If you have considered real estate investing but discounted it because it seems out of reach and complex, you certainly aren’t alone. And you aren’t necessarily incorrect.
It is challenging to get started. It is difficult and overwhelming to learn the process. No matter how much you read about it, it’s unlikely you will feel comfortable enough to jump in and make a purchase.
But I’m here to say that buying your first rental home isn’t out of reach. And, yes, the steps involved are daunting and scary, but you can overcome them.
I was able to overcome my analysis paralysis by teaming up with someone that had more knowledge and experience than I did. This also solved my other obstacle, lack of sufficient funds to break into real estate investing.
With this one simple strategy, finding a partner more experience than myself, I was able to move forward and just get started.
Because that’s really what it boils down to. Just get started.
In this post I will outline exactly how I was able to move forward and finally make my first rental property investment. The process wasn’t nearly as scary as I anticipated and I’m super excited to move onto my next purchase!
How I Purchased My First Rental Property
Details of my purchase
Since I didn’t have enough money to buy (and rehab) a duplex on my own, I partnered with another investor. This helped me to learn to ropes and have someone close that could answer my questions and guide me through the process.
The #1 obstacle holding people back from investing in real estate is a lack of knowledge and experience.
Partnering is a great way to overcome this, as well as a lack of investment funds.
The main strategy we used for this purchase is the BRRRR method.
Check out Real Estate Investing Using The BRRRR Strategy to learn about this process.
Here is an outline of the steps it took to purchase my first rental.
- Cash purchase a duplex at auction
- This is where the skills of my partner were vital. He has experience in buying homes in foreclosure or at auction for a discount. Often you are unable to view the property before making an offer and you are bidding against other investors. Therefore, it takes some experience to learn this process.
- Once under agreement, have a home inspector and contractor walk through to search for any issues and provide an estimate of work needed.
- Complete escrow and purchase the property at 50/50 ownership.
- Hire the contractor to begin repairs.
- Fully replace the roof
- Some siding and new gutters
- New carpeting and linoleum in one of the kitchens
- Replace most of the kitchen in one of the units
- Paint full interior
- Replace most of the appliances
- Hire a property management company and establish details of services provided
- The property manager pays all utility bills
- Maintain a $400 repair balance, any repairs under $400 are taken care of without contacting me. Anything over this amount will require my input.
- Manage yard work
- Show property to prospective tenents
- Hands off management – I receive an email once a month that rent money has been deposited into my account and a downloadable invoice of all monthly transactions for the rental.
- Hire lawn maintenance
- Contact bank regarding refinance details
- Once 6 month mark is reached, begin refinance process
- Paperwork – gather and send all paperwork needed for loan approval
- Verification of lease – have property manager send to loan agent
- Appraisal – the bank picks and appraiser to hire, I worked with the appraiser and the property management company to schedule the walk-through. The bank hires the appraiser and I reimburse the bank for the expense.
- Home insurance – We already had home insurance throughout the rehab process, then I switched to a company of my choosing for insurance on a rental property
- Pay commission fee to partner for finding the property and managing the rehab – 4%
- Contact title company to switch title upon receival of funds
- Upon completion of refinance, transfer money to partner and switch title to my name
- Move funds over to high interest earning savings account and search for the next investment property – i.e. rinse and repeat!
The next step, now that I have my investment cash pulled back out, is to switch turns with my partner and repeat the process. The difference is that my partner will hold onto the property the next time around.
As with most things in life, there are some pros and cons to this transaction.
This system allows each of us to acquire homes beyond our personal investment budget. We essentially borrow 50% of the money needed to purchase and rehab the property then repay the loan with the cash-out refinance.
This process takes a long time. I am not a very patient person, I want to dive in and tackle everything at once. But with this strategy, the quickest I can work my way through a full cycle and purchase my own buy-and-hold rental is once a year. Realistically, more like once every 18 months.
Maybe I’d be able to purchase cheaper homes with conventional loans at a quicker rate, but my money would be locked into the purchase and I’d quickly run out of money. So the quickest I could save money for each downpayment is probably 18-24 months.
- It takes time to find a property that can be purchased below market value. This is key to the BRRRR strategy!
