I bought my first investment property (a “duplex”) when I was 22. Prior to making this purchase I had to prepare for nearly two years in order to set up the necessary financial infrastructure to make this purchase. This is the story about that process, the lessons I learned, and things that that I wish I had known beforehand. Unlike the many other articles and “guides” to real estate investing, I won’t be treating you like a novice. The reality is, only a small fraction of the people reading this article will use the information that I’m attempting to convey and that’s fine. If you’re like me and want a perspective that’s more than skin deep, then this is for you.
My parents were average middle-class people and growing up, I did not have a “Rich Dad” mentor who would guide my financial education. During my journey towards acquiring my first rental property, the greatest difficulty I faced was the lack of detailed and specific information available to new investors. Most of the information I encountered were either very generic or “philosophical”, sure financial freedom sounds nice but what are the exact steps that I need to take? As someone who doesn’t come from wealth or parents with high financial IQ, it really made me realize why the middle-class and poor were at such a disadvantage when compared to the wealthy and financially educated class. The greatest barrier was not money but knowledge.
Part I: Getting Started
Now, back to the story at hand. As I mentioned the process of buying my first investment property began more than two years before my first purchase. The reason for this simple: qualifying for a loan. In my opinion, the reason why real estate is a far superior investment option compared to stocks is that no one is going to give you a 95% loan-to-value 30-year-fixed rate interest to buy stocks. Thanks to government subsidies, mortgages are the cheapest money you’ll ever get and it’s accessible to all investors, not just accredited investors.
However, in order to access this valuable resource, you’ll have to develop several important assets. These assets are: credit, income, and capital.
Credit: If you’re like me growing up, you’ve either been told many negative things about this subject or nothing at all. What I’ve learned is that credit is a tool and the way you use it will lead you either to wealth or ruin. As an investor you must discipline yourself to use credit wisely and care for it as if your life depends on it. Credit is one of the greatest barriers to entry for younger investors and that’s why you must start building it as soon as possible. Whether you get your credit history started with a secured card or become an authorized user on someone else’s card, the important thing is to start! I won’t go in further detail about this, you can look up resources like Credit Karma to answer your questions. Income: Having a great credit score is a good start, but without any provable income, you’ll be hard pressed to qualify for any sort of loans. The ideal scenario is to have a steady salaried job which you’ve been working at for at least one year or you are in a related field to your education. You can qualify for a loan with self-employed income but it’s much harder to do so. Of course, loan regulations are constantly changing so you should find yourself a qualified mortgage broker to familiarize yourself with the details. Learning as much about loans and the various ways you can take advantage of them is something I wish I had done prior to buying my first investment.
Capital: Recently I’ve seen dozens of articles, books, and classes that offer you the opportunity to get into real estate investing with “No Money Required!”. Now I wouldn’t go as far to say that these people are all lying, but doing any sort of investing without any personal funds is both risky and foolish, especially if you’re a novice. If you’re the type of person who can’t manage to scrape together any savings to invest with, then your first priority should be to straighten out your personal finances, not investing in real estate. Acquiring sufficient capital to make a down payment on your property should be part of your preparation process. You should ideally prepare enough to make a 5% down payment, but 3.5% + closing costs should be the bare minimum.
I made the decision to go into real estate investing back when I was in high school. However, I didn’t really take any serious action until close to my second year of college. It took me quite a while to figure out exactly what I needed to buy my first property. I started my credit history with a $500 secured credit card.
For my income, I had started A project engineering position in the construction industry making a decent salary but nothing extra ordinary. In hindsight, a salaried job in my related field of study was one of the best financial decisions I made, as it made me bankable immediately after graduation.
Finally, living at home and building my savings during that time allowed me to accumulate around 20k in 5 months which was enough to make a down payment on a property. And so, with a mid 700’s credit score, $20k in the bank I was off to find my very first investment property.
Part II: Finding Your Investment Property in the year 2022 brought its own unique challenges. While the real estate market in the Dallas area was scorching hot, and everyone was paying well over asking, the foreseeable correction in the market still loomed like a dark cloud and was never far from my thoughts. It was during this period that my naive and inexperienced self-began the hunt for my very first investment property anyways.
