Let's Give Those First Time Buyers Some Rules!

General Real Estate Investing
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I see new real-estate investor hopefuls on this site, so I am going to help you out with my own personal rules:

  1. YOUR FIRST HOUSE NEEDS TO BE A PIECE OF CRAP.

Now you’re screaming, “WHAAT? Why would I want to buy a piece of crap?”

Okay. Calm down. Here’s why.

  1. You need to buy NOW, and if not now, then ASAP. This is the best buyer’s market in MY lifetime, so that’s in your lifetime, too. Interest rates are so low they’re unbelievable. 10 years ago you would have been laughed out of the room had you predicted today’s rates–3.5% for a 15-year loan, 4.2% for a 30-year. OMG!

  2. The inventory of homes is huge, with more foreclosures hitting every month. DO NOT WAIT for the bottom of the market, it is now. Are you gonna be one of those people who’ll say, “Gosh, I wish I had bought back in 2010 when they were practically GIVING houses away, man…”.

  3. Okay, you’ve got historical low interest rates, huge amounts of inventory, so what are you waiting for? Oh, you are not ready? You have debts? You don’t know enough about real estate?
    This is WHY you are going to buy crap. Yes, you are going to buy what you can afford. Right away, just quit dithering. Unless you have a great excuse like you live in Manhattan, or you are still in prison.

  4. What you buy will be YOUR PIECE OF CRAP, not your landlord’s! Instead of buying your landlord’s house for him every month (so nice of you) you can buy your own place.

  5. So if you are renting a nice place right now, look around and then kiss your granite counter tops and your double-door frig good-bye.
    What you can buy is almost always way uglier than what you can afford to rent. It’s your FIRST (piece of crap) place, remember? So just get over it.

  6. If the home you want to buy ALSO has granite counter tops and a mega-frig…STOP. It is not a piece of crap. You are not stretchhhhing enough! If you can afford those items, you can afford a duplex, a tri-plex, a FOURPLEX! Think about it…you can have tenants WHO MAKE YOUR MORTGAGE PAYMENT.

  7. You can live free, or cheaply. You can improve your building by sweating as you paint and clean (that’s sweat equity). You can save your income for that NEXT place, okay, maybe with the granite counter tops. Your 2 bedroom, 1 bath piece of crap apartment will look better and better to you. It will look better as you deposit your tenants’ rent checks into your bank account.

  8. Do it now. Do it soon. Do it imperfectly, blindly, half-scared to death. Just do it. Go buy a piece of crap.

Furnishedowner

2

One mans crap is another mans TREASURE

Nice post…

I remember my first piece of crap. Roof was gone due to Hurricane Francis I think it was in south florida. House was destoryed. Major rehabber. Took 5 months to complete working on and off. Then market started to go up… Sweat Equity was bucket loads

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enjoyed it as well…why do i feel like you made this post personally for me…lol…you’ve inspired me to take action

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I did do it personally for you! And for all the others trying to get it perfect. Don’t get it perfect, just get it done.

Good luck, and keep us posted on your path. You can inspire other newbies, nuivya.

Furnishedowner

5

Good post
Thanks for taking the time

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Thanks furnishedowner, great post…

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I would add:

“If you care what your friends think and are not rich already, you’ll never be rich. Most people don’t understand the sacrifice it takes to get there.”

As far as being a landlord, I know Rookie and fdjake don’t look at it as their preferred income strategy but it is the most accessible method of building wealth if you don’t have much money. I had many friends try to scare me out of being a landlord. I heard the horror stories and educated myself.

Here’s how my first property went:

–4 family house in a nice blue collar neighborhood

When I learned of this property,. the mortgage balance was $342K and was listed as a short sale for $299K. The property needed at least $50K in work. There were offers from buyers who would need FHA financing or utilize HUD programs. Those offers were between $280-$290K. There were cash offers in the $210K range. Here’s where it gets interesting.

      The owner had signed and addendum to the mortgage promising he would install a state mandated fire alarm system. He didn't have the alarm installed. Instead, he took the money that was intended for the alarm system installation and over-improved his unit with nice tile floors, recessed lighting, and an island in the kitchen. Because there was no alarm system, there was a lien on the property from the state fire marshal. A fire alarm needed to be installed before the title could be transferred to a new owner. This knocked all of the non-cash buyers out of the deal. Including me. I asked my agent the question; What if I bought the fire alarm? She had previously assumed I didn't have access to cash. She then talked with the state fire marshals office and asked if it would be possible to set up an escrow account for the fire alarm. At closing I would put $20K in escrow for the alarm. If I didn't start the alarm installation within 30 days of closing, the state would have an alarm put in with my $20K. I submitted an offer to the bank with a letter from the state fire marshal agreeing to the escrow deal and a proof of funds letter. I offered $228K and the bank accepted. It even gets more complicated.

