Initial Purchase (Negotiations)

My initial purchase was a series of negotiations that I truly felt would never end.  In that market, where prices increased about 10% in a single year, sellers were being flushed with offers.  I put in more than five offers on different properties and all were denied.  Again, I was mostly outbid by other large investors who came in with cash offers well over the asking price.  The offers that I put in were usually no more than 5-10k over the asking.  The reality of the market was that offers below this would definitely not be chosen.

Property Inspection

The property that I eventually chose was actually one that was recommended to me by a family member.  There were two properties next to each other that had been on the market for a rather long time.   I had disregarded the property because of its location.  I did not believe it would be a good area to invest in.  This family member who knew the area stressed that it was in a bad zip code, but in secluded area without many of the problems of the surrounding area.

I drove to the area to visit the property and the neighborhood.  Neither was particularly impressive but it did seem workable.  The worst problem with the property was the lack of a fence in the closed parking are to the back of the house.  In this area this meant that the backyard had become subject to illegal dumping.  There were mattresses, couches, and even shopping carts but problem this can easily be fixed with a fence.  The other main problem was that there was a rather messy tenant currently in one of the units.  Nevertheless the property would generate cash flow if managed properly so I put in a bid subject to interior inspection.

A week passed and the bid was accepted.  I was very surprised because sellers usually prefer to avoid FHA offers.  FHA appraisal inspections are notoriously strict and consistently headaches. While inspecting the property it was fairly evident that this tenant would most likely need to be evicted.  Not only was the apartment filthy, but to me it seemed like a public health issue.  They had two small children which they had living in unsanitary conditions.  I was open to letting them change their ways once I acquired the property but that was a long ways away.

Appraisal Results

When the appraisal results returned we received the expected news.  The bid I had put in on the house was greater than the actual value of the home.  The asking price was at 117k while the appraisal came in at 103k.  I actually believed this would be the end of the deal as the seller would be getting 14k less than originally agreed upon.  Surprisingly the seller was willing to negotiate, likely because his property had been on the market for so long.

The seller agreed to sell the property and make all of the fixes required by the FHA inspection.  FHA inspections not only focus on the price of a home but on the safety of the home for the buyer.  This is why their inspections are often more stringent.  The deal with the seller was that the property would sell at 105k and that I would cover the extra fees for both parties.   This mean that my down payment would be 3.5% of the price of the property along with an extra 2k and the fees.  I found it to be an acceptable deal especially for someone breaking into the business.

The deal was sent to the underwriter and it was another month before anything was heard.  There is a certain time limit within which the deal must be completed or the seller is able to choose another bid.  Luckily the deal closed in time and I purchased my first property.

Be Prepared

The purchase of a property is always a very stressful experience.  The best way to handle the experience is to research thorough beforehand and to have a very trusty broker.  Take a chance and enjoy the process.  It’s a once in a lifetime experience purchasing your first property.

Types of Real Estate

The types of real estate that one can possibly invest in varies greatly.  Each type carries its own set of benefits and problems but I firmly believe that you must begin small before building up.  Below I will describe each set of residential properties then further below I will explain what types of properties I believe are best for an initial investment.  This post will not go over industrial or agricultural real estate.

Real Estate Properties

Single Family Unit: In simpler terms this is a common house.  Most homes consist of 2-5 room with 1-3 bathrooms.  Some contain a dining room in addition to a living room and possibly an office.  A standard and the most common of purchases.

Condominium:  A condo is an individual property, usually styled as an apartment, within a larger community complex.  When you purchase a condo you purchase your individual apartment that is usually among many other apartments.  The condo community usually comes with other communal benefits that can include a pool, gym, or other recreation rooms.  Once the condo is purchased there is a continual association fee that must be paid every month.  This fee is what helps keep the condo community areas clean and in working order.

Multiple Housing Unit (Duplex/Triplex etc.): This type of property consists of units, or apartments, in a single building.  The building is usually a single structure that hold 2-4 different apartments.  This property can also be multiple stories.  These types of properties have to be in the appropriate zoning to be built.  They may not always be allowed in the same zones as the single family units.

Residential Income (5-11 Units):  This is a larger style property that contains 5 units or greater.  In my opinion this can almost be considered a commercial building due to the amount of units.  These building can provide the most cash flow although they can also cause the most problems.

For my initial purchase I chose a multiple housing unit, more specifically a duplex.  Why did I choose a duplex?  Truthfully there were various reasons.  Some were my reasons and others were dictated by the market.  Let me show you my  thought process.

My Reasoning

– Single V. Multiple:  My initial idea was to purchase a single family home and to rent it out to a single family.  A single family home has the benefit that it usually is more desirable to potential renters and that you will not encounter any problems regarding tenant disagreements.

After studying the situation further I realized the positives for a multiple housing unit far outweighed the negatives.  A multiple housing unit in the same neighborhood as single family unit often does not cost much more than the single family unit.  For example, the property that I chose was directly across the street from a very well kept single family unit.  When I checked their respective estimates on Zillow I realized that the duplex I was choosing was only 20K more.  In addition, the combined rent possible from a duplex far exceeded the possible rent from a single family home.  The rent coming in was nearly double.  These reasons made the multiple housing unit my preferred choice.

–  Duplex V. Triplex/Quad:  Initially I made a very hard push to try to find a triplex or quad that I could purchase.  It was very difficult to find reasonable priced properties that were less than my loan limit of $175,000.  When I did find a property and made an offer my offers were always rejected.  I ended up choosing a duplex essentially because it was what the market dictated.  At that time the real estate market was slowly coming out of its bottom point after the 2008 recession.  Prices were still low but were quickly rising.  It became a hotbed of investor activity.  Big time investors were coming in and purchasing real estate at low prices with straight cash.  Sellers usually prefer cash offers because there is less hassle involved.  Big time investors like to focus on 3-4 unit properties and that is why I was squeezed out.  I had to find a duplex to get some sort of profit out of my property.

Final Conclusion

It would be best to find a multiple housing unit with 2-4 units to break into real estate investing.  A single family home can also work but it will not render much workable cash flow.  A larger unit with 10 units could cause a beginner to feel overwhelmed due to inexperience.  Begin small, gain some experience, and work up from there.