How I Bought My First Real Estate Investment Property

Photo by Scott Webb on Unsplash

I bought a house yesterday.

If you want the TLDR, you can just jump down to the reflection part at the end.

I’ve been looking at houses for a while. I listen to real estate investing podcasts like BiggerPockets, The Tom Ferry Podcast, ChooseFI, etc. I go through phases of loving them and getting frustrated with them, and loving them again.

I read a couple of books on real estate:

  • Cheap Houses by The Homestead Craftsman – This really opened my mind to how to buy houses. There is no one way of buying houses and you don’t always need an agent.
  • The Millionaire Real Estate Agent by Gary Keller – there are some good points in this book but I don’t love it.
  • Building Wealth One House at a Time by John Schaub – When I first read this book, I wasn’t super impressed. But looking back, this guy had a lot of great points and it’s probably the most rounded book I’ve read.

My criteria for the first investment:

  1. 3 bedroom 2 baths (at least 2 bathrooms for resale value)
  2. In a decent upcoming neighborhood
  3. In the 150k – 250k range
  4. In Bentonville, AR

Some preferred qualities: 1) no major renovations, 2) have more expensive houses surrounding it, 3) fenced-in yard.

Bentonville’s real estate market has been crazy since the Pandemic started in March 2020, and it gradually became crazier and crazier. Currently, the houses in the 150k-250k range sell within the day it lists on MLS. Multiple offers would come in, and people fight over houses going 50K above asking and appraisal prices. Listening to Tom Ferry’s podcast, I realize that the entire U.S. real estate market is like that.

I have seen so many houses coming onto the market that I thought “this could work,” and in the blink of an eye it’s under contract, off the market, no longer available. So when my friend Hills&Higher told me this listing from Nextdoor, I picked up the phone and called that seller number right away, but I wasn’t hopeful at all. It was Easter Sunday and I asked if I could see the house today or tomorrow (Monday). He said, how about Monday at 4 pm. I thought maybe he was delaying the appointment because he already had enough interest from the property and wasn’t keen on meeting up.

Regardless, I checked out the neighborhood on google maps and also saw the 4 only photos he uploaded to Zillow. It is not an exciting house, which is exactly what I am looking for. I realized after the fact that most of the time, deals are inside the not-so-exciting listings, the mediocre mundane ones. 

The house fits ALL the criteria I was looking for:

  • It was 3 bedroom 2 baths
  • It was listed under 200k
  • It was in a very nice neighborhood where surrounding houses are twice as expensive
  • It was in Bentonville
  • Has a fenced-in yard
  • Does not have a pool

I knew if I didn’t present an offer to the seller that Monday afternoon, I would definitely lose this house. I know the house is priced under market value. Based on the comparable homes I ran, the appraisal would most likely be around $173k. I called my loan officer and asked for two different pre-qualification letters for the two scenarios in my head. One is that there is moderate interest in the house, I would offer 185k, and one is this is my BEST offer 200k if there are a LOT of interests. I also tried to draft a contract before going to this showing (which I would recommend people do, a generic one if you can, and just leave the amount blank). I wasn’t able to figure out the contract in time, but I printed out my pre-qualification and drove to the showing.

The seller was super friendly. We got to talking about life, work, dating in Arkansas, swapped ridiculous stories about work. It felt like that he trusted me enough and I asked how much he wanted to sell the house for. He said, well, there’s moderate interest in the house, and people offered more than the asking price for it. Knowing the market, I know he wasn’t lying. So without saying a number, I asked him, what would be the number that would seal the deal today. I was shocked by my own boldness. I don’t really know why I wasn’t more nervous. I just knew at that point if I asked, the worst I would get is a counter-question (like maybe he’d say, well how much can you offer?). And to my surprise, he just gave me a straight answer, 180k. I said DEAL. 

We continue to have some more conversations about what it is like living here, the neighbors, and he told me his favorite spot of the house is this one-bedroom and kitchen because the sunlight hit that part of the house first in the morning. I realized I was lucky because unknown to myself at the time, I just achieved the winning bit of getting a deal, to get the seller to like me.

Summary and reflection on buying my first real estate investment:

  1. Clearly define the search criteria: this may take some time to refine and tweak, but it will come more clearly the more house you see.
  2. Be brave enough to pull the trigger: Put an offer on houses that fit those criteria. Don’t be afraid. If you’ve done the homework, worked out the financial part, you need to trust your gut, trust the system you’ve built on the due diligence you’ve done. You NEED to pull the trigger. 
  3. Know how much you want to offer BEFORE you walk in: You know what the house looks like (sort of, or ballpark it). You know the location. You know the market. Therefore, there is no reason to go in without having a number in your head. 
  4. Let the seller say the price first: Don’t offer up the price you are willing to pay. If I had offered up 185k from the start to see if it was ok, then I would have overpaid.
  5. Play fair: I think this was a hard one for me. The Chinese side of me will always want to haggle. But from living here for so long, I realized that there are prices that don’t matter in the big scheme of things. Could I have bargained him down from 180k? Maybe. But I am taking a big risk in this seller’s market. I need to keep the seller feeling like he’s in control, and that it is his way. Plus, I know 180k is a fair number from the comparable homes sold around there. Ultimately, you don’t want to be known as the shark. The goal of the negotiation is to get your way and have the seller walking away with respect for you that they want to do business with you again and again. 

#2 is probably the hardest one for me. I keep dancing around the pool but never want to jump in. I was too afraid to commit to it. I think you will have to see enough houses and miss the deals you really wanted to have to understand how to pull the trigger next time. I have missed a unique yellow A-frame in Bentonville, a nice rental property 2 minutes away from my house, and 2 other houses walking distance from me so far. But without them, I wouldn’t have those data points to understand what is a good deal and what criteria are my must-haves.

