In this blog post, we cover how to invest in real estate for beginners! This is a free 19-minute tutorial that guides you on buying your first rental property.
How To Invest In Real Estate For Beginners (STEP-BY-STEP)
Below is a transcription of the podcast. This transcription was taken from Otter.ai so it might not be completely accurate:
Unknown Speaker 0:02
This is the digital nomad quest podcast with Sharon Tseung. teaching people how to build passive income, become financially free and design their best lives.Unknown Speaker 0:14
Hey guys, Sharon from digital nomad quest, and this is Sean with everything Rei and today we’re gonna go over how to buy your first rental property. We actually did this presentation with teachable, where we walked through like the benefits of buying real estate as well as how to buy your first rental property. So we kind of wanted to do this presentation again for you guys. So we have a lot to cover. So let’s just get right into it. In this presentation, we’re going to be going over why real estate is a great investment to begin with, how to get started and what to do to actually buy the very first one. So as a disclaimer, this is all for educational purposes. Please remember that investments involve risk, and you should do your own due diligence before investing so we aren’t financial advisors, so make sure to consult with a certified professional before making any financial decisions. Alright, so a little bit about us. My name is Shawn I used to be an engineer. Back in the day I studied electrical engineering at UCLA, and used to work as a former system engineer at Boeing and Northrop Grumman. Recently, I became a hard money lender. So I fund a lot of projects for real estate investors, and the founder of everything Rei. We’re also kinda creator on YouTube, Tiktok and Instagram. And my channel is mostly about real estate investing tips, strategies and current events to help you become a real estate investing boss. And I am Sharon and I graduated from UC Berkeley. I’ve been in marketing for over 10 years at various companies, including Google, founder of digital nomad, quest, content creator on YouTube, Tiktok, and Instagram as well. And I teach all about building passive income towards financial freedom. So we’re married and we recently moved from Bay Area to Dallas, we’re real estate investors with 25 units under a portfolio and another 700 escrow we have properties in California, Texas, Florida and Georgia are both content creators, like I mentioned, with almost 2 million followers combined, or so grateful for the community we built. And we’re all about financial freedom and designing our lives. And we hope to inspire you to do the same. So let’s talk about why you should invest in real estate and why we really love it. So there are a lot of benefits of real estate. First off, obviously cashflow, it’s the passive income you get from the rents after paying all of your monthly expenses. So that can include principal interest insurance, property taxes, also possible repairs and vacancies. So aside from all that, you should be able to cash flow if you are, you know, investing in the right properties. Now also appreciation is a large benefit. So real estate tends to increase in value over time, the average is usually around three to 4% per year. But if you’re choosing the right markets, there can be even more potential for appreciation. So for example, I purchased a property at $240,000 Back in the day, and now it’s worth over 650,000 or so in the last couple years, I bought a four Plex for around 175,000. And now that’s worth maybe 260,000 as well. So you know, you can dramatically increase your net worth if you are purchasing real estate because of the appreciation benefit. Now also diversification is another benefit real estate is relatively uncorrelated with other asset types, like stocks, bonds, or crypto. So owning real estate can help you diversify your portfolio. So for example, if stocks go down like it’s not going to take your entire portfolio, if you diversified in multiple asset types, including real estate, another benefit is leverage. So it’s a lot easier getting a loan to purchase real estate relative to other industries and asset types. So you can buy real estate with just 20% of the purchase price, but you keep all of the net income in the gains. And leverage helps you increase your returns, since you’re putting less of your own money in to begin with, and allows you to scale your portfolio faster. So let’s go over an example actually. So now say you purchased a property at $100,000, you putting in a 20% down payment of $20,000. And then the property appreciates from 100,000 to $120,000, which means an increase in $20,000. Essentially double your investment because if you paid all cash, your return would have only been 20% instead, whereas in this scenario, you put in 20,000. And you’re basically now at 40,000. So you’ve doubled your investment. There’s also a lot of tax benefits when it comes to real estate investing. The first one is depreciation, depreciation is saying the government allows you to write off the value of the structure of the building over 27 and a half years. So every year you can write off one out of 27. And a half of the structure is value from taxes as a passive loss. So you didn’t actually lose the money here, but you get a write off against your profits. Second one is a 1031 exchange now allows you to defer paying capital gains taxes when you sell your real estate, if you then use those proceeds to buy another like kind investment. So if you had a property that you had a lot of gains in instead of selling it and paying taxes on those gains, you then use the entire amount to buy more real estate. So this allows you to scale your portfolio even faster. And finally, we have a step up in basis. So what that means is when you pass away, your heirs receive a step up in basis to the current market value. So that means that you will have to pay any capital gains taxes on any of the gains that occurred during your lifetime if they end up selling the property at that price. So why we started we essentiallyUnknown Speaker 5:00
