The House Hunt Begins!

After return­ing from the Chau­tauqua where I talked at length to Paula, I declared I was going to buy a mul­ti-fam­i­ly prop­er­ty to rent out and kick­start my pas­sive income stream.

That time is now!

I’ve spent the last sev­er­al months read­ing up on what seems like every blog post ever writ­ten about rent­ing out mul­ti-fam­i­ly prop­er­ties, how to look for good deals, what to look for in a prop­er­ty man­ag­er and hor­ror sto­ries galore.  I also took the time to get acquaint­ed with my local mar­ket. What was for sale, where they were for sale, what kind of prop­er­ties this area has, and tak­ing note of their gen­er­al con­di­tion.

Through out this process, I’ve been tak­ing very detailed notes so I can share them with you and hope­ful­ly make your process eas­i­er than mine. If not eas­i­er, at least slight­ly less scary. I’d say I’m pet­ri­fied, but that’s a bit too strong of a word. Ter­ri­fied.… maybe. Def­i­nite­ly appre­hen­sive. There’s so many ways this can go wrong, BUT there’s also tons of sce­nar­ios where every­thing turns out great and I make a boat­load of mon­ey. A for­mer cowork­er of mine and I grabbed a drink last week and were chat­ting about it. He has sim­i­lar aspi­ra­tions as I do, and went out of his way to assure me this was a good path. He fell into the land­lord­ing path, where­as I’m delib­er­at­ing seek­ing it out and doing it based on the math and fan­cy for­mu­las.

Fol­low the steps below and you’ll have a sol­id foun­da­tion on which to build your house hunt!

Step 1: Prepare

Ask your­self the fol­low­ing ques­tions: What kind of mort­gage are you going to get (FHA, VA, tra­di­tion­al, etc)? Do you have enough for a 20% down pay­ment to avoid expen­sive PMI? What kind of prop­er­ties are you look­ing at? Are there any in your area? What area of town do you want to buy in? Who do you want to rent to (stu­dents, young pro­fes­sion­als, fam­i­lies)? One arti­cle I found stat­ed you should have a short state­ment that encom­pass­es your bud­getary expec­ta­tions. Mine is this:

I will pur­chase one prop­er­ty with a pur­chase price of $155,000-$225,ooo once every 24 months.
I will finance the prop­er­ty using a VA Loan with a 5% down-pay­ment. Depend­ing on total pur­chase price,
I will bud­get for up to 2% in clos­ing costs and no more than 3% in repairs max­i­mum. The max­i­mum
all-in cost includ­ing down pay­ment, clos­ing costs, and repairs should be no more than $15,000.

I also plan to rent to fam­i­lies or young pro­fes­sion­als in a build­ing with up to 4 units. I will not be rent­ing to col­lege stu­dents. I have to live in one side for at least 12 months fol­low­ing clos­ing, so the prop­er­ty needs to have one emp­ty unit or a ten­ant on a month to month lease.

Step 2: Find a Lender

Thanks to my time spent serv­ing in the Air Force, I have access to a VA Loan. No min­i­mum down-pay­ment, and no PMI! There is a small fund­ing fee attached, but it’s neg­li­gi­ble in the long run so I’m not wor­ried about it. The trick is find­ing a lender that has expe­ri­ence with the kind of loan you want to get. Each type of loan has its own set of intri­ca­cies, so it’s pru­dent for you to get one that knows how to best uti­lize your pre­ferred loan. Thank­ful­ly, a cowork­er high­ly rec­om­mend­ed the lender he got his VA loan from so that was one less has­sle off my plate.

Once you find a lender, you’ll need to gath­er paper­work for every time you’ve sneezed in the last year. It’s not that bad, but you do have to come up with cred­it card state­ments, bank­ing state­ments, W-2’s, tax returns, and state­ments for any invest­ments you’ve got. Some of those can take a lot of effort to track down (past tax returns, I’m look­ing at you!), so make sure to start before you find your dream house. After you get all of your paper­work in, your lender will run your cred­it and give you a pre-qual­i­fi­ca­tion let­ter. This is so the sell­ers know you can actu­al­ly afford to buy the prop­er­ty like you say you can.

