A few weeks ago I posted on Facebook about real estate investing. I was shocked by how many people commented and reached out with questions.
I am no expert, but I do invest in real estate and getting ready to do more. So, I’ll start sharing what I know and what I’m learning in hopes of helping others. There is a lot to share, so I’ll break it up across different posts. Figured the first one should be about my start.
I got started in real estate like many others … I needed a place to live.
After undergrad, I moved back home to start my new job as a gov’t consultant (the same company as Snowden). After a year, I was very ready to leave my parents house. The idea of renting felt like wasting money and at the time all the 23 year olds were buying property, so why not me.
It was 2007 and I was living in Mitchellville, MD, a suburb of Washington, DC. The real estate crash was in full force. Houses were losing up to 50% in value, foreclosures were rampant, and the truth behind subprime lending was being unearthed. Real estate was going through a dark time.
Sounds like opportunity!
Real estate investing ran in the family. After leaving our first home, my parents decided to keep it and rent it. With all it’s issues and bad tenants, that house put my brother & me through college. This example, coupled with my lifelong obsession with wealth, gave me a slightly different perspective on finding my new home.
While there were a lot of reasons to buy a home (including impressing women), but I wanted to make sure I was making a sound financial investment. First thing I did, I read “Investing In Real Estate” by Gary Eldred. This armed with a ton of basic knowledge about finding neighborhoods, thinking about rental income, and the nuances of financing.
The most important thing was allowing me to construct some basic criteria to guide my search:
- Priced under market
- Emotion and buying a “home” can lead to overpaying and bad decisions. I knew I wanted to get a good price in order to minimize costs and maximize profit.
- Some neighborhoods don’t lend themselves to renters. Rural, custom & unique property, and bad locations got ignored.
- Solid rental income potential
- I knew I wanted to leave and rent out my place, so I needed a neighborhood where rental income was high enough to support this.
- Within my budget
- With all the foreclosures around me, I understood the cost of buying too much house. I figured out how much I could afford and stuck to it.
Back then I used ZipRealty (but recommend Redfin now) because their realtors refunded part of their fee and there was a great online search. I looked for multi-units, condos, and single family houses. I searched DC & MD trying to find a place.
I learned a lot just visiting houses and talking to realtors. You start to understand what determines prices: floorplans, neighborhoods, renovation needed, etc. I saw triplexes missing a ceiling, duplexes in the hood, and condos with insane HOA fees. Each taught me something and helped hone my search.
Eventually I found my home. A 2 bed / 2 bath condo on short sale (house is selling for less than is owed to the bank … a sign of “distress”) in Largo, MD, 3 miles from my parents. Needed a little work, walking distance to the metro (subway in DC & MD), and next to several apartment buildings with good rents. All selling for $30k under other condos in the complex. And, it was nearby to family in case I needed help while I lived elsewhere.
I ran a lot of numbers.
- What will it rent for and will it cover my mortgage?
- How much money should I put down?
- If I go to grad school next year and need to rent, will I be OK?
- How long before I can sell and make a profit?
I wanted to know for certain that I was making a good decision. This was the most expensive purchase in my life.
2 years later, an opportunity to move to Atlanta would make me a landlord. This would officially start my real journey in real estate investing. But, making the transition wasn’t hard because I picked a property I knew could work.
After having had this condo for almost a decade now, I can look back to my younger self and say:
I was wrong! Oh man was I wrong.
The economy changed, rents changed, property values (which I guessed had stopped dropping) continued to drop, and I learned about bad property managers and an eviction.
Yet, with all of those issues it will still make me money in the long run. I learned a lot, which is making my second investment much smoother. I do believe in learning by doing and I was able to live through it.
I’ll share more on lessons learned and mistakes later, but there is one critical mistake I made that I would warn anyone against
I underestimated the costs of repairs, maintenance, and vacancy
Now, I aim for rents that are 2x the cost of the mortgage. This leaves room for repairs, vacancy, and property management fees. There were many other smaller mistakes, but this is the one that cost me. It’s actually the most important factor now when I look at new places to buy.
Ensuring a healthy cushion for costs is the smartest thing you can do in ensuring success. Now I run every potential deal through my custom excel spreadsheet to estimate profit, but rule of thumbs like rent >= 2x mortgage & insurance or rent >= 1% of the purchase price are good starting points.
Point of my story, it didn’t take a lot for me to get started. And even though there were issues, I learned and have survived. If you are thinking about adding real estate to your investments, don’t be afraid. There is a lot to like and it’s not as bad as you think to get started.