There are two important lessons that I learned during this. One is that the majority of people know nothing about real estate investing and taking advice from such people will only lead you to catastrophe. Two, this same principle applies to real estate agents as well. The only people who know anything about real estate investing are real estate investors. I don’t care if the person who’s giving you advice is a CPA, financial adviser, managing broker of a real estate brokerage, or a successful business entrepreneur. Unless they’ve actually gone through the process of buying a property, listing it for rent, managing tenants, collecting rent, and spent a Sunday afternoon repairing a leaky roof; they don’t know anything about real estate investing. On top of this, the majority of real estate investors are terrible investors. I would say that the percentage of successful real estate investors is probably equivalent to the percentage of successful stock investors. Many of these people became landlords/investors by accident, and as a result, their investments are likely to be either cash flow negative or just break even. So before you take advice from Uncle Billy who rents out his former house in Minnesota, check to see that their investments are actually investments and not a poorly disguised liability.
With what little I knew I outlined a simple criteria for the type of property I wanted:
Good location (meaning commuter friendly, developing area, and potential for growth) Cash flow positive Multifamily (I’ll go into more details) Within my price range ($300k-$400k)
I had decided early on to buy a multifamily property because based on my reasoning and research: multifamily properties benefit from fluctuation in income from vacancies (1/X% units vacant vs $0 income if a SFH is vacant), combined maintenance costs (one roof, one sewer, one structure), location convenience (1 address for all units instead of multiple addresses), and better cap rates in general. Of course, this is sacrificing greater appreciation and longer term tenants but the cost-benefit weighed in favor of multifamily for me.
There were a few properties that I considered prior to finding the duplex that I ultimately purchased, frankly if I could go back I would have looked at more properties and have done more research before making my purchase but with how hot the market is I didn’t have that opportunity. I think I was more lucky with my timing and location than any smart decision making on my part, but the experience gained from making that initial leap of faith was the necessary jump start to my journey as a real estate investor.
The Duplex I ended up buying was located in the South part of Dallas, it was an old property over 50 years old and frankly looked the part with a listing price of $335k. Several things that caught my eye about this property was that it was 2 minutes from the highway on ramp and cash flow positive. I made an offer of $345k (10k over with 5k back at closing) for the property and the offer was eventually accepted.
I found the property using Zillow while searching for multifamily properties in the greater Dallas area, the Duplex which isn't a true Duplex was a main house (4bed 2 Bath) with an ADU that has (2 bed 1 bath). The rents of the main house is $2150 and the ADU $1100. At 5% down the monthly costs for mortgage, insurance, and taxes were about $2,100 with a 3.49% interest rate. That would leave me about cashflow positive of about $1100 a month. Of course at the time I didn't account for any vacancies and definitely underestimated my maintenance expenses considering the age of the property. The closing process went pretty smoothly. During the inspection contingency I did as much research about the property as I could. I checked the county records to look up the property history, previous sales, current and estimated property taxes, and any permits that were pulled for any renovations. Due to the unique zoning of the property, I made an appointment with the city permit department to learn more about the zoning benefits of the property.
Turnkey: I would suggest for new investors to buy a more turnkey property than a more risky property that requires a lot more repairs and work. I think real estate investing is a big pill to swallow and it’s better to have your first investment be something more manageable. A catastrophe on your first investment will set you back quite a lot while a good but not killer first property will help set a good foundation for your future acquisitions while allowing you to decide whether or not real estate investing is for you.
Patience: While decision paralysis is a real issue, I strongly believe being patient and meticulous is important to have a better understanding of your market and its current opportunities. I specifically purchased the property I did because the main house was fully renovated and could be rented out immediately. I would move in the ADU and renovate it, I added a privacy fence a separate mail box and a few other things.
Inspector: For the novice real estate investor, a good inspector makes a world of difference. This is someone that unlike your realtor, your loan officer, and everyone else in the buying process is not incentivized by you closing the deal. I was not impressed by the inspector that I had for my first purchase, I think if I had someone more knowledgeable and insightful, I would have been more aware of the issues that I was buying into. I suggest getting referrals from other investors for inspectors that really dig into the details. You may not want inspectors referred by your agent because they may be incentivized to say less to prevent scaring new buyers away. Ask for samples of previous inspection reports to get a better idea of the service and information that the inspector will offer you.
I hope this story inspires and educates those who have a desire to dive into real estate investing, I truly believe this wealth vehicle has the opportunity to change my entire world view and make every financial goal I have ever had a reality. With hard work and dedication and education this industry provides extreme wealth creation opportunity. Stay disciplined, stay consistent and the money will come. Good luck to you all, I would love the opportunity to learn so please connect with me here on Bigger Pockets and reach out to me anytime!
