If you have ever thought about your financial future and ways to secure it, you probably thought about getting into real estate in one way or another. And if you've done any research on the topic, you've probably heard the term, real estate investing.
I remember the first time I heard the term real estate investing.
I was reading an article about Oprah and how she likes finding real estate properties as a hobby. My first thought was if Oprah does this, this must be something I need to pay attention to.
I did more research and found that many one-percenters swear by real estate investing. And as I learned more, it became more difficult to find any wealthy celebrities who didn't invest in real estate.
What is Real Estate Investing?
Real estate investing is the act of collecting multiple real estate properties (residential or commercial) to improve and make a profit from them, either actively or passively.
Its more than just buying a house to live in. Its purchasing other properties for other people to live in. One of the great things about real estate investing is that there are so many ways to do it. You can do house flipping, you can rent condos, you can buy full apartment complexes. But my favorite way is with residential homes that you rent out.
In this article, I am going to tell you in detail how I managed to do my first real estate investment deal while giving you the tips to get your first property started as well.
How I got started
I got started with real estate investing the same way many people get started with it, reading a book by Robert Kiyosaki. If the name does not sound familiar to you, hes most popularly known for his book Rich Dad, Poor Dad.
Here is how Robert's Process works.
- Buy a house with potential
- Renovate it
- Rent it out
- Get a passive income from your tenant every month
But as I dug deeper with learning this process, I realized that there are 100 other difficult steps that you have to take into account. Details such as making sure you find the right property, have the correct paperwork, and develop a lease that will protect you in extreme circumstances with a tenant.
I was feeling quite overwhelmed when I heard how many details were involved, so my husband and I joined a real estate investing mentorship group called Lifestyles Unlimited to show us the ropes.
This group not only shows you all the necessary steps to becoming successful real estate investors, but they also provide numerous resources for us to use. Resources include templates for different paperwork, a list of vendors to choose from, realtors who specialize in certain properties, and classes, webinars, and training to learn more.
My husband and I have heard enough horror stories to want to have an organization like this at our side. This was our first step. We went to the weekend classes that taught you all about doing your first deal, leasing, picking a suitable property, and even the renovations themselves.
We became members and didnt look back. One thing they did tell us is that we needed to have at least $15,000 in savings to be able to do this. Saving $15,000 was a bit of a challenge for us since we had both just recently graduated from college when we first started looking into this. But after a job switch and a few raises, we save $30,000 to go towards our real estate dreams.
Next, it was time for us to find our first property.
Finding a House
We needed to find the right property. We knew that this was an important step, and if I am honest, it intimidated us quite a bit.
The key to finding a good real estate investment property is that you have to find a house that has to be the worst in a good neighborhood. That gives you enough wiggle room to buy a home with a low enough cost and still have enough money to do the renovations.
Luckily, the real estate masterminds in our group did much of the due diligence for us and sent us several emails a day for different properties with all the details of how it will cash flow once all the work is done. One of the realtors from the group told us about one property in particular that he thought would be a good fit for us.
The house was in a decent neighborhood and cost $98,000. It would need about $30,000 worth of work. After accounting for the mortgage, taxes, and all the fees for closing, we would need $30,000 out of pocket to do this deal.
Luckily, this was what we had to work with, so we decided to take the plunge on this house.
Financing was probably the part that made us the most nervous.
But we felt confident in our membership group. We ended up closing twice on this property.
The first closing was with the hard money lender. The hard money lender will give you 70% of the after retail value. That means theyre willing to pay you for what you believe the house will amount to after you complete your renovations.
They send an inspector to your home, and the inspector says what they think your house will be valued at after you make the renovations you say youre going to make. In our case, the inspector said he believed it'd be worth $145,000a $47,000 profit.
That meant that we initially received $101,500 to pay for renovations. The catch is that you have a higher interest rate than a conventional loan, which means you have to be fast with your improvements so that you pay less in interest fees each month. Most investors try to get their renovations completed between 30 and 60 days to cut down on interest payments.
Once you finish renovations, you do another closing. You get the same inspector to your home to look at all the revisions and tell us if it indeed measures up to the price he originally said it would be. Then, you start the closing process again with a conventional lender.
Conventional lenders give you 80% of the actual value of the home, which is why they should go second in this process. So now, instead of me getting $78,400 for the original cost of the home, I am now getting $116,000 to pay off my hard money loan and have a more reasonable interest rate.
But first, we had to renovate.
Once we got to the renovation stage, we were able to relax a little bit more. The period between finding the property to closing was only two weeks. It was nice to be able to breathe a little and get excited that we were doing this!
But we had our work cut out for us before we could get a renter in this house.
We had to get a new roof, change the cabinets in the kitchen, new countertops and sink, new tile in the bathrooms, new cabinets in the bathrooms, new toilets, fresh paint on the interior and the exterior of the home, a new furnace, new light fixtures and hardware, new washer and dryer connections, and new windows.
