8 Lessons Of Our First Year in Real Estate Investing

We’re taking you back in time to when we first started our journey in real estate investing and the valuable lessons we learned for that first property we acquired.

Introduction

We started our search for a house in the winter of 2016. I had been working for about 1.5 years at an architecture firm in an affordable housing development company in Los Angeles. So I was fascinated with multi-family apartments and with housing for all, given the lack of housing in Los Angeles.

It’s been a hot market for home buyers for several years, with little inventory, home prices going up and more people wanting to buy. It is also a good market for rents because most people cannot afford to buy and instead rent in the city to be close to work. Daniel was still in school and had one more semester to go, but he was working on the side for his father’s inspection company and he made good money. Between the two of us we were able to save some money, but our goal was to get to $100,000 (20% down payment for a median home price in Los Angeles).

So we started our home search thinking it would be easy. We did not even bother looking in areas where we would be out-priced and instead focused on the up and coming neighborhoods of El Sereno and City Terrace. We also indulged in the possibility of living in Montecito Heights and Mount Washington.

Here are a few things we learned from our first house purchase:

1. Communication is Important

Have a conversation with yourself and your significant other about your goal in purchasing a home. This is the most important step because once you know what you want to accomplish, you can weed out the properties that don’t work much quicker and easier.

Halfway along our search, we discovered the power of rental income and real estate investing and how it can contribute to financial independence and early retirement. Our background in design and construction also helped make our vision for our future clearer. We set up a criteria and only looked at properties that met at least 80% of our criteria. It included neighborhoods, proximity to work and/or public transit, rental potential, development potential, home condition, financing type, and the most important, a multi-family (2-4 units). When you buy a multi-family, you become a landlord, and can use the 70% – 75% of the rental income to supplement your income when you are qualifying to get a loan. This gives you more purchasing power.

2. Educate Yourself

After you figure out what is your goal, learn as much as you can about the process and what it will take to achieve it. You don’t have to study the market in detail, but learn about the steps to purchase a house successfully. Calculate your mortgage and expenses so you can truly see if you can afford that house.

In our case, we were young and didn’t want to start a family right away. We wanted properties that we can add value to so that it appreciates and then we can pull our investment out through refinancing. And then repeat the process again. We learned through real estate investing books and podcasts, seeking mentors, and trying it out. We didn’t get into educating ourselves until after six months of starting our search and it changed the way that we look at properties and the possibilities of retiring early through rentals.

3. Get Pre-Approved

Or at least know realistically how much of a house you can really afford. Do not trust the mortgage calculators or estimators websites and do not trust what a lender tells you unless you are running hard numbers (credit scores/reports) and they are looking at your documents closely (tax returns, pay stubs, bank statements).

Knowing how much you can afford is an effective way to trim down and narrow in on the places that you can afford. It saves you time and disappointments. We ran fictitious numbers on these websites and thought that we could afford a $500,000+ house. We started looking at hillside neighborhoods (because we love views) for single family residences and pretty quickly fell in love with the neighborhood and basically excluded anywhere else. In fact, we weren’t even close to being able to afford them without paying a huge down payment (50%), especially only on my income alone.

We did not know that 2 years tax returns were required for people who have 1099, the average of those 2 years tax return is the income for 1099, you can only use 40%-45% of your income towards the house, and any debt that you have is used against your gross income before they take the 40% calculation. Don’t be afraid that getting pre-approved will ding your credit score. Your score goes down by very little and you will know for certain what your purchasing power is.

4. Don’t Take On Major Debt Before Your House Purchase

Try to avoid major debt, which will work against your income. Luckily we both graduated without any student or consumer debt. We always used our credit cards responsibly and always paid on time. However, when Daniel graduated from school, he needed a new car to work his inspection jobs. So we decided to sell his old car and finance a new car.

That was an immediate debt of $542/month that counted against my W-2 income. At the time Daniel did not have 2 years tax return so we could not use his income (even though it was easily double mine). Everybody’s situation is different, I’m sure if we had two W-2 incomes, the car loan wouldn’t have been a big deal; but for our situation, it was. That brought our purchasing power down, hovering in the $400,000 purchase price for a multi-family and $350,000 for a single family (mid 2017). And if you live in Los Angeles, those prices don’t exist anymore unless you drive 1 hour away from the city.

Now, we can use his 1099 income since he has two years work experience and we also paid down the car to 10 payments because if you owe 10 payments or less, that debt doesn’t count against you. That was a big chunk of money that we had to pay off eventually; but it hurts to pay it upfront.

5. Clean Up Your Finances

Make sure your finances are clean and there isn’t anything fishy that could scare off the lenders. Ever since the market crash of 2008, lenders are more conservative and strict about whom they lend to. They want to protect their investments. Applying for a mortgage now is much harder than it was back in 2008, there is more regulations and requirements. If you are thinking about buying a home soon, budget at least 3 months prior to getting your pre-approval letter to make sure your bank accounts look clean.

Make sure you don’t have a huge purchase or even a huge deposit of money that they may question, and if you do, make sure you have all receipts and documentations of it. Typically, lenders require 2 months of bank statements, so make sure your down payment money has been sitting in your account for at least 2 months. If you deposit cash, it raises a red flag, so if your business receives a lot of cash, ask your clients to give you checks instead.

6. Find a Real Estate Agent Who Knows Your Market & Goals

The real estate agent is one of the most important people in your team. They will advise you about the neighborhood, alert you when new homes hit the market, and know if it is a good value. It is also convenient if your agent lives nearby or even in your target neighborhood so you can always see the house first. Our first agent lived 30 miles from Los Angeles and we only saw each other during the weekends. This doesn’t work in a hot market since s/he doesn’t know the demand/prices in our specific area.

Our current agent lives in our target neighborhood and she is very knowledgeable of it. She even recommended us how to price our units for rents. Good real estate agents keep abreast with technology. Most often than not, we cannot answer phone calls at work, but we can respond/send a quick text/email. Also, the ability to DocuSign documents is a time saver (this is typically the norm).

7. Niche Down on 2-3 Neighborhoods and Study Them

Narrow your search to at most 2-3 neighborhoods and focus your energy on finding the right property on those. We were looking all over Los Angeles because we weren’t specific on our neighborhoods; all we cared about was meeting our budget. However, this strategy can be time consuming. Drive around neighborhoods, get to know them intimately, hang around them, see who lives there, check out the transit system, and have a feel for them. Once you like a neighborhood, you will always find a house that meets your criteria.

8. Make Offers

Make offers on a house that you like as soon as it hits the market, but make it contingent upon interior inspection. In a hot market like Los Angeles, homes with the right price can go within hours of being on the market. Homeowners and investors are competing to buy property because prices and home values are always rising. We lost at least 3 houses because we offered too late. We were literally 1 hour late because we wanted to see the house before submitting an offer. That was before we knew that we could submit an initial offer and have it contingent upon interior inspection. You can go see it with your real estate agent and if it doesn’t match your criteria you can always withdraw the offer, offer less/more, or proceed with the transaction.

Just remember, there’s always ways to back out of a transaction as long as it’s legitimate. Don’t be afraid to take the plunge, nobody ever regrets purchasing their first home.

Ending Remarks

This is just the tip of the iceberg; there are still tons of things we are learning along the way. Just remember to never be afraid of asking questions and seek for help.

Please let me know your thoughts in the comments. I am always happy to provide recommendations and encouragement in your own journey to become a homeowner.