Born for real estate
My first investment property cost 50 pretend dollars, was green, and was the size of a pebble.
My second investment property cost 350,000 real dollars, was brick, and 1,800 square feet.
I bought both before I had my first home to live in.
If you are thinking about buying an investment property before buying your first home to live in, I hope you can learn from my experience.
Monopoly was one of my favorite board games growing up.
I took it very seriously. In a family of six kids, we were lucky to finish the game without the little houses flying off the board.
But I did everything I could to get as much pretend rent money as possible.
I stacked houses around the board where the pieces were headed, I sold and bought houses at a furious rate, I mortgaged properties to buy more houses.
After losing a couple of times, I realized that the key to the game was owning the right properties, in the right area at the right time.
Knowing this, I started to win more — although many of the games had no winner. I had a tolerance to play the game for 5 hours at a time, which many of my brothers and sisters did not have.
Playing monopoly as a kid was the first clue. Later in life it became apparent that I had been bit by the real estate bug.
I have been involved in real estate as an agent in Northern VA since age 25.
I bought an investment property in 2014, and it was before I had a home to live in.
Staying Growth Minded
I have, since I bought this property, purchased several more properties, and continue to help clients invest in real estate as a licensed Realtor in Virginia.
I have learned through this journey that knowledge is power. Follow the link for the books I recommend for getting started in real estate.
The investment property
The decision I made was a quick one. The property had tenants in it that the owner did not want to disturb.
In the seller’s case, the plan was not to put the home on the market, but find someone to buy the property and keep the tenants in place in a private sale.
We agreed on a fair price for the home and the seller also held the mortgage note back.
I put down a down payment that stretched me. Back then, I did not keep a budget or really do much financial planning at all.
I just wanted to start to build my equity as quickly as I could. In this case, the property had good “bones”, but would need some work down the line.
Once the contract was in place, I closed on the home. I was living in a small basement apartment about 20 minutes away.
I finally had my first investment property, and it was also my first property ever. Now, I was a landlord. I got rent every month and paid down my note.
All things considered, I did not make much (or any) extra monthly cash with rental income.
In fact, I later realized I was leaving money on the table not doing it another way.
However I did build equity over the years since the neighborhood was a good long term investment.
In this article, I am going to tell you what I would have done differently. After that, what I did well. I will end with some other thoughts for you if you are considering doing what I did.
What I wish I did differently
This would have made more money…
The investment property was a townhome in a popular neighborhood close to lots of amenities and jobs.
I got it with a 4 month lease at 1700/month.
The lease was extended another 2 years for 1800/ months. I paid 700 dollars a month for renting a basement in a townhome to live for myself.
What I realized looking back was that I would have made more money by living in the property I had purchased as an investment.
I could have done this by renting out individual rooms.
Check out this table for my scenario. Figures are monthly, “mortgage” includes mortgage payment including HOA fee, taxes and insurance.
|Mortgage/Taxes/HOA/Insurance||Rent income||Rent paid||Net|
|Live in |
|*estimated for rent by room|
In my market (Northern VA) renting individual rooms gives you a higher rental rate then renting a property as a whole.
That is why the rental income is pretty close, whether I lived in the property or not.
On top of that, I would have eliminated having to pay rent to live somewhere else.
The difference is $640 per month in my case. If you are buying an investment property before your home to live in, consider this scenario first.
You have to live somewhere, and chances are it is not free.
Learn more about the property and the maintenance costs.
I bought this property after walking through it for just ten minutes. That was it. Call it arrogance or wishful thinking. But I was so anxious to get the property I had no inspection contingency.
I wish I had done more research to know my long term maintenance costs.
Sometimes living in a home can teach you a lot about what goes into maintenance and what everything costs. The first point above can also help with this.
Also, a home inspection is a good idea unless you have extensive knowledge of home repairs and maintenance.
I have since bought more properties without an inspection. But I do not recommend it unless you have a large knowledge of real estate.
The property I bought needed work. I had no idea how much until later on when things began to need replacing….seemingly everything.
