This is a long overdue post, and a compilation of my thoughts and reflections upon purchasing my first property, a duplex in Rhode Island, to which I did a major renovation, lived on one side, rented the other, and ultimately converted it into an investment property. The strategy used is often referred to as the BRRR Method (Buy, Renovate, Rent, Refinance). The notes below seek to help any new, first-time homebuyers who may be looking to understand how to find the right property, where to search, how to start, how to negotiate, how to get the house they want, how to finance renovations, and potentially how to become a real estate investor.
Searching for a house
The first and most obvious step is to set up your search and search criteria. If you are looking to operate as an investor, I suggest coming up with a clear set of criteria for what types of properties you will look to buy: will you be a single family home investor? Are you looking to start with a duplex? small multi-families? Figure out what your criteria is, including locations and price ranges.
- Setting up the search - figure out what you're looking for. For me, it was to buy multi-family residential (2-4 units) properties where I can owner occupy one unit and rent the other(s).
- Work with an agent - Find a local agent who is an expert in the market who can keep their ear to the ground and keep you updated on what's going on in the market. They will also set you up on the MLS where you can receive a feed of new listings that match your criteria. Having trouble finding an agent? You can search Zillow and request info on houses and an agent will reach out. Ask for them to set you up on MLS, there is no commitment and it doesn't cost anyone anything. You are also not obligated to work with that agent just because they reached out to you.
- Some other resources you can leverage when evaluating properties: Homepath, HUDHomeStore, Hubzu Home Auctions.
- There is also the concept of driving for dollars, in which you may decide to solicit houses that are not currently for sale (typically done with mailing brochures inquiring about purchasing their property).
Getting a Pre-Approval
Next step, you'll want to have a pre-approval in place as you begin your real estate search., This will assure you're ready to begin making offers when you find the house you're looking for. Network, ask around, and reach out to lenders. The real estate industry is typically well connected given all of the moving parts and people involved - agents will know lenders, lenders will know closing attorneys, etc. You will likely need good credit, or good enough credit for a reasonable interest rate. Run your numbers as far as the down payment and how much may be required, talk to lenders, and understand that you will likely need verifiable income from a job to get pre-approved. One thing I learned was to not get pre-approved for an amount too high otherwise it will work against you and sellers will know you have room to bid higher on their property. You also don't want a pre-approval too low, otherwise it looks like you can't afford the property. There are lots of great options with banks for first time home buyers with options as low as 3.5% down. First time home buyers have a great advantage, however it's a competitive market so it doesn't mean you're going to get the house you want at the price you want. See my next point on making an offer. When you're ready to make a purchase, ALWAYS shop for the best mortgage rate. If you inquire multiple times within a certain period of time, the inquires will not sequentially impact your credit score, You should also try to find a lender who doesn't charge an origination fee (pure profit for the bank to do the paperwork to generate your loan). Banks claim to pull from the same rate sources but they will all give you a different rate. See the refinance section below for my experiences. I also suggest not letting the bank continue to pull your credit to stay pre-approved if you're on a home search that extends a long period of time. This will only hurt your credit. Get pre-approved and as long as your savings or employment circumstances don't change, you shouldn't need to have your credit pulled again even if "the pre-approval expires". Ask your lender to update the date on the pre-approval and tell them nothing has changed. If they ask to continue to pull your credit, I'd likely suggest a different lender.
Making an Offer
It's a competitive market - I wrote this in 2021, and its only gotten worse. Make the most compelling offer where the numbers work for you. A rule of thumb: The total mortgage payment (including taxes, insurance, etc.) shouldn't be more than 25% of your gross household income. If you make $60,000 a year, your total payment shouldn't be more than $1,250/mo. Make the math work on your initial offer for a property, and you can always negotiate again later (I highlight my experiences here below). I highly recommend never waiving your inspection contingency as this is extremely risky, especially for a first time homebuyer. You can always pull out for being 'unable to obtain financing', so know you have ways out even if the buyer accepts your offer. Your agent can also work with you to make the most compelling offer, such as using price-escalation clauses (increasing your bid up until a certain threshold to beat competitive bids), leveraging a higher down payment, or starting with a higher offer are all ways to look more compelling. A general rule of thumb for those who are making offers: only 1 out of 10 offers you put in should be accepted, otherwise you're not offering high enough price or you're offering too high and too many offers are getting accepted because you're over-paying. If the home doesn't appraise for what you're offering, your bank most likely won't give you the money because you will be underwater from the start, so keep this in mind when making an offer. This rarely happens, but is totally plausible.
Negotiation
Use inspections and appraisals as leverage to re-negotiate. The deal is always negotiable until it's done. They want to sell, and it's in everyone's best interest (your agent getting commission, you getting the house, seller getting cash). So if you're under agreement, you have leverage unless they have compelling back-up offers. I make note of my negotiation under the renovation and contractors section.
