Real Estate Investing #1: My first foray into the glamorous life of real estate investing
July 21, 2014
Brace yourself, it’s hot stuff!
In my ~ 4 good days this year, my friend and I put our heads together in a massive information dump. He taught me everything he could about his investing plans which we’d been discussing on and off for a few years. Once I felt on relatively firm footing, he put me in touch with the people he’s done business with and if you ever doubt the value of a great referral, well, don’t. I was well taken care of and due in large part, I’m sure, to the email that said I was his “VERY good friend, so take care of her.”
The strategy was basic:
1. Find a property in a good neighborhood with good amenities at a decent price;
2. Rent only to the best possible tenants [steady income, good references];
3. Maintain the property well, and if the value steadily increases, eventually sell it.
4. Result: Rake in the income. [Hahah… no, not really, as you’ll see.]
My loan preapproval only hinted at the paperwork nightmare to come. I’d asked about what sort of documentation would be needed so that I could prepare it ahead of time but irritatingly, the broker didn’t tell me until he needed everything yesterday. Nevertheless, the preapproval was completed really quickly and we were off to the races.
We vetted more than a couple dozen possibilities and I was prepared to take several more weeks in trying to find the right fit but in surprisingly short order, much much more quickly than I expected considering we had to raise my initial ceiling on how much I wanted to spend, we were able to place several bids.
[See what I mean about the value of energy? If I had a few months of that stuff, I’d be flying high!]
The “favorite” of the four, ideally located and best-priced, required a bit of back and forth, but nothing critical. The property wasn’t perfect, what ever is? but it was fine for the purpose: renting it out for income.
I then spent the next week digging out every piece of possible paperwork they could demand going back two, sometimes three, years and discovering that my records weren’t actually as good as I thought they were – it’s both humbling and frustrating to realize how much better my recordkeeping needs to be.
Another humbling realization: Buying outside the hotbed of Bay Area real estate is a huge eye opener. Properties elsewhere look ridiculously affordable in comparison. I had the down payment sitting in my bank account! Now we’re neither rich nor poor, we’re somewhere in the middle. But if I were to try and buy here? I’d need ten or twelve more years of savings, roughly.
Paperwork is so boring. I’d like to say it’s over-rated but obviously it’s not!
Hah well I wouldn’t disagree that paperwork is boring … š
Buying (and selling) property is such a huge huge headache! That being said, it can be a great investment (as you obviously know). Had we not bought our house 6 years ago, we would not be able to pay off all our debts AND have a good amount left over to build our savings back up now that we’re selling. Stick with it, it’ll be worth it in the long run!
I think your experience was the ideal one – I am hoping for the same! Thanks š
Which were the places you ended up looking at for rental properties? I also live in the Bay Area – and you don’t have to tell me twice, real estate is ridiculously inflated! At the savings rate I’m going, it would take me another 10 years just to afford a 20% down on a DECENT home. I’ve been doing research on other places I could afford property..
Hi Michelle, I’m not sharing location information at the moment but I wish you all the best in your try!
Exciting! I wish you the best of luck! In my dreams I’d want to do something similar but we’ll see if it ever happens one day š
Thanks so much Janelle! I think you’re doing something pretty awesome with your shop and your YT channel right now so I bet your time investment is much more certain than mine š Do let me know if you do give it a try.
If you’re not investing in the Bay Area, where are you investing? I’m just curious.
Having just looked at the rental housing in your area a few weeks ago, I’m still in sticker shock. Most communities on the Peninsula had ridiculously high rents for such a tiny footprint. I’m sure there are better deals out there that I didn’t run across since I was just dipping my toe into the waters and as I get to know the communities better that could change. However, I’m definitely starting out in East Bay where there were a couple attractive and reasonably affordable areas.
Sticker shock indeed! I keep looking at Zillow and stuff to acclimate myself to the prices but I don’t know if that’ll ever really happen š
I’m not sharing location here yet, but definitely not in the Bay Area š
hmmm… So here’s my Dumb Question of the Day: Unless you can rent the thing for considerably more than the cost of the PITI + maintenance costs, how is a rental property an effective investment? Even given the absurd rental costs in the Bay Area, property values also are so absurd you can’t buy anyplace for an amount that would allow you to charge a monthly rent that would cover the mortgage and upkeep.
Are you betting on the come, then? That real estate values will continue to inflate, so if you can simply break even on the rent and afford repairs and upkeep out of pocket, eventually you’ll be able to sell for a profit?
When M’hijito was living in Oakland, I saw a number of houses in the area just below Piedmont that had been broken up into two or three flats; they were selling in the range of a million. He and his roommates were paying $2400 for one such apartment that had three bedrooms; their downstairs neighbors were paying the same for a tiny, windowless one-bedroom that once had been the garage. Later they lived in a house in the Sunset District that had been divided into three flats, each of which was halfway decent — the landlady lived on the top floor. My house was paid off and at the time was worth about $250,000; I figured if I could net pretty close to that and paid it down on a $1 million loan and then threw a little more cash into the pot, renting two floors and living on one floor might be do-able — you could JUST BARELY make it if you could keep both flats rented at $2,400/month. But only because the entire property would represent a business and so costs of your own flat also would be deductible.
But what potential for headaches!! It looked like such a horror show that even though I deeply craved to move back to the Bay Area and very much wanted to live near my son, I just couldn’t justify the risk and the hassle factor.
Not a dumb question, just not sure if I wasn’t clear that I didn’t buy in the Bay Area – definitely too expensive! The mind reels at the amount of money I’d have to put in to keep positive cash flow there.
The first year will be minimal income, but it’ll be a combination of taking in a little more rent than I’m paying out in monthly expenses and waiting for the market prices to keep rising sufficiently to make back the costs and then some.
One of my goals is to buy a rental property, for me it is one of the best investments. My parents had a rental property before, but they sold it, I can say that it really brings a passive income as long as your tenants pay on time.
Were you ever involved in your parents’ rental? (meaning, did you get any hands on experience that you’d share?)
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