The cred­it check was a great test of all my var­i­ous cred­it track­ers. Each one let me know with­in 24 hours (one with­in 20 min­utes!) that some­one had done a hard pull of my cred­it. It was actu­al­ly kind of reas­sur­ing to know that I’d be informed imme­di­ate­ly should some­one try to do some­thing shady with my infor­ma­tion. My lender also told me my cred­it score from the ser­vice he used and it was way high­er than say, what Mint or Cred­it Kar­ma “guessti­mates”. (suck it Mint!) It’s nice to have that handy should I need financ­ing for any­thing else in the future. For some­one who doesn’t have much of a cred­it his­to­ry, I’m actu­al­ly a bit sur­prised it’s that high, but I’ve worked hard to get and main­tain a clean record for just this pur­pose.

Step 3: Find a Realtor

Sim­i­lar to find­ing a lender, you want to find a real­tor who under­stands what you’re try­ing to do. You waste pre­cious time and ener­gy if you have to explain mul­ti­ple times what you’re look­ing for, and I wouldn’t want that to cost you a good deal. My real­tor has expe­ri­ence with both VA loans and investors, so he’s more or less ide­al. He also hap­pens to be an acquain­tance, so we have a shared expe­ri­ence to build our pro­fes­sion­al rela­tion­ship on. I explained once what I was look­ing for and he adjust­ed the search area and para­me­ters accord­ing­ly.

From lit­er­al­ly almost everyone’s reac­tions, it’s high­ly unusu­al for a sin­gle 25-year-old female to want to buy a mul­ti-fam­i­ly invest­ment prop­er­ty. Some peo­ple are impressed when I tell them, and oth­ers react with a bit more skep­ti­cism. It’s incred­i­bly use­ful to have my real­tor there to defend me against the raised eye­brows and back-hand­ed com­pli­ments. He has the utmost con­fi­dence in my plans and my abil­i­ties, which comes in handy when peo­ple grill me on any­thing and every­thing relat­ed to land­lord­ing and house search­ing. For­tu­nate­ly, I’ve passed all the tests with fly­ing col­ors so far.

Step 4: Find a Property

Find a prop­er­ty to buy: it sounds so sim­ple when it’s put like that. How hard can it be, right?

It can get just the tinieeeeeeeeeeeeest bit com­pli­cat­ed. Just a wee bit. Hah, who am I kid­ding? Find­ing a good prop­er­ty takes ded­i­ca­tion, patience and a bit of luck. I’m for­tu­nate to be liv­ing in an area where the mar­ket isn’t com­plete­ly nuts like the Bay Area, Seat­tle, NY, Den­ver or Austin. I’ve friends look­ing to buy in some of those mar­kets and their sto­ries make me shud­der. I’d nev­er be able to get a prop­er­ty there with a small down-pay­ment on a VA loan. If you want a prop­er­ty there, you have to be the first in the door, with cash, will­ing to for­go any inspec­tions and fac­ing sig­nif­i­cant repairs. No thanks.

Any­ways.….….….. while I don’t have to deal with those, I have some unique chal­lenges in mine. To start with, there aren’t a ton of mul­ti-fam­i­ly prop­er­ties in the area. Most are on the sketchy side of town, or clus­tered around the col­leges, nei­ther of which fit my tar­get demo­graph­ics. At one point, there were 42 total prop­er­ties on the mar­ket, and only 8 of those fit the bare min­i­mum of my require­ments. I had to wait for new prop­er­ties to appear on the mar­ket, which didn’t come around very often since most peo­ple appar­ent­ly have some­thing against mov­ing hous­es dur­ing bliz­zards. Weird.

