It has now been a few months since I closed on my first property, had a showing, picked a tenant, signed the lease agreement, and started renting out the place. I’ve learned quite a few things during the process, and now that the tenant is moved in and situated, I figured now was a good time to share some of the knowledge I picked up.
Like they say, the best way to learn is to do it. Now that I’ve done it, here are some things I wish I knew when I started:
- When getting a pre-approval letter from your lender, try and fight for the maximum amount you can get for the purchase price and loan amount. If your maximum budget is $300,000, try and get a letter for $500,000+. This will help make your offer look stronger.
- Pick a real estate agent who is a shark. In real estate, every second counts. The only reason I won the property was because we made a hasty offer. We lost the original bid, but the initial winner couldn’t get financing. As a result, the listing agent countered all the runner-ups to see if we wanted to take another shot. My agent and I found out late in the evening about this new opportunity, so my agent stayed up past midnight that same night to draft up our revised offer. I signed immediately and we submitted our offer before anyone else. The seller was in a rush to sell, so accepted it right away. If we waited until the next morning, who knows how many other offers we would have been up against!
- Location is the most important thing to look for in a property. You can add granite counter-tops to any kitchen and make it pop. However, even a 4 bedroom, 3000 sq. ft house in the boonies will be worth less than a 1 bedroom condo close to downtown and jobs. When the market rebounds, it will also be that shack that skyrockets in value.
- Focus on cash-flow positive properties. I think the key for the first property is to generate profits right from the start. With a 30 year fixed loan, your gains should only increase over time as rent increases to outpace inflation. Since the mortgage is fixed, only the HOA (if there is one), property taxes and insurance can rise. Those should only increment up gradually, so your margins should grow over time. You can use these profits to fund other investments, or to help you save up for property #2. The time it takes to save up for each additional new property should be much quicker than the time it took to save up for the previous one.
- Cash is king. No type of financing offer will be able to directly compete with an all cash offer. By going in with all cash, you can remove loan and appraisal contingencies. Further, you can offer to close the deal in the minimum amount of time. It will be impossible for a financed offer to close in, say, 10 days. Advantage, cash.
- If you cannot do an all cash offer and require financing, you can still improve your offer by increasing the percentage of your downpayment. If you hold stock equities that you do not plan on selling, you should still count them toward your “proof of funds”. So, say you have $50,000 saved for a downpayment. If you have an additional taxable stock portfolio worth $60,000, you should combine the two to give you a total of $110,000. For a purchase price of $200,000, your downpayment would be 55% instead of just 25%. The 55% downpayment will look more attractive to the seller.
- The trick is, you can still opt to go with conventional financing later for the typical 20% or 25%. You won’t actually have to liquidate your stock portfolio. That is, you won’t be on the hook to come up with the 55%, even though you originally said you would! Tricky, tricky. But every advantage you can get counts!
- Protect yourself – don’t remove the loan contingency (unless you are going in with all cash, then you won’t have any contingencies)
- Protect yourself – don’t remove the appraisal contingency (unless all cash, or you are absolutely certain the property won’t appraise for less; otherwise you will overpay)
- If this is your first property, you can elect to go with “owner occupied” or “rental property”. If you go with “owner occupied”, you will typically need to come up with 20% downpayment. You will also be able to lock-in a lower interest rate. For “rental property”, you will be expected to have 25% downpayment ready.
- It is entirely possible to select “owner occupied”, even if you don’t actually intend on living there. Just make sure to contact the postal service and ask them to forward your mail to your actual residence. By default, once the deal closes, all your loan documents, titles, insurance, etc. will be delivered to your “owner occupied” address.
- Do not include the washer, dryer, or refrigerator. Problems with these appliances are common, so spare yourself the headache. You can provide one to the tenant if you have one to spare, but make it clear to them that you will not service these items. That is, they will be provided for the tenant’s convenience only.
- No pets! This should be written in the lease agreement. If you are ok with your tenant bringing in pets, make it known to them that this will cost extra. $40 to $50 extra each month is typical. You can never be too sure with pets, so you don’t want to take the risk of having one destroy your property.
- Here’s a link highlighting the most destructive breeds of dogs: