After a few weeks away from writing about Financial Independence, it’s time to get back to it. Let’s get into Real Estate Investing! And no, I’m not talking about huge companies buying up properties to jack up rent prices. I’m talking about investing in property to provide serious value to someone while making money for your effort.
Today I’m going to share my experience of buying, rehabbing, and renting out my own real estate investment. Before that, though, let’s go over the basics.
What Is Real Estate Investing?
Real estate investing is the act of working with real estate to generate income/cash flow. You can accomplish this through a variety of methods, and it’s often more profitable than the slow-and-steady index fund route (assuming you ran your numbers well), but it also carries far more exposure to risk and liability.
After buying, rehabbing, and renting out an investment property myself, I can assure you that this route is not for everyone. If you don’t like the idea of managing costs, doing physical work, or the potential for tenant calls, this isn’t for you. Those that do have the knack (and stomach) for it will find a seriously profitable opportunity, though!
What Options Are There?
The most common RE investment methods are the Flip, the Wholesale, and the BRRRR. Let’s define them so you’re a bit more familiar.
The Flip
The Flip is what you see on TV all the time – people buying up a property, doing a complete overhaul inside (and often outside as well), then selling the property for a hefty profit. I see this path taken often, especially locally. Hop on Zillow or Realtor and take a look at some of the houses in your area that look really amazing inside. When did that property last sell? Oftentimes you can find that a property was purchased 3-4 months prior for significantly less than its selling price today. There’s your flip.
The Wholesale
The Wholesale is a brokering role of sorts. A wholesaler works to get potential sellers to sign a sale contract. The wholesaler sells that contract to an investor for a fee, who then buys the property. Investors looking to purchase properties without making tons of calls or “driving for dollars” and cruising neighborhoods to find deals are the customers here.
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat)
Next is the rehab with intent to rent out, most commonly using the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat). To accomplish this you need to buy a property below market value, do the rehab, then rent out the unit for continual passive income. This was the method I chose, as I wanted to make sure that my investment paid me consistently over time.
Rental properties have more to them than just rent, though! When you have a rental property, you of course need to set aside a portion of the rent for mortgage, capital expenditure, repairs, upgrades, etc. Anything beyond these necessary expenses is yours to take home. An additional benefit is the fact that when your tenants are paying down your mortgage, you get to capture that net worth increase as well!
The next step that real estate investors often take (I didn’t) is to do what’s called a “cash-out refinance”. This lets the investor refinance the property based on its after-rehab value and pull out upwards of 80% of the value.
In cash.
Tax-free.
Most would use this to reinvest in their next property, and then do the whole process again! This means that your first property, if purchased well, could theoretically fund the rest of your real estate portfolio. What a freaking deal.
My Experience With Real Estate Investing
I started off investing in real estate planning on taking the BRRRR path to build up a huge portfolio. The idea was to get a bunch of properties, step away from work, and just manage my properties for a few hours every month. My trajectory changed once I got into it, but we’ll get to that in a bit. For now let’s talk about my process, from start to finish.
Learning About Real Estate Investing
My first step was to learn as much as I possibly could about real estate investing. I read books and books about negotiation, being a landlord, investing in real estate, how to purchase a property…the list goes on and on. I also listened to the BiggerPockets Podcast and browsed the BiggerPockets forums endlessly – I was a sponge. While I learned, I was scouring the market for deals.
Consistent Review of MLS Websites (Zillow, Redfin, etc.)
While most investors would say that looking at the major realtor websites won’t get you the best deal, I still wanted to stay active and search. I didn’t have the time, resources, or knowledge to find off-market deals – I wouldn’t have even known how to know it it was a fair price! So I used Zillow and Realtor to find my property, and after 3 months of searching and visiting properties I finally found it. The numbers worked for me, the price was great, and there wasn’t a crazy amount of work to do.
Rentometer
An amazing resource available to landlords is Rentometer. This site lets you enter the basic details of the property you’re evaluating (square footage, number of rooms and bathrooms, etc.) and gives you an estimated rent you could expect based on similar properties nearby. This is outstanding and helped me to set a baseline expectation for rental income.
The Purchase Process
The purchase was easy, however I went through a realtor to buy the property. I didn’t have the liquid funds to purchase outright and also didn’t want to explore an alternative like seller financing as such a novice. We closed on the property less than a month after the off was accepted and I got to work!
Rehab
Ah, rehab – this is the fun part! It took a lot of time and work outside of my normal work schedule, but I loved it. Doing things with my hands has always been extremely satisfying to me, and this gave me visual progress every step of the way. Now that I have an understanding of material cost and the time it took for a novice to complete the work, I’d feel comfortable hiring a crew to handle the work.
Here are a couple of photos to show what I was working with.
Demolition
I started with the fun part: demo. I pulled up the linoleum floor in the kitchen and the carpet in the main living area and hallway while my brother-in-law tore up the bathroom floor. We found a surprise: the subfloor was rotting and needed to be replaced. By and large there wasn’t a whole lot to break down, which was nice when it came time to clean everything up.
