One of my goals this year is to prep to buy a house (for investments) for next year. Luckily, Nick did it 2 years back and is guiding me through the process and accelerating my real estate adventures.
I’m sharing the steps here and will use it as a way to “invest in public” as well. 🙂 Hope it’s helpful for you, a fellow budding real estate investor.
Steps (last updated @February 26, 2023)
- after down payment budget, set an income/cashflow goal first and then determine whether prices in your area support the P/E ratio you need, esp including maintenance, capex, etc. otherwise you’re taking on a mortgage hoping for appreciation. there’s no determining ent and BATNA for buying a house is much easier to deal with than for failing to fill vacancy
- def do rent analysis to see if cashflow neutral or positive even if rough
- depending on loan, may need to pay >0 points to close
Step 1: Figure out rough estimates of what you want to buy.
⭐ Michigan → Royal Oak + Berkley towns. Why? Nick recommends and knows the area. Not bad prices.
- Royal Oak = college grads or family
- Berkley = mor family
⭐ Mid-career professional working high paying jobs (in cars, etc.). Already or soon to start a family. 2BR-3BR. Why? Good range size for this persona, and within budget of what I’d be willing to invest in
⭐ Price goal:
$350k ($300-400k roughly)
- could probably do around $300k, but going to pick higher end at $350k in case. I’d also be ok with a smaller house at 2BR, which a $350k budget could cover
- Figure out what your rough budget is for a down payment and choose an area, size and range that you’re comfortable with.
- Ideally you or someone else knows the area well enough to determine if it’s a good investment.
- Think about where you might see yourself living in as a benchmark for whether others would consider living there as well.
Step 2: Set saving goals to work backwards from (how much to save and until when)
⭐ Downpayment estimate:
97,500 = 350k (goal house price) * .25 (rough % for downpayment) + 10k (other fees)
⭐ June 2023 — 16 months from @February 26, 2023
- 97,500 / 16 = 6,093.75 saved per month
- I’d have to give up… virtually all of my net salary monthly plus some.
- (97500 - 20000) / 16 = 4,843 saved per month
- Seems more feasible — but I’d have to move a large part of my ‘investment’ bucket (95%) to only focus on real estate vs. other investments
- Target amount: down payments are usually 25% (you get better interest rates the higher the down is) + ~10k buffer (for title and other processing expenses)
- For timing: consider market conditions — When do I want to liquidate cash? When do I think we’ll be roughly out of a recession.
- Feasibility > the actual date.
Step 3: Find a house, with your realtor.
⭐ Jake - the realtor who helped Nick out.
- Heavily consider finding a house with a realtor. It’s virtually free for you as the seller is the one that pays them in rent. They organize all of the trips, and also give you lots of tips about the area, types of things to look out for, etc.
- Realtors have sophisticated search tools: MLS database.
- Be more rather than less opinionated about the kind of house you want - it helps the realtor with the search.
Step 4: Find a loan with a good interest rate
- Good: 3.25%. Now (Jan 2023): bad (6-7%)
- How do you find loans? Very easy — banks, Rocket Mortgage, Fannie Mae. Or search: “Rental Property Loans” on Google!
- Why do you want to find a loan and a realtor/broker at roughly the same time?
- Shorten the time it takes to get a mortgage.
- You want to have everything ready when you send an offer (bank statements, pre-approval for a loan), otherwise someone might grab it from you.
- Credit checks?
- Don’t hard pull on credit checks such that it impacts your credit score
- Tip: if you do it once, for the next month, it’ll be “free” with no impact
Step 5: Send an offer
- After you are accepted, it’s all a waiting game. Realtor, Broker and Title Company work together to close the deal (all incentivized)
- Make sure your money is in a checking account so:
- You can get 1-2 month statements for proof. Helps with the loan.
- Easy liquidate your money to pay the downpayment and close the offer.
Step 6: Find a property manager
- What does a prop manager do?
- Will help find a tenant if you don’t have one. Payment is usually first month’s rent and 6-8% in fees. Or you can find your own tenant.
- Especially if you’re away, the property manager can deal with all your tenants’ requests, broken fixtures, etc. They have contacts and deals with other people locally to help out on this.
Step 7: Determine rent.
- #1 Goal: be cashflow positive