Excerpt from my book "How to Acquire Your First 10 Investment Properties
Section II – Developing a Strategy and Roadmap for Success
What does your first deal look like? What type of property will you acquire – Single Family Homes (SFHs), duplex, quadplex? Perhaps it’s a commercial property like an apartment complex or a mobile home park? There are certainly many choices available to investors today. As I began to educate myself on the various investment vehicles, I figured the quickest and most cost effective way to get stared would be through a smaller 3 bedroom/2 bath home. But I was careful to think beyond this first transaction. I needed to have a long term vision of what the next several deals would look like.
I began to build the roadmap for my first 10 properties. I used the number 10 for two reasons – the first was because it was a number I could put my head around. It was a good stretch goal but it also wasn’t exactly mogul status either. The other reason I chose 10 was because this was the maximum number of financed properties that Fannie Mae and Freddie Mac (government sponsored lending authorities) would allow for a single investor. I believe this is a good target for those just getting started and is the thesis of this book.
Tip – If you are married, currently you and your spouse are each allowed up to 10 financed properties as long as your spouse can qualify for the loan. It is important to note that your primary residence also counts towards a financed property.
Fortunately for our household, my wife has a strong stable job which allows her to qualify for Fannie/Freddie financing. Because of this, I built my strategy around alternating who applied for each loan. I would do the first, then she would apply for the next. This would allow enough time between each application for things to settle down before the next acquisition.
The fun part for me was to project future cash flow based on the number of properties I would own. It’s ok to let you imagination run wild. What really inspired me was calculating the amount of monthly cash flow I needed to replace my current W2 income. This is a financial freedom number. It is extremely liberating to set a date on a calendar and plan for the day when working becomes optional. For many folks, they will continue to work past this date because they really enjoy what they do. For others looking to escape the rat race, this day cannot come soon enough.
Section III - Looking at Deals
Like many first time investors I chose to search for a simple and boring 3 bed/2 bath SFH which was within a 20 minute driving radius. Because I was so green, I decided to enlist the help of a local realtor Judy, who knew the area quite well. Because Judy had many years of experience, she was able to ask me a series of questions that helped define what my strategy in the short term would be. She was also worth her weight in gold – she not only ran comps of neighboring properties for sale, she also knew what physical aspects to look for like cracked foundations, evidence of termite damage, and signs of mold. She seemed to keep me grounded when at times I would fall instantly in love with a property at first sight. Over the first two months we looked at a dozen properties. All of them had issues but in the price range that I was looking, it was much more difficult to uncover that hidden gem…until one day.
Judy called me up and said a new listing just hit the MLS (Multiple Service Listing) and ironically it was just down the road from me. We immediately went there and walked the property. It seemed to had all the right criteria that I was looking for including the right price, size, proximity to where I lived and appeared to be in excellent shape.
The best way to become familiar with the different investment properties available is to actually look at them. And one of the best ways to look is from the comfort from your own home via the Internet. There are so many tools available to help investors assess geographical areas, taxes rates, local economies, crime statistics, local attractions and entertainment, schools and churches, etc. Additionally, there are great websites like www.Loopnet.com for searching commercial properties. I live in Houston and we have an excellent residential website called www.Har.com. From here you can see 95% of the checklist items needed to create a short list of properties to see in person. This is where having a strategy should be applied. Filter your online search criteria to match the property demographics you are looking for.
Tip - It is best to run a financial pro forma on each property prior to seeing the property in person. This will save you and your realtor a great deal of time. The pro forma will estimate what monthly and annual expenses will be relative to projected income. The more properties you look at, the better you will become at knowing good ones from great ones. A sample pro forma can be viewed at www.marsantinvestments.com
Another word of advice when you’re first starting off is to not become romantic about the property itself; be romantic about the numbers. Many first time buyers view their first deal through the lens of what they would buy for themselves. The fact of the matter is that there are plenty of hardworking folks in America that are perfectly content with an "average" but safe place to hang their hat without all the bells and whistles. Once you have narrowed down your list to the top three properties contact your realtor to schedule showings. Your realtor should be able to provide you with additional information such as how many days the property has been on the market, offer history, if there are any incentives, or if there are any red flags (sellers disclosures) that you should be aware.
It's also important to be patient with the process. I must have looked at 50 properties before I found the right one. Many of the houses had foundation issues, termites, water damage and other problems that would not be acceptable per Fannie May and Freddy Mac guidelines. I needed a house that needed minor fix ups like paint and carpet - things that would make the property more appealing to a renter but would also pass the sniff test of the banks.