Luckily, Chris works in the home building industry and knew how to do many of these things. And for those he did not do himself, he knew who to call! We were also very grateful to our mentorship group for providing us with some vendors who helped us with the renovations, including a general contractor.
One place we made sure to pay close attention to when making changes was the kitchen. My friend Melissa at Everyday Spokane, who recently did a renovation and sold her home, told me to make sure I don't cheapen out in the kitchen. That is the room that wowed people when she showed her home. We kept her words in mind and got new cabinets with quartz countertops and a Rurvati Crushed Granite Sink.
The countertops and sink were an absolute showstopper every time we showed the property. We liked the design so much we actually bought a Rurvati sink in a different design for our own home too! You can get one for yourself here on Amazon.
Chris did the washer-and-dryer hook up in the garage himself as well as the kitchen and bathroom cabinets. He also changed all the light fixtures in the house and fixed the wiring in the kitchen. I'll be honest, Chris did A LOT of the renovations in this house himself. And the best part was that he seemed to have some fun while doing it, which made this project even more enjoyable.
Once we finished the renovations, the before and after photos were like night and day. Our house went from being the worst house on the street to one of the best. We put a for rent sign out and started our journey of finding people to rent the property.
Finding A Renter
While Chris managed most of the renovations for our property, I lead the charge on finding a renter.
I took photos of all the rooms in the house and put them on the website called Cozy. I also posted the pictures on the listing on Zillow. Just to make sure I was covering all my bases, I posted a listing on Facebook Marketplace as well.
I didn't worry about there being a shortage of renters. However, I soon realized that there was a shortage of qualified renters. Both Zillow and Cozy offered background checks and credit checks for all applicants, which was a big help. The best part was that the services did not cost us anything as landlords. The potential renters paid a $30 application fee for Zillow to do a background and credit check along with their application.
This process made it easy to decide who was qualified to live in our rental property. We had pretty standard rules, like requiring a credit score of at least 600 and not having any eviction notices on their credit record. We also said that they needed to have their first month's rent and security deposit to move in.
We had over 50 applicants for the property, and most of them did not meet our requirements. Chris and I began to wonder if our requirements were too stringent. But after speaking to our mentor, she gave us examples of how it could go wrong if we decided to loosen our qualifications.
And they were bad. Really bad. Enough for us to tell people sorry, you dont meet our requirements even if their sob story made us want to let them stay there.
And then we finally found renters who we loved. They were great on paper and met all of our requirements. They paid the fees, signed our lease agreement, and were ready to move in within a week. We felt so lucky to find the world's best tenants. They are a young couple who are looking to rent their first house togetherhow sweet!
Our Little Hiccup with finding a renter
But then, the unexpected happened. Only a few days after they finally received the keys to move in, they asked us if there was a way to get out of the lease.
The stress of the move had taken a toll on their relationship, and they were breaking up. Obviously, the ex-couple no longer wanted to move into the house together.
Leasing the property
Chris and I used a lease template given to us by our rental mastermind group, so before replying to our new tenants, we made sure to review the rules on breaking the lease.
If we decided to let them out of the lease, it would be of our own goodwill. Technically, they could still be responsible for paying rent, whether they moved into the house or not. We were leaning towards letting them break the lease when we noticed a clause that we were so grateful we included.
In the case they broke the lease, they would have to pay 80% of one month's rent to go towards us finding a new renter to move in. On top of this, they would be responsible for paying the rent every month until we found someone new.
We let our tenants know about the clause and the amount they would owe for breaking the lease, which was a little over $1,000. They replied almost immediately with so much gratitude we were shocked. They were so grateful that we were allowing them to break the lease in the first place, they weren't worried about the fee and the rent until we found another renter.
I made the property available on Zillow, Facebook, and Cozy again and had no trouble getting people to view the property only days after we closed our listing online. We got lucky this time around. We were able to get a new couple in the property within 20 days.
We took the amount they owed for breaking the lease out of their security deposit and sent them a check for the rest they paid us. We had a happy renter in the property within a week of signing the new lease.
Conclusions and Takeaways
After everything was said and done, we now have a monthly cash flow of $319 of rental income after we pay the mortgage and other bills for the property. Being property managers has been pretty low key. Of course, there's the occasional maintenance hiccup, but nothing to complain about. Here are a few tips I would recommend for your first property.
Do your research
There are so many ways investing in real estate can go wrong. Find mentors or friends who have done it before and ask questions. And find vendors too who have done real estate investment deals before. We were incredibly grateful for our representatives for our hard money and conventional lenders since they held our hand the whole way.
Do background and credit checks on tenants
We met a lot of people we liked and way fewer people who actually qualified to live in our house. Don't skip this step. Make sure to call previous renters and jobs too!
Chris knew what he was doing for many of our renovations, but there were plenty where he hired help. And that is okay! Many people can probably do the work faster and better than you, and they may not be as costly as you think. I cannot speak highly enough about Lifestyles Unlimted. If you have the means to join their membership, I recommend you do. It helped us so much.
Are you interested in your first rental property? Here are a few resources you should check out.