We did have another surprise in store when I found asbestos tile under the linoleum. For those that don’t know, asbestos requires special removal procedures. Oftentimes people wind up leaving it due to the expense.
Key Takeaway: Enjoy demo, but be prepared for surprises (and a lot of cleanup!)
Rehab Upgrades
The upgrades we put into the place were a lot of work, but a lot of fun. Here’s a list:
- New vinyl plank flooring throughout the kitchen, living room, and main hallway (I was so pleased with this flooring that I put the same planks in my basement and home theater)
- New porcelain flooring, mirror, and faucets (vanity and shower) in the bathroom
- New doors to every room and leading out to the garage
- Stripped and repainted the cabinets white with new rubbed bronze hardware
- Re-surfaced the countertop (which was still in good shape) with a granite countertop coating
- Installed subway tile backsplash in the kitchen
- New white trim and quarter round throughout the house
- Painted the walls of all rooms a neutral light grey, and the ceilings white
- New front door and storm door
- New refrigerator
- New light fixtures and fans
The updates were a lot of fun and I learned a ton, but doing them myself (with the help of my brother in law) took a LOT of time.
Key Takeaway: Rehabbing a property is a LOT of fun, but if you aren’t well-versed in the work you may find yourself in way over your head. Make sure you have a friend (or brother in law!) to help you out if this is the case.
Renting It Out
The next part was renting the property to a great qualified tenant. I used Zillow for the listing and Cozy.co (now owned by Apartments.com) for the background check, credit check, and payment processing. Modern solutions make the process extremely easy.
I tried a few screening methods to start, and definitely made some starter mistakes. I held some open houses and made the process available to any qualified tenants, but I didn’t have them do the screening beforehand (which they had to pay for). This resulted in mostly unqualified applicants coming to ask if their “unique situation” would be an exception to the rule.
Time: wasted.
After that I only showed the property to tenants that were willing to pay for the credit and background checks beforehand, which whittled the number of applicants WAY down and left us with a much more reasonable time commitment to show the property.
Since renting it out, I’ve had no issues with tenants – some maintenance calls here and there, but the screening allowed me to remove the bad seeds that would have caused us a lot of stress.
Key Takeaway: Stay strong with your screening criteria and don’t budge for anyone. I require a 600 credit score, no evictions, no criminal record, and proof of employment and ability to pay for every adult that will live in the property.
Oh, and I do allow small dogs and cats. The catch is that the tenant will have to pay additional “pet rent” every month (per pet), a non-refundable pet fee, and a refundable pet deposit in case repairs are needed due to the animal.
Maintenance and Repairs
One of the biggest concerns I had was terrible tenants calling at all hours of the night for crazy maintenance requests or complaints. I wholeheartedly feel that this can largely be avoided by screening tenants properly, and I’ve had 0 calls after hours 4 years in, but there will always be things that go wrong. Here are the things I’ve gotten a call about with my rental.
- AC Unit required cleaning and a new remote
- Water heater failed and had to be replaced (went with a mom & pop shop)
- New water heater failed due to improper wiring (don’t go with a mom & pop shop), had to have another installed out of warranty due to improper installation
…And that’s about it! Not too bad, really – I updated things before renting the property out and have only had to deal with some water heater issues. I can’t be too upset about that.
Key Takeaways: Make sure you focus on cost-effective repairs by finding and using a handyman that can handle the things outside of your skillset. DIY is great when you can do the work, but if it’s something like electrical work that could result in the safety of your tenants being at risk, pay the bill and have someone else do it. Also, bid out the bigger work but be aware that the lowest price may not be the best option.
My Key Takeaways
And there you have it, a novice’s story of their first rental property from start to finish. Let’s summarize.
- The tenant selection process is absolutely key
- Enforce a minimum credit score (I require at least 600)
- Enforce a thorough background check and make no exceptions
- Require proof of income for all adults that will be living in the unit. Each must be able to fully pay for rent in my rental.
- Rehab the property only to the quality of the neighborhood
- I struggled with feeling like the house was “good enough”. I want my place to be exceptionally nice, but renters care less about that. If you make it really nice but the neighborhood is only so-so, you’ll probably find yourself frustrated when your nice property wasn’t taken care of when that tenant moves out.
- Be prepared for surprises
- You may find rot in the walls, terrible wiring, a rotting subfloor in a bathroom…anything. Be prepared to spend a little extra to take care of these surprises!
- Frame yourself as an employee of the business
- In order to avoid complications with your tenants asking to make exceptions or cut a deal on something, make sure that you clarify that management (your wife or husband!) doesn’t allow any shortcuts, and they’re a real hard ass.
- Get comfortable with DIY to save money and maximize your profit
- The name of the game is making money while providing a great home for your tenant. Don’t spend money needlessly! Focus on your ROI and monthly profits – do the work that you can on your own, and bid out the rest to make sure you’re getting a fair price.
- If you’re interested, get to researching. Learn all you can, run the numbers correctly, and have fun when you get your first investment property!