- Contractors take time to hire and projects get delayed. A 2 month rehab could take 5 months. If you take out a private or hard money loan to purchase the property, be sure to have the savings to make your monthly interest payments when the home is being remodeled and there are no tenants to bring in monthly income.
- The refinance takes time. It would be great if at the 6 month mark I started the refinance and 2 weeks later I had my money out, but in reality this process took me a full 2 months to muddle through. I had to schedule the appointment with the appraiser, give enough time to notify the tenants that the appraiser would be walking through, provide all the essential documents, give time for a credit check, the list goes on. It’s not a quick and easy process.
- Depending on the market, it could take time to find the right tenants.
What I learned for next time
- Now that I know what paperwork is required for the refinance process, I will put together an organized portfolio with everything the loan officer needs. Keep in mind, the contacts at the bank are people, too. Building a great relationship and making their life easier can help you out in the long run.
- Now that I understand the details and have some experience, I’ll be better at checking in and making decisions regarding the rehab process. For instance, it took a couple days to respond to the contractor regarding what type of flooring to put in, accepting a bid from a roofing company or whether or not to replace door handles in the home. These small details can be overwhelming when you are busy with life. Familiarity makes this process easier. With this little bit of experience I can now quickly make decisions like putting in laminate floor rather than carpet.
- I know that the process takes more time than expected. I’ll be better prepared for this and more patient next time.
- Every dollar spent is a dollar you may not see back in your pocket after the refinance. After a low appraisal I was only able to recover 40% of my initial investment rather than the full 100%. If I wasn’t receiving as much cash flow and I didn’t think the property would appreciate very well, I would probably sell the home to recover all of my money back plus the added value and repeat the process again. In other words, it would make a good fix-and-flip investment as well. But I’m choosing to hold onto it even though I didn’t recover as much of my money back as I wanted to.
- There are other options and it’s important to have an exit strategy. If for some reason I had incurred even more expenses, it would have made sense to sell it and try again with another property. Regardless, when done correctly, I still come out ahead. I only recovered 40% of my investment dollars, but I have a lot of equity in the home. I trust that the market will remain strong and I will continue collecting rent.
- Even if the market goes down and I lose equity in the home, I will still have a nice home, in a good area, near good jobs. I will have tenants and rent will cover the mortgage. Statistically speaking, if the market goes down, it will come back up again. So long as I’m collecting rent, I’m even or ahead.
- This process solidified my interest in REI. It’s a great way to build wealth and passive income.
For those of you that want to see the actual numbers, I condensed things down to the following tables:
|Loan Fees for Refinance||$8,188.00|
|Total invested before refi||$211,768.00|
|Personal cash Invested||$110,399.00|
|Actual Market Value||$270,000.00|
|Refinance @ 70%||$168,000.00|
|Cash back from refi||$46,661.00|
|Cash remaining in investment||$63,738.00|
|Equity in home||$102,000.00|
|Monthly Cash Flow||$490.00|
Cash-on-Cash return on investment: 9.28%
Related post: How To: Analyze Your First Rental Property
What if you don’t have enough cash?
There are a number of creative ways to borrow what you need. Do not let a lack of money stop you from investing in real estate. Here are some creative ways to work around this:
- Find a great deal first. There are so many other investors out there that don’t have the time to scout out every great deal around. Find the deal, then you will find the investor that is more than happy to partner with you. Not only will you be able to move forward with a purchase, you will have an experienced investor helping with the whole process.
- You can find other investors to potentially partner with a couple of different ways.
- At your local REI meetup group
- At BiggerPockets.com
- Borrow the money you need
- Private money lending – money borrowed from an individual
- Hard money lending – money borrowed from an institution
- Both of these methods rely on the deal you find rather than your personal credit worthiness
For more details on raising capital and the BRRRR method, check out Real Estate Investing Using The BRRRR Strategy.
There are also a couple of books which I highly recommend:
While it might seem like real estate investing is reserved for the savvy investor with a ton of extra cash lying around, that’s just not the case.
With the BRRRR strategy, and partnering with an investor more experienced than me, I was able to purchase a property outside of my means. Additionally, I was able to hold onto it with money back in my pocket and passive rent deposits into my bank account every month. What’s not to love about that??