this is attributed to putting 30% down) after accounting for all reserves.
Reflections/Lessons Learned
Even though this was not a “home run deal” I am happy I got over the initial fear of making this commitment. I bought a solid house that appraised well, rented quickly and will cashflow this gives me confidence that I am on the right path. Things that helped me:
- Learn your market, for me this was looking at new listings daily and getting out and viewing properties to gain knowledge which were priced right and presented an opportunity to earn.
- Streamline your deal analysis so you can assess the property quickly to not let a good deal pass you up. Had I not been prompt with this home, I would not have gotten it.
- Be conservative with your analysis so you have some buffers built in. For me it’s primarily with the rent price and the rehab cost that I use what I feel are minimum and maximum values to ensure I can still make an acceptable margin even if unexpected items present – for me it was having two other homes come for rent on the same street, I had to lower my targeted rent slightly, but it was still higher than how I ran my initial numbers to commit to purchasing the house.
- Take good pictures. I am convinced this was an important factor in why I was getting immediate calls and showings, my pictures look significantly better than the competing homes in the area. I waited for a sunny day and took HDR wide shots with an SLR camera/tripod with the windows open and all the lights on in the house. If you dont understand this, find a friend who does, good pictures will generate more leads.
- For the land lording, I highly recommend “The book on managing rental properties”. It was the only book I read on this subject, but I found it comprehensive and straight forward. Additionally they provide digital forms for all the necessary steps in the process to use as a starting point, this was by far my greatest value ratio with all the resources I consumed knowledge from to date. It saved me a ton of time and gave me confidence to become a landlord.
- Develop processes. I focus on how I can gain economies of scale as I add units. While you can certainly do a lot through email/spreadsheets at minimal cost, for me I want a platform I can utilize to run all aspects the property management side of the business. I looked at several products and chose TenantCloud and have been extremely happy with it so far. It offered the right balance of features/cost and highly recommend it, I can manage every aspect of this property on my phone with a minimal investment ($90/year up to 150 properties) I can offer more details to those interested.
Things that I can do better next time:
- My greatest lesson learned centers around my approach to purchasing this investment property and using a similar mindset of purchasing my residence. These are two very different things and somehow I did not recognize this until I went through the process. I used the traditional MLS exclusively, which can work but its slow and competitive. I am now focused on other means to source deals through networking and wholesalers. The other area is financing, I used just used the realtor financing out of convenience and chasing a low rate. This became a pain point once it went to underwriting, and they are just going to sell the loan so there is of little benefit for me for future transactions. Develop a relationship with a financial institution that knows you and work with them to ensure a smooth transaction.
- I left too much money in this property. Again leaning on my prior experience of purchasing my residence, I have a fair amount of equity in the home, but that equity is predominantly from my cash. I recognize I cannot scale this and am shifting my strategy to focus on a BRRRR for my next purchase, trying to minimize the cash I leave in the home when I refinance. I plan to leverage my HELOC to purchase/rehab my next property, and refinance after I have it rented to keep more money in my pocket for future deals.
- Network. I recently joined a local REIA group and hope to improve my deal sourcing through meeting like minded investors. BP and books are a great source of information, but I immediately recognize the benefit of communicating with others in your market.