He wanted cash flowing rental properties, it allows us that financial freedom and it allows us the option to leave our full time positions. You know, back in the day, we both actually quit our positions because, you know, we wanted to try out that freedom. And we decided to come back to our full time positions. But it kind of means that we have the option if we want to stay in a position or not, we have that option because we have multiple income streams working for us. So if you are trying to grow your net worth having multiple income streams is very important. With real estate, it’s kind of like owning your own business, you have more control. So with stocks, you don’t have as much control, the CEOs are essentially running those companies. Whereas with real estate, you can, you know, do things like force appreciation, where you’re renovating or repairing the property and increasing the property’s value because of that. So you do have a lot more control with your real estate investments. It’s also very replicable. So if you understand the blueprint, once you can actually keep doing this over and over again. So that way you can grow your net worth and scale your portfolio a lot faster. And then lastly, we just really love the feeling of, you know, renovating properties from distressed to beautiful. For example, we had this moldy House Project where there was no one living inside of it for two years is really bad inside, we made it beautiful. And now there are tenants in there happy. So we just really liked that feeling of transforming properties. Now let’s talk about how to start investing in real estate. So first off, you want to start saving money. So there are a lot of different ways to finance your properties. You can pay all cash, you can get a loan, you can get different types of loans and work with different lenders who have different rates, different requirements for the down payments, but usually you’re going to look at 20% down payment for a conventional loan if you’re looking at a duplex triplex or four Plex multifamily properties usually have a 25% down payment requirements. And then closing costs might be around two to 3% of the purchase price. So you need a lot for that you also need a lot for six months of expenses in case so that’s including principal interest, property taxes and homeowners insurance. So principal and interest is basically your mortgage. So all these different things, you want to make sure you have six months of those expenses in case you know, you never know if there’s gonna be vacancy or repairs. So you want to have that backup money. In case anything happens. Now when you’re getting a loan you’re looking at a 43 to 50% DTI Max and DTI is your debt to income ratio, which is whatever monthly debt you have divided by your monthly income. So for example, in this scenario that we have here, you’re looking at $600 monthly rent $300 monthly car loan payment 1100 P i t i and then divided all that by $5,000 monthly gross income, which is $60,000 per year. That’s a 40% DTI. So essentially, that makes it okay with those requirements. So essentially, they put these DTI requirements because lenders want to feel safe lending to you, they want to make sure that you are able to pay back that loan. So if you have high interest debt, you want to make sure you’re taking care of those debts. And you want to try to boost your income as much as you can to help with your DTI ratio. You also want to have two years of w two job income proof and you want to build your credit score if you’re buying with a loan. So you’re usually looking at 620 PLUS credit score requirements. And the best rates are usually at 740 Plus, so you want to improve your credit score because banks might not even lend to you if you have a low credit score. And if they do lend to you, you might not get a very good rate. So you want to improve that score as much as you can. So you want to build your credit history have different types of credit. And just make sure you’re always paying your bills on time. So you might want to set up auto pay if you’re organized so you always pay your bills on time so you can boost your credit score that way. Now you also want to increase your education so that means reading books listening to podcast taking courses if you want that step by step help. So some books we recommend include Rich Dad, Poor Dad, the bigger pocket series. So for example, in these pictures rental property, investing and investing in real estate with no money down those are great books as well. And then ABCs of real estate investing, investing in duplexes, triplexes, and quads, The Millionaire Real Estate Investor all of these different books will help you increase your education. And then if you’re looking for a podcast, definitely recommend the we love real estate podcast by Sean pan. He interviews a lot of professionals and they give a lot of great information. So make sure to check it out. And then we also have our step by step course remote rental riches. So if you want that step by step guide on how to invest out of state, or even locally, that kind of helps you figure out how to buy your first rental property. And then you also want to network so you want to attend meetups in person or virtually to meet people in the space. And that can include agents, investors, contractors, because you never know who’s going to change your business, pass your next CEO or who you’re going to create a partnership with. And this is something that I was more afraid of because I’m more introverted, but now I realize it’s very important when it comes to real estate because for example, I met an agent who ended up passing me a lot of deals.Unknown Speaker 10:00