       After my offer was accepted I would drive by the property just to see how it was doing. I drove by and saw a paper taped to the front door. It was a 2nd notice of violation from the RI Dept. of Health. I took the notice down to the "DOH" office and made an inquiry. They told me that a child living in the building had an extreme case of lead poisoning. The owner of the building had not taken care of the lead problem either! I asked what needed to be done for me to acquire the property. They said I needed to sign and assumption of risk form for the lead liability. This was risky. I was advised against it by a friend who happens to be an attorney. At $228K the property was a good deal. However, I knew the bank would not want the liability of a lead poisoned child. I was ready to walk away from the deal and loose the $1K earnest money deposit that I had given them. Knowing that the bank would want to get rid of this property fast, I revised my offer to $185K and they accepted!!
         I purchased a lead liability insurance policy in which coverage would start on the closing date.  Then, I went to the child's mother and showed her my concern for her sons health. I told her I would move their family into the beautifully remodeled owners unit temporarily. I would then completely remodel their apartment and they would move back into a completely rehabbed and updated unit. She broke down in tears when I offered this to her. I acquired the property for $185K and kept my promise to the mother. Within weeks his lead levels dramatically decreased. It was a win-win-win deal for me, the bank, and the lead-poisoned boy's family.
       
          I have since finished rehabbing the whole house. All of the tenants that came with the house have been turned over. I had one tenant voluntarily leave when they couldn't pay the rent. I immediately evicted another tenant who wasn't paying the previous owner.  I have had some challenges along the way. I was burned by a dishonest contractor. That's another story entirely.  
         I now have the "team" that Robert Kiyosaki talks about. I have a good CPA who also owns the brokerage where my agent is employed. That's how I found her. The attorney that I used for the eviction was recommended by my agent as well.  After the bad contractor, I took over the roll of general contractor for the project. I put ads on Craigslist looking for a licensed  electrician, plumber, carpenter and heating specialist. When I chose the people who would finish the project, I told them I was interested in building a long-term win-win relationship. I told them that I knew that they needed to make money but not try to take advantage of my good nature. In return they would give me a high quality workmanship at a fair wage and I would pay them promptly.  I have some good people willing to help me succeed.  And, I've learned a lot through the process. I'm now ready to take the next step.

As of now, this property is completely rehabbed and cashflowing nicely.

Pics:

http://www.postlets.com/rtpb/3700274

http://www.postlets.com/rtpb/4451150

Anybody can do this if they educate themselves!!! The fear will soon turn into excitement!! Have a plan and know the numbers!! Seek professional help if need be.

JP

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jfpen,
That is a great story! I especially liked, “then I revised the offer downward to $185K and they took it”.

Looking at the pictures, wouldn’t those units be good candidates for furnishing them and charging more rent? There’s much more management, but more income too. We get $65/day, $1950/month, for a fully-furnished, all-utilities paid 2-bedroom; $70/day, $2100/month for a 3-bedroom.

It all depends on your local market–how many traveling workers, transferees, and other users of temporary furnished housing are in your area. The occupancy rate of hotels and what they are charging.

jfpen is right. It takes sacrifice and guts to go out on that limb to buy property. While your friends are home watching TV.

Furnishedowner

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That’s exactly right! Some people will be jealous. Some people think it’s too much of a pain in the butt to do this. It is sometimes. It does take a lot of sacrifice, but what’s the other option - just keep doing what you’re doing and letting your boss/company tell you what you’re worth. This way you can determine how much you will ultimately make. I’ve been working between 12-16 hrs per day this week and taken a week of vacation to catch up on projects. Haven’t seen my wife or kids much which sucks. I worked in a house last night in the dark with only a flashlight for 6 hrs until midnight because I knew it needed to be done. We’ve put out over 11k this past month in rehab/repairs to get these 3 new houses ready. End result is that I already have people approved for these 3 houses that I just got a month ago. One two of them, I’m waiting on Section 8 for the move-in inspection. For the other house, the lady is currently living with her mother and is ready to move in at a moment’s notice so every day longer I go without getting that house done is just lost rent.
It takes sacrifice, but it is worth it if done correctly.

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justin
Your posts inspired me to get out of my comfort zone and buy. If you can work long hours then so can I. There’s no REIA Club here to go to, I gotta see to my own motivation. Family members just keep saying, “Why do it, don’t spend any more money, things are terrible, don’t take risks, how do you know that you can rent that out, you need to think about retiring, there’s not enough money in the bank account…”

For me, happiness is turning a 'lil piece of crap house into a money machine–ka-ching! I love the transformation. I know that it WILL pay itself off. Spend the money and time now and that house will pay me back.

