Let me introduce you to N Diana St, a single-family home in Fresno, California. N Diana has 1176 square feet, 3 bedrooms, and 1 bathroom. It was vacant when I had purchased it, and I found it on the MLS with the help of a local Realtor. N Diana had been listed on the market at $189,900 for about a month.
The Details
Prior to finding N Diana, I had been consistently analyzing deals every day, using my Rental Property Calculator. I came across the property on the MLS, ran the numbers, and liked what I saw. Once I knew the numbers and location fit my criteria, I drove by the property to scope out the neighborhood. I ask myself a few questions when driving through the neighborhood of a potential rental property:
Will this neighborhood attract the type of tenant I am looking for?
Would I feel safe coming to the property alone at night?
Would I be comfortable having my girlfriend walk around the neighborhood at night?
If I can honestly answer yes to all of those questions, then I can move forward with the purchase.
After driving through the neighborhood, I immediately knew I would offer on the property. Since this was my first real estate investment, I wasn’t looking for a home-run deal. I was just looking for a deal that was good enough, because I knew that buying the first property would be way more valuable than remaining on the sidelines. I would have been perfectly happy purchasing the home at list price, so I offered $188,000. The seller accepted my offer, and escrow began.
Once escrow began, I wrote my earnest money deposit check of $5,640 (3% x $188,000), and the due diligence period began. I immediately ordered an appraisal, as well as a home, pest, and roof inspection. The inspections showed that the home was generally well-taken care of. There were only a couple minor repairs had to be done, including a plumbing trap replacement under the shower and a toilet leak repair.
But then the appraisal came in low at $178,000, which is $10,000 less than what I had offered. Once I saw the appraisal, I wanted to lower my offer to $178,000 because I did not want to overpay for the property. However, the seller asked the appraiser to take a second look. So, the property was re-appraised by the SAME appraiser at $180,000. I lowered my offer to $180,000 and did not ask the seller for anything else in escrow. After 3 long days, the seller accepted my offer.
The Financing
I purchased N Diana using a local lender. This was a 15% down conventional loan with a 5.75% interest rate. At the time of purchase, I was still a full-time student working 3 part-time jobs. I had the funds and the credit to make the purchase, but my income was not enough to qualify for the loan on my own. So, I asked my sister to be a co-borrower on the mortgage. Fortunately, she agreed. And I am so thankful for her for doing that.
The Numbers
Asking Price = $189,900
Purchase Price = $180,000
Monthly Cash Flow = $209
Down Payment (15%) = $27,000
Loan Amount = $153,000
Interest Rate = 5.75%
Term (Years) = 30
Closing Costs = $7,481
Repairs = $880
Initial Legal Costs = $500
Initial Investment = $35,861
The Lessons
I learned a ton with this first deal, and I want to share what I've learned to help you, should you decide to step into the world of real estate investing.
Contact Multiple Lenders
My biggest mistake of this deal was not contacting multiple lenders. I only talked to one lender throughout this whole process, and I wish I had talked to more to find the best possible loan terms. But I didn’t know what I didn’t know. I took out the mortgage at a 5.75% interest rate. If I had contacted other lenders, I probably would have been able to find a loan with a 5% interest rate, which would save me approximately $75 each month. That amount may seem small, but it adds up over time and has a big impact on my return on investment (ROI).
By not contacting multiple lenders, I began to feel that if I did not meet my lender's requirements, then I would not be able to get a loan since I thought all lenders were the same. This added a lot of extra and unnecessary stress to the whole process. So, learn from my mistake and contact multiple lenders.
Know Your Rent
Luckily, I rented out the property for exactly what I planned to rent it out for. But what if I couldn’t? Before even offering on a property that you’re planning to use as a rental, you NEED to determine what the property can realistically rent for. You can do this a number of ways, including:
Local Property Managers
Rentometer.com
Zillow.com
Trulia.com
Hotpads.com
Craigslist.com
I mainly used online sources to determine my fair market rent, but I really should have also talked to a local property manager to get their professional opinion. If I had talked to one, they may have helped me back away from a deal if my rent estimate was way off, or they would have given me some peace of mind if my rent estimate was right on point.
Bring in the Professionals
As much as I would like to believe that I can do anything and everything, there are people who can do some things better. And those are the people you want to have on your team. If you’re going to jump into the world of real estate investing, you’ll likely need to form a team of professionals to help you on your journey. This team typically contains a property manager, real estate agent, lender, and attorney.
These people are there to advise you where you lack expertise, and they are the most effective way you will grow in this business.
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Justin Yurong