So I’ve invested in, we met up with a contractor through like this Facebook group, and we ended up working with him on that moldy House Project. So a lot of these partnerships are created by just meeting people in the space. So you have to immerse yourself one site that you can check out is meetup.com, China actually hosts a meet up on there, and you can meet a lot of people locally who invest in the areas you might invest in. Alright, so now we’re gonna go into how to actually buy your first property. First thing you’re going to do is determine where you’re going to invest, we’re going to focus on markets that have good appreciation and rent growth potential. So the metrics that we like to look at our job growth metrics, population growth, seeing that if the crime rates are going down over time, seeing that income is increasing, and looking at the median home price growth, we use sites like city data.com, and also Department of numbers.com. So as you see on the screen here, on the right side, this is a screenshot from city data. It shows you the demographics kind of shows you the median age, as well as the average income and what it was back in the year 2000. So you can use this numbers to see the difference. And if things are going up, or if things are going down, the next thing you want to do is start learning how to analyze deals in your target market. So being able to analyze deals is very important. Because if you don’t know how to analyze deals, you’re just going to be taking someone else’s work, and they may not be giving you accurate information. So you need to be able to calculate deals. So that deals cash flow from day one after expenses. Some of the most common expenses that are gonna have are homeowners insurance, property taxes, mortgage vacancy, repairs, and property management fees. If you do hire a property manager, and above all else, if you’ve just getting started, we encourage you guys to avoid buying alligator properties. Now alligator properties are just homes that are negatively cash flowing. And like an alligator, they’re eating money away from your pocket every single month. So as an example, here’s a deal that has $1,000 of monthly rent, you’re going to pay about $450 for your mortgage $8, your property taxes $50 and homeowners insurance $100 in property management fees, and you’re going to have about $100 in cash reserves in case something happens. So your net is going to be about $220 a positive cash flow every single month. Now an easy way to analyze deals is with a 1% rule. And the 1% rule is just a guideline to help you decide is this a good deal or not. And what it says is the monthly rents should be 1% or more of the purchase price. So as example here, if the purchase price is $400,000, then your rent should be greater than or equal to 1% of that or $1,000. Now, the 1% rule is not an end all be all guide, there are some deals that fit the 1% rule that are terrible investments because they’re in bad markets. And there are deals that are really great markets that don’t quite hit the 1% rule, but still have a lot of good potential. So next thing you need to do is find a great agent to work with. When you determine your market, you guys are building out your team, we find our agents through forums like bigger pockets, or through referrals. If you go on bigger pockets, you can start typing in the market you’re interested in and asking for good agents, people will definitely reach out to you through there, you have to make a lot of phone calls. And during those calls, you should ask them about the market asked about the different neighborhoods and find out about average home prices, you want to find an agent that’s investor friendly, someone that can help guide you through the whole process. And more importantly, they understand how an investor thinks many agents are amazing. But to help you find a property that’s good to live in as investors we want to find properties are good investments that give us good cash flow. So again, call out people you’ll find some people that are great and some that are not and you know, find a good team member there. The next step is contacting multiple property managers. So similarly, you’re going to use referrals to find a good property manager. Again, if you can’t find any referrals, go on Yelp, Google, etc. And these guys are going to be charged of managing the property and making sure that you have tenants in place. When you call them you should ask them several questions such as What are typical market rents in the area, ask them about their tenant screening and eviction processes, ask him a question about the neighborhood and where they can and can’t do property management. So management firms will only do single family properties. Some of them are okay with doing apartment buildings. So have a conversation and ask what their scope is and also ask about their fees and their processes. The next step is get pre approved by a lender, a pre approval letter will let you know how much you can buy. So if you’re only pre approved for $100,000, there’s no point looking at properties at 200,000 or 300,000. It also shows listing agents that you are serious about buying, you’re not just wasting everyone’s time and then you prepare to buy a property. So what you do is you just call a bunch of different lenders, find out what the rates are, and citizen information so we can give you a letter and don’t worry if you end up finding a better lender in the future. You can always switch lenders if you want