Overall, it was such a flurry of events that happened too quickly. I made the oral offer with the seller 5 minutes after walking through the house. I sent him the contract about 2 hours after seeing the house, after figuring out how to write a contract with the help of my real estate superhero.  The seller signed it that evening.  

We have since closed on the house and are preparing to move in next week!

 

Building Wealth One House at a Time by John Schaub

This book has much detailed and down-to-earth advice on how to buy income property/rental property. I love the beginning and the end of the book, but the middle section about seller financing was lacking some serious details for me to understand how it would all work out. Overall, I have learned a TON from this book. My notes below do not include seller financing, preforeclosure, and foreclosure. If you are interested in those areas, I recommend checking out his other book called Building Wealth Buying Foreclosures possibly borrowing from your local library (because these books are expensive!). Otherwise, read my notes below!

General advice on income properties:

  • Buy a house in the best neighborhood you can afford
  • Don’t buy corner lots
  • Don’t buy houses with extra frills: wallpaper, fancy trim, pool/hot tubs
  • Buy in a good school zone
  • Buy in a neighborhood that’s on the way up
  • Buy close to where you live and study the market

Strategies for surviving the market crash: 

  • Get your home paid for.
  • Use options to buy in a hot market: a contract that gives the buyer the right, but not the obligation to buy.
  • Avoid personal liability on dangerous debt: debt you can’t repay from the cash flow on the property that is security.
  • Limit your losses: if you own a losing property, cut your losses.
  • Renegotiate debt that you cannot pay

Cause and effect of cycles:

  • When rents are cheap relative to prices to buy, either rent will increase or selling prices will fall.
  • Construction cycle: smaller Homebuilders rely on banks for construction loans typically one year in length. When they can’t sell, they are under pressure to pay. You could buy houses at a bargain price in a down market by just paying off the construction loan.
  • Older neighborhoods where renters are being displaced by owner-occupants who buy and fix up a well-located but older home will increase in value. Look for this trend and houses that you can rent for a few years while the neighborhood improves. They often are a better investment than new neighborhoods.

Finding opportunities that others miss:

  • Empty houses
  • Houses that need work – especially in nicer neighborhoods
  • Out of town owners
  • Landlords who are not maintaining their property
  • For sale by owners
  • Letters to owners who may need to sell
  • Foreclosures

Ask questions to know what the other party wants

  • Are you the owner?
  • Where is the house?
  • How large is the house?
  • How large is the lot?
  • How old is the house?
  • Does the house need any work?
  • What school district is the house in?
  • What are the neighbors like?
  • How long have you owned the house?
  • Have you made any additions or remodeled?
  • Is the house listed with a realtor? If so, when does the listing expire?
  • Do you have a current appraisal? If so, how much?

Step 2 questions:

  • Sounds like a great house, why are you selling?
  • Can your existing loan be assumed?
  • What’s the balance on your loan now?
  • Are your payments current?
  • What will you do if you don’t sell? Is the owner moving away? When? The day they move, most owners are really ready to make a deal.
  • How long has your house been on the market?
  • How much did you pay for the house? (If the owner balks at this question, tell them you want to buy in a neighborhood that is appreciating. Ask if the house has appreciated since they bought it. You can point out that you can learn this info in the public records and would appreciate their time-saving assistance.
  • If you don’t sell the house, would you consider renting it? If the owner’s answer is yes, you may be able to buy it from him or her with a small down payment. The owner won’t get much down when he or she rents it.

Use your time wisely:

  • Ask questions on the phone. You will be surprised how much sellers will tell you
  • Rank motivation and potential profitability from 1 to 10. Use this to compare houses to decide priority.
  • Motivated seller: asking them questions like “are you ready to sell your house today?” Or “can you be out by this weekend?” To show you are interested in buying NOW.
  • before sitting down with seller, write down your strategy using figure 4.1

Knowing what a house is worth before you make an offer:

  • If you are buying on a street with many foreclosures or short sales, calculate your best offer, and then reduce it by 20%
  • pay no more than 10% down, pay no more than 10% interest, buy at least 10% under the market
  • 72/rate of return = years of a house that will double value
  • Buy properties that produce enough rent to pay the expenses and repay the loan
  • Buy properties that are relatively easy to manage and easy to sell
  • Borrow the longest term possible

Making an offer:

  • Let the seller make the first offer
  • Never never never try to think for the seller
  • Make your first offer an offer you know will make you money and see how she responds. If you decide you’d like to buy this house for about $175k, the seller wants 250k, offer 160k. If they make a big move in your direction, go up to 165k, then settle the difference at 175k. If they move to 245k, offer them 175k, with 10k down, balance payable at $1000 a month including 3% interest.
  • Don’t let the seller shop your offer (get you to bid with another buyer). Tell them you have two houses you like theirs better but if they don’t accept the offer by end of day, you will buy the other house.

Renting a house:

  • Spend the money to clean the whole house
  • Introduce yourself to the neighbors and ask them to keep an eye out for you. Tell them if there is a problem with the tenant you want to know about it and will do everything in your power to fix it.
  • Usually, a tenant can afford to pay between 30-40% of their income as rent.
  • Rather than charging a late penalty, give tenants a discount for paying on or before the first of the month. Pay on time and not call for maintenance to earn the discount.
  • Give tenant phone numbers to call for “emergencies” – 911, police, plumber (for leaks). Then have your weekend off.