1st Investment Advice

General Real Estate Investing
1

Hello Everyone - seems like this is the place where a lot of people know a lot about real estate investing.

I’m looking for advice, suggestions or recommendations for my first investment. I’m actually going through a dilemma because I’m not sure whether to go with a 3-family rental first or a flip.

This would be my first home purchase in general. I don’t own a home right now – I rent. My idea was before I buy my first house to own and live in, I’d like to buy a rental for additional monthly income, so that I can afford a better home and then use the equity to get another rental etc. My big dream was to eventually get a bunch of rentals and live off the income and continue to invest, but I see how that could take a very long time.

However, I talked to my real estate agent and he advised me to do a flip first, and if it works out, do another flip, then buy my house, and then get a rental or two. Which makes sense because I’d be able to build up equity quicker.

I am well aware of the responsibilities that come with rentals, although I’m sure you guys would know of more than I do. Although I’m in healthcare finance now, not making a whole lot money, I do have construction background, so I’m not afraid of a flip either.

Then comes the question of how to get the mortgage for these properties. I have 12k cash but can sell one of my cars and get additional 13k for a total of 25k as a down payment. If I’m correct, with either a flip or a rental, I’ll have to get a conventional loan and 20% down, which leaves me very little money to rehab if I go with the flip, possibly, none.

There’s also the option of doing FHA with less, rehabbing the place with the remaining cash while living in it for a year, and then after a year, sell it gaining some equity. By then I should have enough to get another with a conventional loan, with money down and for rehab itself.

I’m really not sure which is the best way to go. Ideally I’d like to get into a house of my own within a year, while doing either the rental or a flip. Long term, I think I’d like to own a few rentals and live off that, but again, those are just dreams for now

Any and all feedback is greatly appreciated.

Thanks,
Konrad

2

Konrad,

My best advice to any beginner in real estate is … DON"T OVERPAY! In real estate, you make your money when you buy even though you don’t realize the profit until you sell. I try to have absolutely no more than 70% (60% is even better and safer) of After Repair Value (market value after all the repairs are done) into the home when it is time to sell. I can’t count the number of times I’ve lost bids to beginners outbidding me on listed properties only to break even or worse on their “deal”. In my area, if its listed in the MLS it is almost assuredly overpriced as an investment. The best deals are direct with the seller. Best of luck.

3

Thank you very much for the advice. Trying not to overpay would be ideal, although not knowing if I’m overpaying wouldn’t be evident till later to a newbie like me.

You mention that the best deals are made directly with the seller. How would I do that? Only look for properties ‘for sale by owner’? Where would I look for them? What are the benefits of dealing directly with the seller other than not having to have to pay commission to the realtor based on your experience? How would I know if I’m getting a good deal dealing directly with the seller if the realtor isn’t there to determine that? Would I use my best judgement or get it valued somehow?

Does that apply to flips and rentals?

Thanks in advance.

Konrad

4

The Realtor represents the seller. It’s his/her job to get the highest price for their client. You are the enemy in that relationship. . .unless you are working with a buyer’s agent. Still, good deals, meaning creative and profitable, will come only from dealing direct with the homeowner.

5

How would I do that: FSBo is one source of direct to owner. My best deals have come from “driving for dollars” by looking for empty/abandoned homes or the worst house in the neighbothoods where I want to buy. I look up the owners on the web and send them a letter. Also, I use the web to find properties where the owner lives out of state and send them letters. Bandit signs also work but they can also draw attention from municipal code officers so I put them out on Friday afternoons and pick them up Sunday afternoons.

In dealing directly with sellers you have eliminated the likelyhood of competing buyers and that keeps prices down as well as you can control the deal without interference from a third party agent. For example, in direct from seller purchases I have put as little as $10 down with signing the contract and an agent would likely advise a seller to not accept such a small earnest deposit.

You need to find a source of comps independent of the agent and MLS. In my area the “Association of County Tax Boards” has a web site that provides info on EVERY house including recent sales and that includes private sales as well as those thru agents. Its not as easy to use as the MLS but it does work.

My advice, in my opinion, applies to both flips and rentals. The less you pay for a property, the better you profit potential regardless of how you realize the profit. There are other factors beside low price in purchasing a property and you will need to weigh those factors against price to determine if it is the right deal for you.