to. And don’t worry about committing with a lender at this point. Using the letter you still have the option to work with another lender in the future. If you find someone that has better rates now you want to start finding a good deal. So obviously you can look on sites like Zillow and Redfin. And honestly, we found, you know, many properties through that method. It’s also good to network with agents and wholesalers, like I mentioned before, because they actually pass a lot of deals to you. And again, like I mentioned, we’ve gotten many deals from some of the agents and even wholesalers we’ve connected with and we’ve also found deals through Facebook groups. So the moldy House Project, like I mentioned, that was through a Facebook group and then bigger pockets as well. I found a property at $23,000 before on bigger pockets, fix it up with $33,000 and now it’s worth over $100,000 And there are so many other ways to find good deals, you just have to be creative with it. Now also, like I mentioned, you may want to get a home that you can fix up to increase the value so whatUnknown Speaker 15:00
those scenarios I’ve talked about, we’ve forced appreciation by fixing up the home a little bit, and then it became worth a lot more after that. So find something in need of some repair in a good location before your first one, you want to start simple and don’t go to advance. So you don’t want to go too hard. And basically buy something that’s a complete fixer for your first property, because you might not know what you’re doing, it might be super overwhelming, and it might make you want to quit because it’s too much. So I think you should start small, you could possibly get something with just a little bit of cosmetic repair, or even something that doesn’t need repair and just go from there. Because you just want to get your feet wet for your first project, then you want to make offers. And you need to have patience, because some markets are super competitive. So for example, the Bay Area, Austin, those are going to be very competitive markets that you probably won’t win the offer right away. So it can be frustrating, but you don’t want to settle for anything that won’t cashflow or doesn’t have the potential to appreciate. You don’t want to just go you know what, let me just buy this whatever property and then it starts negatively cashflow and you can’t hold on to it right, you want to make sure that you’re buying something that fits your buying criteria. Now I mentioned that, you know, those markets are very competitive, but we’ve looked out of state and found some affordable markets that are a lot easier to win the offers. So it really depends on the market that you choose. Once you have your offer accepted, you’re going to be going into something called the escrow process escrow the time between getting your offer accepted. And when you get the keys to the home and you close right when you get your offer accepted, you’re supposed to put it in an earnest money deposit. And that’s typically going to be about 3% of the purchase price. And that shows that you’re serious about buying the home during this time, you’re also going to be gathering documents for your lender. So that’s gonna meet your two years of WTS tax returns, pay stubs and bank statements, you’re also going to be doing your home inspection report, you’re going to find an insurance carrier for your homeowners insurance, and you’re going to finalize your decision on your property manager. If you decide to get one, then finally you’re going to close on the property. After you close you’re going to be working with your property management company to make sure the property is ready. So they’re going to fix any issues with the home. Any miscellaneous repairs or changing the carpets, the property management company will start screening tenants and we’ll find you someone that can live in your property. And you’re going to have the cash flow rental property congratulations. And I’d also like to add that pm companies are optional if you decide you want to manage your property yourself. But for example, for us, we invest a lot out of state and we want property management companies to take care of the properties because it makes a lot more passive for us. But also they have a lot of experience in managing properties, we know that they’re going to do a good job, even the properties I have that were an hour away when I lived in the Bay Area, I still hired a property management company for that because of those reasons I just mentioned. And with pm companies, you’re looking at maybe eight to 10% of the rent and would be about the fee that you would pay. But other than that, that’s basically the steps on how to buy your first rental property. If you guys do want that step by step course we have remote rental riches for acquiring your first out of state cash flowing rental property. It also applies if you want to invest locally around you those same principles and everything apply. We talk about you know how to analyze deals, how to find your target market, how to build your boots on the ground team, we go over homework assignments, we have case studies where you can just watch me call different members of the Dream Team like the property management company, the agents and things like that. So you can see how I talk to them. On the right side, you can see some of the properties in our portfolio. Our current gross rental income is over $23,000 a month and we’re constantly growing that number. So we want to help you do that as well. And if you guys want to connect with us, obviously this is on YouTube. You can find me on YouTube on Instagram and Tiktok at Sharon Tseung and then you can find Sean at Sean loves real estate as well as youtube.com/sean Penn invest. So I hope you guys enjoyed this episode. Please make sure to rate review and subscribe. It really helps our podcast grow. And thanks again. I’ll see you guys in the next one.Transcribed by https://otter.ai