Closing
Find a lawyer - your agent will likely be able to make a referral to one they've worked with. They will help do title work, etc. This is one of those times where you don't want to go for CHEAP, you want to go for RIGHT. QUALITY over quantity, here. Pay for the title search etc., don't step over dollars to pick up nickels, no cutting corners to save a few bucks.
Renovation & Contractors
Get multiple quotes if you're doing rehab and renovation. Use this as leverage between contractors. Everything is negotiable. If renovation is a major part of your purchase, use it as leverage to negotiate with the seller too. I had two contractor quotes, and used the larger amount ($70,000) as leverage in my negotiations to get the seller to drop $20,000 off the price. I made the case that I anticipated repairs to be $40,000 and they came out to $70,000, so I wanted $30,000 off the price. They were unhappy, but met me closer to my ask with $20,000 off the purchase price.
Down Payment & Financing Options
There are tons of options you should take to a reputable lender about. You can search for mortgage lenders, and I suggest contacting large banking institutions, as well as local credit unions to review your options. You may be eligible for as little as a 3.5% down payment, or alternative financing options. I personally utilized a 203K / renovation loan, which allows for as low as a 3.5-5% down payment, and allows you to borrow for the renovation work when working with a general contractor that works closely with the lender throughout the process.
Renting
These sections will likely only apply to real estate investors or those who are curious about the rental process. First, I created an apartment listing on Zillow, Facebook Marketplace, and Apartments.com. I then used Apartments.com portal to manage tenants and rentals, find templates for rental applications, and pre-screen people. The first step was to get photos, get my listing set up online, and then reply to the significant amount of inquires that came in by doing some pre-qualification and setting up showings. I suggest creating an 'open-house' style system where you will only plan on showing the house over a few day period and will narrow down your selection that way. Some people will drop off, no-show, or will not pass the initial application criteria. I handed out applications at the door once people viewed the house, and this helped me understand who was trying to rent, if they were employed, what their income status was, why they were moving, etc. Once I narrowed down my selection of interested candidates from the applications, I made a shortlist and contacted the few that were remaining until I had my top 3 future tenants listed in order, and offered the unit to them in sequential order. Some dropped off or went ahead with other apartments, and I eventually found my current tenants. From here, the last step was a credit check once they were ready to move forward and sign the paperwork.
Again, do not step over dollars to pick up nickels by avoiding running a credit check (I used Experian), reference check, or background check. A side note - if you have TONS of rental interest to the point of overwhelm, your rent rate needs to go up. This is just simple supply and demand. High demand for your unit may mean your price is too low. Meet people in-person if you're renting, do all your background checks, income verification etc. You can use Rentometer to gauge rent prices in your area. If you are overwhelmed with inquiries, set up a pre-application process to verify that prospective tenants are good prior to inviting them to an open-house showing. Here was my message to those individuals who inquired via Facebook:
Hi, I've had over 70 people interested, can you please answer these questions?
- How many people in your party:
- Pets?
- Smoker?
- Household income:
- Any party ever filed for bankruptcy?
- Any party ever committed a felony?
- Years at current location:
- Reason for moving:
I also suggest using DocuSign for document e-signatures. I preferably wouldn't charge for an application fee but you may choose to do so as a filter if you have a lot of people who are simply applying and not serious about moving forward.
The Rental Application
Find a template that works for you. This should include rent price, length of term, occupants, rent history of prospective tenant, income sources, employment info, and any disclosures necessary (such as if you are requiring a credit or background check). Check with your state's regulations. Have people fill this out once they've seen the unit and if they are interested in moving forward. Your tenant should make at the least 3X the annual rent in their gross income as a rule of thumb.
The Lease
Again, find a template that will pertain to your state's regulations and laws. I recommend collecting a security deposit equal to one month's rent if you can. Apartments.com contains a full suite of tools, including a rental draft lease agreement and templates readily available for free!
Refinancing
Get multiple quotes, similar to your initial mortgage. You can pull your credit multiple times (usually within a 14 day window, I recommend shopping same day to get comparable rates as rates change). Always mortgage-shop. I had lenders ranging from 2.99% to 3.3% for the same exact thing back in 2020, and the lower rate lender I went with was also $2,000 cheaper in refinancing fees. Again, do not pay origination fees. You can negotiate these away, or go with a lender who doesn't charge them. Everything is negotiable. The only thing you should be paying for in a refinance is legal title work, and an appraisal. If they require you to open a new escrow account where money will sit for taxes and insurance, you may have to pay up front for this but your current lender will reimburse you with your existing escrow so this will essentially break-even.
I hope you've found this valuable, and if you have, please give it a share with those who would find it useful.