6

Buying Direct from a Seller.
The benefits here is that often you can bypass the lender and buy the property on a land contract (also known as Subject To). The seller keeps paying their mortgage and you pay them for a couple of years. At the end of that time, you then go to the bank and get a loan or you sell the house (flip it) and pay off the seller.

Good leads come from looking for out of state owners, run down properties, abandoned homes and calling on rentals.

Advice about your first purchase.
Fix and flip properties can be a source of “quick” income but they also carry more risk than an income property (in my opinion). You can pay too much, underestimate repairs, hold it too long, run out of buyers etc. That being said, if it was me, I would consider buying a 2 - 4 unit property and live in one of the units. Your goal here is to live “rent free.” Make sure all the rent can cover your mortgage, taxes, insurance etc. Meanwhile, you put every extra dollar in the bank to buy your next rental. Then the income stream can be used to pay the mortgage on your personal home down the road.

How to Fix and Flip
If you want to go this route, consider living in the property while you renovate it. It reduces the holding costs; allows more time to fix it up and you can get owner occupancy loan rates. Just make sure your family will not mind living is managed chaos and dust.

Financing a Fix and Flip
There are some loan options for fixer-upper homes that allow the borrower to wrap the cost of the renovations into the loan. Here are a few:

FHA Loans: FHA which offers many different types of loans geared toward first home buyers and owner-occupants. They have programs that only require 3.5% down. Be aware, however, that loans with less than a 20% down payment will permanently carry mortgage insurance and their rate is higher than other lenders. Their 203(k) loan program even allows borrowers to wrap renovation costs into their mortgage when they buy a fixer-upper.

HomePath Loans: This is a labeling for loans on all Fannie Mae-owned foreclosure properties. They offer low down payment requirements, no required appraisals and they do not charge mortgage insurance. These loans are available both to owner occupied purchases and investors. The HomePath Renovation Mortgage is available to borrowers who plan on renovating the house.

7

Just for giggles…

“Land Contracts” are ‘not’ the same thing as “Subject To” agreements.

In “Subject To” deals, the deed transfers to the buyer.

In “Land Contract” deals, the deed stays in the seller’s name, until the buyer pays the seller off in full.

Whether we’re buying or selling, if the deed doesn’t transfer to the buyer, it cannot, by definition, be called “subject to.”

Just saying…

8

If you are just starting out without a lot of cash in the bank, I would advise you do the FHA owner occupied 203(k) loan. This let’s you finance most of the rehab costs. Plan to live in the property two years before you sell.

Then, all of your sale profit will be tax free. Since, two years will have passed and your FHA loan will be paid off from the proceeds of the sale, you can do it all over again. Buy another rehab, fix it up, occupy as your primary residence for two years, then keep all the profit tax free.

This should help you amass a sizable bankroll that will expand your options for the next round of property acquisitions.

9

DaveT’s advice to a beginner in your position may be one of the best I’ve read (apart from “Do Not Overpay”). If you’re working full time and fixing a property, it could take a year (maybe more) to rehab a property anyway, depending on the shape of the property you are buying. Another average 90 days on the market, another average 90 days to settle, and you’re only six months shy of the 2 year holding anyway. But remember, it must be your principal residence to the profit to be tax free, so make sure you establish residence.

10

I have a property I would like you to consider in Philadelphia. Purchase and rehab should come in at 40k, we should be able to sell for 60k or more.

11

Study the market properly and compare the nearest property price then go for it, but dont spend too much money

12

Investment is really a good option. First, understand that investing should be a long-term process. Markets fluctuate and you should try to have at least a 5 to 10 year time period for your investments.
Next, you should practice diversification. Diversification means that you should not have too much money in any one particular investment.
You should also consider how you divide your investments among different types of investments. It can serve as a logical starting point for your investment strategy.

13

Another option to consider is to owner finance a wholesale property. My mentor in San Antonio literally retired himself at 30 by owner financing $40,000 houses in the right neighborhoods.

Benefits for the investor - 15%+ cap rates, no repairs or renovations, great cash flow long term.

I find this much preferable to renting. Flipping is great, it’s one way to build up cash to buy more property, but it’s risky and you can get in trouble very easily.

JP