This is the digital nomad quest podcast with Sharon Tseung. teaching people how to build passive income, become financially free and design their best lives.Unknown Speaker 0:14
Hey guys, Sharon from digital nomad quest, and this is Sean with everything Rei and today we’re gonna go over how to buy your first rental property. We actually did this presentation with teachable, where we walked through like the benefits of buying real estate as well as how to buy your first rental property. So we kind of wanted to do this presentation again for you guys. So we have a lot to cover. So let’s just get right into it. In this presentation, we’re going to be going over why real estate is a great investment to begin with, how to get started and what to do to actually buy the very first one. So as a disclaimer, this is all for educational purposes. Please remember that investments involve risk, and you should do your own due diligence before investing so we aren’t financial advisors, so make sure to consult with a certified professional before making any financial decisions. Alright, so a little bit about us. My name is Shawn I used to be an engineer. Back in the day I studied electrical engineering at UCLA, and used to work as a former system engineer at Boeing and Northrop Grumman. Recently, I became a hard money lender. So I fund a lot of projects for real estate investors, and the founder of everything Rei. We’re also kinda creator on YouTube, Tiktok and Instagram. And my channel is mostly about real estate investing tips, strategies and current events to help you become a real estate investing boss. And I am Sharon and I graduated from UC Berkeley. I’ve been in marketing for over 10 years at various companies, including Google, founder of digital nomad, quest, content creator on YouTube, Tiktok, and Instagram as well. And I teach all about building passive income towards financial freedom. So we’re married and we recently moved from Bay Area to Dallas, we’re real estate investors with 25 units under a portfolio and another 700 escrow we have properties in California, Texas, Florida and Georgia are both content creators, like I mentioned, with almost 2 million followers combined, or so grateful for the community we built. And we’re all about financial freedom and designing our lives. And we hope to inspire you to do the same. So let’s talk about why you should invest in real estate and why we really love it. So there are a lot of benefits of real estate. First off, obviously cashflow, it’s the passive income you get from the rents after paying all of your monthly expenses. So that can include principal interest insurance, property taxes, also possible repairs and vacancies. So aside from all that, you should be able to cash flow if you are, you know, investing in the right properties. Now also appreciation is a large benefit. So real estate tends to increase in value over time, the average is usually around three to 4% per year. But if you’re choosing the right markets, there can be even more potential for appreciation. So for example, I purchased a property at $240,000 Back in the day, and now it’s worth over 650,000 or so in the last couple years, I bought a four Plex for around 175,000. And now that’s worth maybe 260,000 as well. So you know, you can dramatically increase your net worth if you are purchasing real estate because of the appreciation benefit. Now also diversification is another benefit real estate is relatively uncorrelated with other asset types, like stocks, bonds, or crypto. So owning real estate can help you diversify your portfolio. So for example, if stocks go down like it’s not going to take your entire portfolio, if you diversified in multiple asset types, including real estate, another benefit is leverage. So it’s a lot easier getting a loan to purchase real estate relative to other industries and asset types. So you can buy real estate with just 20% of the purchase price, but you keep all of the net income in the gains. And leverage helps you increase your returns, since you’re putting less of your own money in to begin with, and allows you to scale your portfolio faster. So let’s go over an example actually. So now say you purchased a property at $100,000, you putting in a 20% down payment of $20,000. And then the property appreciates from 100,000 to $120,000, which means an increase in $20,000. Essentially double your investment because if you paid all cash, your return would have only been 20% instead, whereas in this scenario, you put in 20,000. And you’re basically now at 40,000. So you’ve doubled your investment. There’s also a lot of tax benefits when it comes to real estate investing. The first one is depreciation, depreciation is saying the government allows you to write off the value of the structure of the building over 27 and a half years. So every year you can write off one out of 27. And a half of the structure is value from taxes as a passive loss. So you didn’t actually lose the money here, but you get a write off against your profits. Second one is a 1031 exchange now allows you to defer paying capital gains taxes when you sell your real estate, if you then use those proceeds to buy another like kind investment. So if you had a property that you had a lot of gains in instead of selling it and paying taxes on those gains, you then use the entire amount to buy more real estate. So this allows you to scale your portfolio even faster. And finally, we have a step up in basis. So what that means is when you pass away, your heirs receive a step up in basis to the current market value. So that means that you will have to pay any capital gains taxes on any of the gains that occurred during your lifetime if they end up selling the property at that price. So why we started we essentiallyUnknown Speaker 5:00
