I’m always shocked at how many people are thinking about or are interested in real estate investing.
I’m no expert, but I do invest in real estate and I’m currently ramping up my investing. The more deals I finish, books I read and investors I network with, the more I realize how much I’ve learned.
I want to share my story in hopes of answering questions and giving you a real example of how to get started.
My start was as simple as it comes … I just needed a place to live.
After undergrad, I moved back home with my parents to start my new job as a consultant in the greater Washington, D.C. area. A year later, I was ready to get the f*** out of my parents’ house. The idea of renting felt like wasting money and at the time all the 23-year-olds were buying property, so why not me?
It was 2007 and I was living in Mitchellville, MD, a suburb of Washington, DC. The real estate crash was in full force. Houses were losing up to 50% in value, foreclosures were rampant, and the truth behind subprime lending was being unearthed. Real estate was going through a dark time.
Sounds like opportunity to me!
Real estate investing runs in the family. After leaving our first home, my parents decided to keep it and rent it. Even with all it’s issues and bad tenants, that house put both my brother & I through college. This example, coupled with my lifelong obsession with generating wealth and financial freedom gave me an investor’s perspective on finding my new home.
While there are many reasons to buy a home, I wanted to make sure I was making a sound financial investment. First thing I did was read “Investing In Real Estate” by Gary Eldred. This armed me with a ton of basic knowledge about finding neighborhoods, thinking about rental income, and the nuances of financing.
A pivotal moment was deciding what type of real estate investor I wanted to become. A lot of people think of flipping houses when they hear real estate investing. I knew I wanted passive income, like my parents, and wanted to buy & hold. Buy & Hold investing is buying rental properties for long-term cash-flow and appreciation.
The most important thing it did was help me construct basic criteria to follow when looking for a home:
- Priced Under Market
- Paying the right price for your home is how you guarantee your money. Buying at the right price gives you room for surprises or hidden costs. It locks in your profit so you have options. If you pay the wrong price for a deal, it is impossible to recover and make money.
- For me, this meant looking at short sales, foreclosures, and houses that needed a little updating. I knew the savings would help ensure I was generating wealth with the purchase.
- Solid Rental Income
- Neighborhoods that are good for investment rental properties have a strong rental market. The area should be desirable and a great place to live. This helps ensure you can constantly find good tenants and keep your property rented.
- Everywhere I looked, I made sure to check the rental market for activity and high rents to be collected. I wanted to make sure that when I rented my home I would make a profit every month.
- Within my Budget
- Buying a house that is too expensive for a person’s income was one of the core reasons for the real estate crash of the 2000’s. People were being convinced to buy houses that were way too much for them to afford and then everything exploded.
- I had a budget and I stuck to it. I had some money saved for a down payment (which I ended up not using), a solid job and a good grasp of what I could afford.
Back then I used Zip Realty (but prefer Redfin now) because their realtors would pay you part of their fee as a refund. They also had a great online search tool (by 2007 standards). I looked for multi-units, condos, and single family houses. I searched DC & MD trying to find a place.
I learned a lot just visiting houses and talking to realtors. You start to understand what determines prices. Stuff like floorplans, neighborhoods, renovations needed, etc. I saw triplexes missing a ceiling, duplexes in the hood, and condos with insane H.O.A. (Home Owner’s Association) fees. Each taught me something and helped hone my search.
Eventually I found my home. A two bed / two bath condo on short sale (house is selling for less than is owed to the bank…a sign of “distress”) in Largo, MD, three miles from my parents’ home. It needed a little work, but was walking distance to the subway and was next to several apartment buildings with good and high rents. It was selling for $30k under other condos in the same complex and it was nearby to family, in case I needed help once I eventually moved out.
I ran a lot of numbers.
- What will it rent for and will it cover my mortgage?
- How much money should I put down?
- If I go to grad school next year and need to rent, will I be OK?
- How long before I can sell and make a profit?
I wanted to know for certain that I was making a good decision. This was the most expensive purchase in my life.
Two years later, an opportunity to move to Atlanta would make me a landlord. This would officially start my real journey in real estate investing. But, making the transition wasn’t hard because I picked a property I knew could work.
After having had this condo for almost a decade now, I can look back to my younger self and say:
I was wrong! Oh man, was I wrong.
The economy changed (aka a recession), rents changed, property values (which I thought had stopped dropping) continued to drop, and I learned about bad property managers and an eviction.
Yet, even with all of those issues it will still make me money in the end. I was able to buy this condo with 0% down. With someone currently paying my mortgage and more, development that is raising property values and rents, and a great tenant in place, I’m happy.
I learned a lot, which made my second investment property much smoother. I do believe in learning by doing and I was able to live through it.
There is one critical mistake I made I must warn you about:
I underestimated the costs of repairs, maintenance, and vacancy.
Now, I aim for rents that are 2x the cost of the mortgage. This leaves room for repairs, vacancy, and property management fees. There were many other smaller mistakes, but this is the one that cost me. It’s actually the most important factor now when I look at new places to buy.
Ensuring a healthy cushion for costs is the smartest thing you can do in ensuring success. Now I run every potential deal through my custom excel spreadsheet to estimate profit and return before I submit an offer. But, these basic rules of thumb lead my regular searches for new investment properties. Specifically:
Comparable rents are twice as much as the mortgage payment.
Comparable rents are 1% of the purchase price.
As you are looking at potential investment rental properties, these basic rules can help you filter the hundreds of homes that come up in your city. I use them when searching Redfin or Zillow for properties.
The point of my story is that it didn’t take a lot for me to get started. And even though there were issues, I learned and have survived. If you are thinking about adding real estate to your investments, don’t be afraid. There is a lot to like and it’s not as bad as you think to get started.
Are you interested in real estate investing? Already have some properties and have your own story to share? Leave us a comment and join the conversation.
Damien is a Personal Finance Nerd and former Facebook Product Manager who started Wealth Noir to help others find wealth. He actively invests in stocks, robo advisors, and cryptocurrency … but loves real estate investing. He holds an MBA from MIT and a Comp Sci & Econ degrees from Unv. of MD. He’s a proud dad, which is his biggest accomplishment.