How I Got Into Real Estate Investing at 22
I bought my first investment property (a triplex) when I was 22 back in 2013. Prior to making this purchase I had to prepare for nearly two years in order to set up the necessary financial infrastructure to make this purchase. This is the story about that process, the lessons I learned, and things that that I wish I had known beforehand. Unlike the many other articles and “guides” to real estate investing, I won’t be treating you like a novice. The reality is, only a small fraction of the people reading this article will use the information that I’m attempting to convey and that’s fine. If you’re like me and want a perspective that’s more than skin deep then this is for you.
My parents were average middle-class people and growing up, I did not have a “Rich Dad” mentor who would guide my financial education. It wasn’t until after I had made my first investment purchase that I had sought out my first mentor who was none other than my own landlord at the time (that’s a story for another time). During my journey towards acquiring my first rental property, the greatest difficulty I faced was the lack of detailed and specific information available to new investors. Most of the information I encountered were either very generic or “philosophical”, sure financial freedom sounds nice but what are the exact steps that I need to take? As someone who doesn’t come from wealth or parents with high financial IQ, it really made me realize why the middle-class and poor were at such a disadvantage when compared to the wealthy and financially educated class. The greatest barrier was not money but knowledge.
Part I: Getting Started
Now, back to the story at hand. As I mentioned the process of buying my first investment property began more than two years before my first purchase. The reason for this simple: qualifying for a loan. In my opinion, the reason why real estate is a far superior investment option compared to stocks is that no one is going to give you a 95% loan-to-value 30-year-fixed rate interest loan to buy stocks. Thanks to government subsidies, mortgages are the cheapest money you’ll ever get and it’s accessible to all investors, not just accredited investors.
However, in order to access this valuable resource, you’ll have to develop several important assets. These assets are: credit, income, and capital.
Credit: If you’re like me growing up, you’ve either been told many negative things about this subject or nothing at all. What I’ve learned is that credit is a tool and the way you use it will lead you either to wealth or ruin. As an investor you must discipline yourself to use credit wisely and care for it as if your life depends on it. Credit is one of the greatest barriers to entry for younger investors and that’s why you must start building it as soon as possible. Whether you get your credit history started with a secured card or become an authorized user on someone else’s card, the important thing is to start! I won’t go in further detail about this, you can look up resources like Credit Karma to answer your questions.
Income: Having a great credit score is a good start, but without any provable income, you’ll be hard pressed to qualify for any sort of loans. The ideal scenario is to have a steady salaried job which you’ve been working at for at least one year. You can qualify for a loan with self-employed income but it’s much harder to do so. Of course, loan regulations are constantly changing so you should find yourself a qualified mortgage broker to familiarize yourself with the details. Learning as much about loans and the various ways you can take advantage of them is something I wish I had done prior to buying my first investment.
Capital: Recently I’ve seen dozens of articles, books, and classes that offer you the opportunity to get into real estate investing with “No Money Required!”. Now I wouldn’t go as far to say that these people are all lying, but doing any sort of investing without any personal funds is both risky and foolish, especially if you’re a novice. If you’re the type of person who can’t manage to scrape together any savings to invest with, then your first priority should be to straighten out your personal finances, not investing in real estate. Acquiring sufficient capital to make a down payment on your property should be part of your preparation process. You should ideally prepare enough to make a 20% down payment, but 5% + closing costs should be the bare minimum.
I made the decision to go into real estate investing back when I was in high school. However, I didn’t really take any serious action until close to my second year of college. It took me quite a while to figure out exactly what I needed to buy my first property. Thanks to a family friend who was a mortgage broker, she explained to me the minimum requirements (listed above) that I needed to qualify for a loan. I started my credit history with a $500 secured credit card from a local credit union, and my parents were kind enough to bolster my credit score by adding me to one of their cards (like many middle income families, my parents had great credit but no money).
For my income, I had started an IT consulting company which I managed to net out about $50k in profits in the first year and about $80k in the second year. This was reflected on my tax returns for their respective years which allowed me to qualify for a loan. In hindsight, a salaried job would have made it easier to qualify but I might not have made as much considering my age at the time. Besides, it wasn’t until my second year of operating that business that I had learned about the requirements to get a loan. I had to make do with the situation at hand.
Finally, living at home and building my savings during that time allowed me to accumulate around $80k which was enough to make a down payment on a property. And so, with a low 700’s credit score, two years tax returns, and $80k in the bank I was off to find my very first investment property.
Part II: Finding Your Investment Property
The year was 2013. While the real estate market in the Seattle area was starting to pick up again, the great recession still loomed like a dark cloud and was never far from peoples thoughts. It was during this period that my naive and inexperienced self began the hunt for my very first investment property.
There are two important lessons that I learned during this and later periods. One is that the majority of people know nothing about real estate investing and taking advice from such people will only lead you to catastrophe. Two, this same principle applies to real estate agents as well. The only people who knows anything about real estate investing are real estate investors. I don’t care if the person who’s giving you advice is a CPA, financial adviser, managing broker of a real estate brokerage, or a successful business entrepreneur. Unless they’ve actually gone through the process of buying a property, listing it for rent, managing tenants, collecting rent, and spent a Sunday afternoon repairing a leaky roof; they don’t know anything about real estate investing.