He wanted cash flowing rental properties, it allows us that financial freedom and it allows us the option to leave our full time positions. You know, back in the day, we both actually quit our positions because, you know, we wanted to try out that freedom. And we decided to come back to our full time positions. But it kind of means that we have the option if we want to stay in a position or not, we have that option because we have multiple income streams working for us. So if you are trying to grow your net worth having multiple income streams is very important. With real estate, it’s kind of like owning your own business, you have more control. So with stocks, you don’t have as much control, the CEOs are essentially running those companies. Whereas with real estate, you can, you know, do things like force appreciation, where you’re renovating or repairing the property and increasing the property’s value because of that. So you do have a lot more control with your real estate investments. It’s also very replicable. So if you understand the blueprint, once you can actually keep doing this over and over again. So that way you can grow your net worth and scale your portfolio a lot faster. And then lastly, we just really love the feeling of, you know, renovating properties from distressed to beautiful. For example, we had this moldy House Project where there was no one living inside of it for two years is really bad inside, we made it beautiful. And now there are tenants in there happy. So we just really liked that feeling of transforming properties. Now let’s talk about how to start investing in real estate. So first off, you want to start saving money. So there are a lot of different ways to finance your properties. You can pay all cash, you can get a loan, you can get different types of loans and work with different lenders who have different rates, different requirements for the down payments, but usually you’re going to look at 20% down payment for a conventional loan if you’re looking at a duplex triplex or four Plex multifamily properties usually have a 25% down payment requirements. And then closing costs might be around two to 3% of the purchase price. So you need a lot for that you also need a lot for six months of expenses in case so that’s including principal interest, property taxes and homeowners insurance. So principal and interest is basically your mortgage. So all these different things, you want to make sure you have six months of those expenses in case you know, you never know if there’s gonna be vacancy or repairs. So you want to have that backup money. In case anything happens. Now when you’re getting a loan you’re looking at a 43 to 50% DTI Max and DTI is your debt to income ratio, which is whatever monthly debt you have divided by your monthly income. So for example, in this scenario that we have here, you’re looking at $600 monthly rent $300 monthly car loan payment 1100 P i t i and then divided all that by $5,000 monthly gross income, which is $60,000 per year. That’s a 40% DTI. So essentially, that makes it okay with those requirements. So essentially, they put these DTI requirements because lenders want to feel safe lending to you, they want to make sure that you are able to pay back that loan. So if you have high interest debt, you want to make sure you’re taking care of those debts. And you want to try to boost your income as much as you can to help with your DTI ratio. You also want to have two years of w two job income proof and you want to build your credit score if you’re buying with a loan. So you’re usually looking at 620 PLUS credit score requirements. And the best rates are usually at 740 Plus, so you want to improve your credit score because banks might not even lend to you if you have a low credit score. And if they do lend to you, you might not get a very good rate. So you want to improve that score as much as you can. So you want to build your credit history have different types of credit. And just make sure you’re always paying your bills on time. So you might want to set up auto pay if you’re organized so you always pay your bills on time so you can boost your credit score that way. Now you also want to increase your education so that means reading books listening to podcast taking courses if you want that step by step help. So some books we recommend include Rich Dad, Poor Dad, the bigger pocket series. So for example, in these pictures rental property, investing and investing in real estate with no money down those are great books as well. And then ABCs of real estate investing, investing in duplexes, triplexes, and quads, The Millionaire Real Estate Investor all of these different books will help you increase your education. And then if you’re looking for a podcast, definitely recommend the we love real estate podcast by Sean pan. He interviews a lot of professionals and they give a lot of great information. So make sure to check it out. And then we also have our step by step course remote rental riches. So if you want that step by step guide on how to invest out of state, or even locally, that kind of helps you figure out how to buy your first rental property. And then you also want to network so you want to attend meetups in person or virtually to meet people in the space. And that can include agents, investors, contractors, because you never know who’s going to change your business, pass your next CEO or who you’re going to create a partnership with. And this is something that I was more afraid of because I’m more introverted, but now I realize it’s very important when it comes to real estate because for example, I met an agent who ended up passing me a lot of deals.Unknown Speaker 10:00