The prop­er­ties that did pop up on the mar­ket were usu­al­ly not that great. Most had issues with their foun­da­tions and/or water in the base­ment, and oth­ers had ten­ants in all the units. I’m look­ing for a prop­er­ty that’s more or less turnkey with a unit open so I can move in as per the con­di­tions of the VA loan.

Step 5: Make an Offer

You’ve done all the hard work and found a place you can live with (haha get it?). Maybe some tears were shed, some wine was drunk, lots of gas wast­ed going all over town but none of that mat­ters any­more. You’ve found The One. (side­note: find­ing a prop­er­ty to buy is a lot like dat­ing. What flaws are you will­ing to accept?)

Did someone say paperwork?
Did some­one say paper­work?

So your real­tor gets a stack of papers togeth­er that looks like it belongs in Office Space. Then, you get to go over all of it in excru­ci­at­ing detail. I’m fuss­ing a bit, but real­ly it’s incred­i­bly impor­tant to make sure you under­stand every sin­gle line.

BECAUSE THIS ISHUGE DEAL OMG THIS IS SO MUCH MONEY AND WHAT IFMAKEMISTAKE AND RUIN MY CREDIT FOREVER SERIOUSLY WHO SAIDWAS ADULT ENOUGH TO DO THIS AHHHHHHHHHHHH.

cough

Sor­ry for the freak out. That’ll prob­a­bly also go through your head as you look over all this paper­work. Stuff such as: earnest mon­ey, pur­chase price, clos­ing costs and who’s going to pay for them, what the sell­er is will­ing to leave behind and def­i­nite­ly wants to take with them, how long the inspec­tion peri­od is and what day you’re going to close.

After you make an offer, the sell­er can either counter or pass. If they counter, you can counter back and so on and so forth until one of you caves and accepts the other’s offer.

Step 6: Finish Everything Else

Then you maybe get to do some or all of the fol­low­ing: get the prop­er­ty inspect­ed (to include mold, radon and pests), get a rental cer­ti­fi­ca­tion (if it doesn’t have one already), get the sell­er and their stuff out, get the prop­er­ty to the con­di­tion as ear­li­er agreed upon, get all your paper­work for the loan processed, inter­view prop­er­ty man­age­ment com­pa­nies for the best fit and hire one, and then final­ly the keys are in your hand and you’re the own­er of THE WHOLE WORLD.….…. errrr I mean your prop­er­ty!

Help­ful ref­er­ences:
Every­thing from Paula at Afford Any­thing
Fru­gal Vagabond’s writ­ings on Real Estate invest­ing
Big­ger Pock­ets 

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3 thoughts on “The House Hunt Begins!

  1. Con­grat­u­la­tions on your future prop­er­ty! I hope you enjoy it. My wife and I just bought our first rental prop­er­ty last year at age 33. So far, so good. I would con­sid­er adding anoth­er one in anoth­er year or two.

    I would add one oth­er financ­ing source that I wish I had tak­en more advan­tage of. Since we own our own house and the rental prop­er­ty is just an invest­ment, we used a home equi­ty loan for about 20% of the pur­chase price. The home equi­ty loan is at 2.75%, but the rest is cov­ered by a $100,000 rental mort­gage at 4.25%. We actu­al­ly could’ve tak­en out a much larg­er home equi­ty loan. I wish I had, because the rate is so much bet­ter.

    Also, don’t neglect the “sketchy side” of town. I live in a “sketchy” town, and our rental is in anoth­er “sketchy” town. They only have that rep­u­ta­tion, but are actu­al­ly fine places to live. It’s a bit hard­er find­ing prospec­tive ten­ants if you’re not in the “hot” neigh­bor­hood, but on the oth­er side, the pur­chase prices are much low­er, and you won’t need to demand such a high rent to meet your expens­es.

  2. This is excel­lent. Many of the FI blogs start with the per­son already fair­ly far along in the jour­ney. They already own their prop­er­ty or they are already retired. It will be fun to watch some­one blog from the begin­ning of the jour­ney. Keep it up please!

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