Give us those numbers on those 3 houses when you get them done, so that others can see what can be done.

Furnishedowner

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Okay, my question is this. What if the house is not exactly a piece of crap but was acquired at a 50 percent discount? Should I downgrade it? Sell the granite and install the Formica? You got me thinking.

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Heck no you shouldn’t sell the granite. Why would you want to do that?

If you got a house at a 50% discount that is great. But a discount from what?

Furnishedowner

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Great post! I appreciate you taking the time to write that up for us noobs.

A couple of questions though… if someone has no rehab skills and/or limited to no money to sink into repairs, would you still stick to this advice? I get what you’re saying, and I don’t necessarily disagree with it, it just seems like going the “fixer” route, especially if someone has no experience with them, would be a pretty big gamble. I’ve heard more horror stories than I count from people who had rehab projects go south, and those were people who actually knew what they were doing.

For the record, I do understand that fixers will sell for much less than houses that have already been renovated with all the bells and whistles. And I also understand that, if done right, a fixer will provide a great rate of return. I certainly wouldn’t overpay for a house that has already been renovated, but the flip side of that is that I don’t think I would be real comfortable buying a place that needs major repairs (minor repairs – carpet, paint, etc. wouldn’t be a big deal, however).

Thanks again for posting. As I said in one of my other posts, I appreciate all the knowledge you guys are willing to share with the beginners!

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Seattleguy,
I would recommend wholesaling or bird-dogging if you have limited funds. Being “house poor” is no way to invest in RE.

JP

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Seattleguy,
If you are going to own real estate now or someday, you will have to learn about fixing houses. I knew nothing when I started. But I could CLEAN. Cleaning first, before repairs, has remained my mantra. I can’t even tell you how much money that has saved, how many replacement projects were canceled, because stuff got CLEANED–the stove, the walls, the floor, the bathtub. There have been some amazing transformations due to cleaning.

Now I have a cleaning lady/guy who does most of it. Just today I was debating–do we throw out this older, really dirty Bisque-colored electric stove or clean it? Guess the decision…first we tested it–does it WORK? Yep, all burners and oven heated right up. Now my cleaning gal has spent about 4 hours on that stove and it is gleaming inside and out. The labor cost is about $55. Can you buy an immaculately clean, working stove for $55? Unlikely. That was a good fixer decision.

We have just one problem, never before encountered! There are corpses of dead bugs visible behind the plexiglass control panel! Tomorrow we will open that all up and finish the job. We will also heat up that oven to 400 degrees for 30 minutes or so to make sure it has been sterilized of any critters living behind the panels. (We bag in plastic and use bug bombs for used appliances; but ovens you can just fire up).

I can also pull weeds. I pick up trash. I can rake a yard. I can buy bags of mulch and spread it in the crusty old flower beds. All of those jobs take no skill, only an eye that sees that it looks much better with those jobs done. Those are fixer jobs. That you can do.

So if you are going to buy a “fixer” rental, buy the really dirty one with purple walls. But it has a good heating system! Buy the one with the yard full of giant dog-dug holes and piles of smelly dog poop–but it has a good roof! Buy the problems that you can fix with sweat, rakes, shovels, trash bags and Mr. Clean. Before paint and carpet.

A dirty house IS a “pile of crap”. Buy the dirty house. Leave the gutted-out major rehab projects for contractors, they have the skills and money.

You need a check list when you are looking for a house. Then you need someone knowledgeable to inspect it. Maybe we should share our checklists here?
Mine is start at the top–roof, then electrical, plumbing, sewer, sewer clean-outs, heating, cooling. You WILL get to be an expert. Just start looking for that ugly piece of crap. Soon. And get ready to roll up your sleeves.

Furnishedowner

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Great response! I think I just misunderstood your post, or more specifically, I misinterpreted what you meant by “fixer.” But that’s not real surprising considering I’m still learning. :smile

Thanks again for taking the time to write out that response, as well as the initial post. I know you don’t have to and I know it probably took a while, so I appreciate you taking the time to share your knowledge with those of us who are still wet behind the ears.

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Yeah, I think you’re right. Wholesaling seems to be the consensus here when dealing with limited funds. I bought a home last year and also paid off some debt, so I’m in the process of trying to replenish my savings.

Thanks for the response!

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“9. Do it now. Do it soon. Do it imperfectly, blindly, half-scared to death. Just do it. Go buy a piece of crap.”

I like that.