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?)
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 IS A HUGE DEAL OMG THIS IS SO MUCH MONEY AND WHAT IF I MAKE A MISTAKE AND RUIN MY CREDIT FOREVER SERIOUSLY WHO SAID I WAS ADULT ENOUGH TO DO THIS AHHHHHHHHHHHH.
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!
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