So I’ve invested in, we met up with a contractor through like this Facebook group, and we ended up working with him on that moldy House Project. So a lot of these partnerships are created by just meeting people in the space. So you have to immerse yourself one site that you can check out is meetup.com, China actually hosts a meet up on there, and you can meet a lot of people locally who invest in the areas you might invest in. Alright, so now we’re gonna go into how to actually buy your first property. First thing you’re going to do is determine where you’re going to invest, we’re going to focus on markets that have good appreciation and rent growth potential. So the metrics that we like to look at our job growth metrics, population growth, seeing that if the crime rates are going down over time, seeing that income is increasing, and looking at the median home price growth, we use sites like city data.com, and also Department of numbers.com. So as you see on the screen here, on the right side, this is a screenshot from city data. It shows you the demographics kind of shows you the median age, as well as the average income and what it was back in the year 2000. So you can use this numbers to see the difference. And if things are going up, or if things are going down, the next thing you want to do is start learning how to analyze deals in your target market. So being able to analyze deals is very important. Because if you don’t know how to analyze deals, you’re just going to be taking someone else’s work, and they may not be giving you accurate information. So you need to be able to calculate deals. So that deals cash flow from day one after expenses. Some of the most common expenses that are gonna have are homeowners insurance, property taxes, mortgage vacancy, repairs, and property management fees. If you do hire a property manager, and above all else, if you’ve just getting started, we encourage you guys to avoid buying alligator properties. Now alligator properties are just homes that are negatively cash flowing. And like an alligator, they’re eating money away from your pocket every single month. So as an example, here’s a deal that has $1,000 of monthly rent, you’re going to pay about $450 for your mortgage $8, your property taxes $50 and homeowners insurance $100 in property management fees, and you’re going to have about $100 in cash reserves in case something happens. So your net is going to be about $220 a positive cash flow every single month. Now an easy way to analyze deals is with a 1% rule. And the 1% rule is just a guideline to help you decide is this a good deal or not. And what it says is the monthly rents should be 1% or more of the purchase price. So as example here, if the purchase price is $400,000, then your rent should be greater than or equal to 1% of that or $1,000. Now, the 1% rule is not an end all be all guide, there are some deals that fit the 1% rule that are terrible investments because they’re in bad markets. And there are deals that are really great markets that don’t quite hit the 1% rule, but still have a lot of good potential. So next thing you need to do is find a great agent to work with. When you determine your market, you guys are building out your team, we find our agents through forums like bigger pockets, or through referrals. If you go on bigger pockets, you can start typing in the market you’re interested in and asking for good agents, people will definitely reach out to you through there, you have to make a lot of phone calls. And during those calls, you should ask them about the market asked about the different neighborhoods and find out about average home prices, you want to find an agent that’s investor friendly, someone that can help guide you through the whole process. And more importantly, they understand how an investor thinks many agents are amazing. But to help you find a property that’s good to live in as investors we want to find properties are good investments that give us good cash flow. So again, call out people you’ll find some people that are great and some that are not and you know, find a good team member there. The next step is contacting multiple property managers. So similarly, you’re going to use referrals to find a good property manager. Again, if you can’t find any referrals, go on Yelp, Google, etc. And these guys are going to be charged of managing the property and making sure that you have tenants in place. When you call them you should ask them several questions such as What are typical market rents in the area, ask them about their tenant screening and eviction processes, ask him a question about the neighborhood and where they can and can’t do property management. So management firms will only do single family properties. Some of them are okay with doing apartment buildings. So have a conversation and ask what their scope is and also ask about their fees and their processes. The next step is get pre approved by a lender, a pre approval letter will let you know how much you can buy. So if you’re only pre approved for $100,000, there’s no point looking at properties at 200,000 or 300,000. It also shows listing agents that you are serious about buying, you’re not just wasting everyone’s time and then you prepare to buy a property. So what you do is you just call a bunch of different lenders, find out what the rates are, and citizen information so we can give you a letter and don’t worry if you end up finding a better lender in the future. You can always switch lenders if you want to. And don’t worry about committing with a lender at this point. Using the letter you still have the option to work with another lender in the future. If you find someone that has