On top of this, the majority of real estate investors are terrible investors. I would say that the percentage of successful real estate investors is probably equivalent to the percentage of successful stock investors. Many of these people became landlords/investors by accident, and as a result, their investments are likely to be either cash flow negative or just break even. So before you take advice from Uncle Bengee who rents out his former house in Minnesota, check to see that their investments are actually investments and not a poorly disguised liability.
Continuing on with my story, I followed the advice of my friends and family and I started my search by asking around for a good real estate agent to work with. I soon partnered up with an agent who, looking back now, was a mediocre agent at best and didn’t have the slightest clue about investment properties. But he was a likable character and had some very entertaining stories, not that this would help me in anyway.
With what little I knew I outlined a simple criteria for the type of property I wanted:
- Good location (meaning commuter friendly, developing area, and potential for growth)
- Cash flow positive
- Multifamily (I’ll go into more details)
- Within my price range ($200k-$300k)
I had decided early on to buy a multifamily property because based on my reasoning and research: multifamily properties benefit from fluctuation in income from vacancies (1/X% units vacant vs $0 income if a SFH is vacant), combined maintenance costs (one roof, one sewer, one structure), location convenience (1 address for all units instead of multiple addresses), and better cap rates in general. Of course, this is sacrificing greater appreciation and longer term tenants but the cost-benefit weighed in favor of multifamily for me.
There were a few properties that I considered prior to finding the triplex that I ultimately purchased, frankly if I could go back I would have looked at more properties and have done more research before making my purchase. I think I was more lucky with my timing and location than any smart decision making on my part, but the experience gained from making that initial leap of faith was the necessary jump start to my journey as a real estate investor.
The triplex I ended up buying was located in the South part of Seattle, it was an old property over 100 years old and frankly looked the part. It was a short-sale (which means the owner owed more than the listing price) with a listing price of $330k. Several things that caught my eye about this property was that it was 2 minutes from the highway on ramp, a 10 minute walk from the new light rail station, cash flow positive based on the rent numbers, and it was zoned for commercial use in an area surrounded by commercial properties. I made an offer of $300k for the property and the offer was eventually approved by the bank.
I found the property using Zillow while searching for multifamily properties in the greater Seattle area, the triplex had two 1 bedroom units and one 2 bedroom unit.
The rents were $690, $730, and $1000 respectively or $2420 total. At 25% down the monthly costs for mortgage, insurance, and taxes were about $1,500 with a 4.5% interest rate. I estimated about $300/month in maintenance and $200 in utilities for additional expenses. That would leave me about cashflow positive of about $420 a month. That’s about a 6% cash on cash return, it was nothing to write home about but I didn’t know any better at the time. I was just happy with the fact that it was cashflow positive. Of course at the time I didn’t account for any vacancies and definitely underestimated my maintenance expenses considering the age of the property.
The closing process went pretty smoothly despite being a short sale property. During the inspection contingency I did as much research about the property as I could. I checked the county records to look up the property history, previous sales, current and estimated property taxes, and any permits that were pulled for any renovations. Due to the unique zoning of the property, I made an appointment with the city permit department to learn more about the zoning benefits of the property. After speaking with a city planning representative they informed me that the property was a zero-lot-line property (meaning if developed the new structure can be built close to the edge of the property line), no parking spaces were required due to close public transit, and that the building height limit was going to be increased from 65 to 130 feet.
This was all very good news to me. After considering the current state of the property, I believed that if I had to sell the place down the road, it was more likely to be picked up by a developer instead of another landlord. What I learned from meeting with the city permit department was that the land would be worth a lot to any future developers.
Things I learned and things I wish I knew then:
- Turnkey: I would suggest for new investors to buy a more turnkey property than a more risky property that requires a lot more repairs and work. I think real estate investing is a big pill to swallow and it’s better to have your first investment be something more manageable. A catastrophe on your first investment will set you back quite a lot while a good but not killer first property will help set a good foundation for your future acquisitions while allowing you to decide whether or not real estate investing is for you.
- Patience: While decision paralysis is a real issue, I strongly believe being patient and meticulous is important to have a better understanding of your market and its current opportunities. I think if I had spent more time analyzing more opportunities, I would have likely found a even better cash flowing property.
- Inspector: For the novice real estate investor, a good inspector makes a world of difference. This is someone that unlike your realtor, your loan officer, and everyone else in the buying process is not incentivized by you closing the deal. I was not impressed by the inspector that I had for my first purchase, I think if I had someone more knowledgable and insightful I would have been more aware of the issues that I was buying into. I suggest getting referrals from other investors for inspectors that really dig into the details. You may not want inspectors referred by your agent because they may be incentivized to say less in order to prevent scaring new buyers away. Ask for samples of previous inspection reports to get a better idea of the service and information that the inspector will offer you.
- Rent: Don’t be afraid to raise rents to market levels. This is perhaps one of my biggest mistakes after buying my property. I simply renewed everyones leases and kept the rent the same for the three years that I owned the property. I probably lost tens of thousands of dollars by not increasing rents to market rates. Previous owners and landlords usually aren’t as aggressive in raising rents because they don’t want to deal with turnovers. Use resources like Craigslist, Zillow, and Rentometer to determine what market rent is for your property. It’s a good idea to take tours of other units and see how they compare to yours.
I hope that my story will help and inspire you to go forth on your own journey of real estate investing. If you have any questions or would like to request a write up on a different topic, please post your response below!