Learn more about buy & hold investing, period
The investment property that I bought worked out. Intuitively the investment seemed like a good long term decision.
Always know what numbers to calculate when analyzing an investment. And make a decision based on analysis, not emotion.
You can see what books I recommend for real estate pros here.
But the truth is, I knew very little about the details of the world of buying real estate for investment, as opposed to a home.
I made the mistake of relying some on luck instead of facts.
Writing out some simple projections of rental income and expenses is a good plan. The more in depth you go with planning and budgeting, the better decision you can make about each property.
If you are unsure about what numbers to run, another really good resource for learning about real estate investing is biggerpockets.com.
They have nearly 10,000 articles, a free course, and a forum with a great community.
There are some investors who have pages of numbers and different equations, while others have much simpler parameters.
What equations you use will be up to you.
I like to calculate cash flow, my cash on cash return and a few other projections.
I also consider the area carefully and the potential for future growth/amenities/jobs.
What I did well
Sometimes, there is more to an investment than price
As I mentioned before, I got a fair price. It was not a price that most investors would call a “home run”.
But I got a really good rate with almost no closing costs aside from the down payment, due to the terms of the owner holding the mortgage note.
I also inherited very good tenants who stayed long term immediately. This cut down on my vacancy cost. Vacancy can quickly cut into your rental income.
Sometimes, there is more to the deal than the sales price, so keep your eye on the whole picture. For example, there may be tax benefits as well as simple dollar-in dollar-out monthly expenses. Talk to a good accountant about these.
Keep housing expenses low
Ok, let’s say you decide to go for it and buy an investment property. You do not own your home yet, so you will have to rent elsewhere. Try to pay as little rent as possible where you are.
Like I said above, it would have made more sense for me to move into the property I bought as an investment and rent out rooms.
If you cannot do this for some reason, find an affordable rental. I rented a basement apartment in townhome, which was all I needed.
You can accelerate your gains and get ready to buy something else if you rent the minimum you need for your situation.
Breathe, then take action
My decision to buy my first investment was quick. It had to be. If I did not buy the townhome it was going to be offered to someone else.
Most likely, your first investment property is the biggest investment you have made. This was the case for me. In the Northern VA real estate market, homes are relatively expensive.
Therefore I was feeling the stress of making such a big investment. Was it the right use of money? Did I get the right place? Why was I emptying my bank account on a down payment? (mostly kidding).
There will always be some risk and uncertainty in every investment. I knew that it was the right move and was risk I had to take.
I felt a feeling of uncertainty and fear, took a deep breath, and jumped right in.
In your case, while you are doing research, remember that some thoughts of doubt may jump in. Be sure you have a good investment…and then go for it.
Don’t let fear steer you into too much thinking and not enough action.
Every situation is different. As a new investor you should always keep an ear out and an eye open for something that could be a good investment.
First, you could get an opportunity like myself to buy a property that you cannot yet live in for some reason.
You may not have your first home yet. In this case, if the deal is good you should probably go for it.
Secondly, you may find that the numbers for your area are different than mine. Make sure to look over both scenarios and see if it is better to rent elsewhere and start to buy.
Finally, do not forget that for your particular case, waiting could be the best option. If making a move into a real estate investment will overly strain you and/or your family, sometimes patience is the best move.
So the final question is this: if I could go back, would I still have made the same decision to buy this investment property? In all honesty, I would not have changed anything.
But what about the mistakes I made? The fact is, I made a lot more mistakes than are listed above.
In addition to not moving into the property and renting rooms, I moved into it later and instead of renting rooms I remodeled the property.
This is a story for another time but it busted my finances.
And yet, it was those mistakes I learned from the most. In real estate investing, it is crucial to embrace your mistakes and learn from them.
If you are looking for an investment property in Northern VA, I hope that our paths cross. In addition to owning investments, I have helped several clients find a good buy and hold investments.
The market is always changing, so working with a real estate expert can keep you ahead of the curve.
At the end of the day, I learned to analyze real estate decisions more intensely, with more focus on short term and long term numbers.
And I learned that I love real estate investing. Which is a lesson that can pay off for generations.
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