better rates now you want to start finding a good deal. So obviously you can look on sites like Zillow and Redfin. And honestly, we found, you know, many properties through that method. It’s also good to network with agents and wholesalers, like I mentioned before, because they actually pass a lot of deals to you. And again, like I mentioned, we’ve gotten many deals from some of the agents and even wholesalers we’ve connected with and we’ve also found deals through Facebook groups. So the moldy House Project, like I mentioned, that was through a Facebook group and then bigger pockets as well. I found a property at $23,000 before on bigger pockets, fix it up with $33,000 and now it’s worth over $100,000 And there are so many other ways to find good deals, you just have to be creative with it. Now also, like I mentioned, you may want to get a home that you can fix up to increase the value so whatUnknown Speaker 15:00
those scenarios I’ve talked about, we’ve forced appreciation by fixing up the home a little bit, and then it became worth a lot more after that. So find something in need of some repair in a good location before your first one, you want to start simple and don’t go to advance. So you don’t want to go too hard. And basically buy something that’s a complete fixer for your first property, because you might not know what you’re doing, it might be super overwhelming, and it might make you want to quit because it’s too much. So I think you should start small, you could possibly get something with just a little bit of cosmetic repair, or even something that doesn’t need repair and just go from there. Because you just want to get your feet wet for your first project, then you want to make offers. And you need to have patience, because some markets are super competitive. So for example, the Bay Area, Austin, those are going to be very competitive markets that you probably won’t win the offer right away. So it can be frustrating, but you don’t want to settle for anything that won’t cashflow or doesn’t have the potential to appreciate. You don’t want to just go you know what, let me just buy this whatever property and then it starts negatively cashflow and you can’t hold on to it right, you want to make sure that you’re buying something that fits your buying criteria. Now I mentioned that, you know, those markets are very competitive, but we’ve looked out of state and found some affordable markets that are a lot easier to win the offers. So it really depends on the market that you choose. Once you have your offer accepted, you’re going to be going into something called the escrow process escrow the time between getting your offer accepted. And when you get the keys to the home and you close right when you get your offer accepted, you’re supposed to put it in an earnest money deposit. And that’s typically going to be about 3% of the purchase price. And that shows that you’re serious about buying the home during this time, you’re also going to be gathering documents for your lender. So that’s gonna meet your two years of WTS tax returns, pay stubs and bank statements, you’re also going to be doing your home inspection report, you’re going to find an insurance carrier for your homeowners insurance, and you’re going to finalize your decision on your property manager. If you decide to get one, then finally you’re going to close on the property. After you close you’re going to be working with your property management company to make sure the property is ready. So they’re going to fix any issues with the home. Any miscellaneous repairs or changing the carpets, the property management company will start screening tenants and we’ll find you someone that can live in your property. And you’re going to have the cash flow rental property congratulations. And I’d also like to add that pm companies are optional if you decide you want to manage your property yourself. But for example, for us, we invest a lot out of state and we want property management companies to take care of the properties because it makes a lot more passive for us. But also they have a lot of experience in managing properties, we know that they’re going to do a good job, even the properties I have that were an hour away when I lived in the Bay Area, I still hired a property management company for that because of those reasons I just mentioned. And with pm companies, you’re looking at maybe eight to 10% of the rent and would be about the fee that you would pay. But other than that, that’s basically the steps on how to buy your first rental property. If you guys do want that step by step course we have remote rental riches for acquiring your first out of state cash flowing rental property. It also applies if you want to invest locally around you those same principles and everything apply. We talk about you know how to analyze deals, how to find your target market, how to build your boots on the ground team, we go over homework assignments, we have case studies where you can just watch me call different members of the Dream Team like the property management company, the agents and things like that. So you can see how I talk to them. On the right side, you can see some of the properties in our portfolio. Our current gross rental income is over $23,000 a month and we’re constantly growing that number. So we want to help you do that as well. And if you guys want to connect with us, obviously this is on YouTube. You can find me on YouTube on Instagram and Tiktok at Sharon Tseung and then you can find Sean at Sean loves real estate as well as youtube.com/sean Penn invest. So I hope you guys enjoyed this episode. Please make sure to rate review and subscribe. It really helps our podcast grow. And thanks again. I’ll see you guys in the next one.Transcribed by https://otter.ai
