The Easiest Way To Launch Into Real Estate Investing

The following is a guest post from Prosperity Junky.

If you have been reading Free Money Finance for some time you are very likely investing in the stock market in some capacity.  But, have you also considered real estate investing?  Maybe you have but not sure how to get started?  Here’s my story detailing the easiest way to start your real estate investment business. 

It all began with simply my desire to move to a different part of the city.  I had wanted to make this move for over two years but I had not found the right opportunity to make that happen.  This was difficult for two reasons.  First, I currently owned a house and I was planning to rent or sell that house before I could move.  Second, I obviously would need to find a new house to buy and it takes time to find the “right” house. 

Luckily, an acquaintance presented me with an offer I could not refuse.  In casual conversation he said he had received a job offer and he was going to leave his company.  When I heard that, I really didn’t think too much about it.  As I asked a little more about the new offer, he revealed that the new position was in a different part of the state and he would need to relocate.  Hmm…now I got a little more interested!  I had a rough idea of where he lived and I knew it was close to where I wanted to be.  Being the opportunist that I like to think I am, I asked, “When are you going to be moving?”  He said, “Well I have to start my new job within 4 weeks so I will be moving soon.”  Ding! Ding! Ding!  The bells of opportunity were ringing. 

I knew right away this guy was going to have a difficult time trying to sell his house.  His job offer came at a time that the housing market was in a slump.  Houses were not selling quickly.  In addition to that, his house was also in a fairly new community.  If you were in the market for a new house, you could buy a brand new house in this area for nearly the same price or less than he was going to list his house.  On top of that, if you bought a comparable new house you could customize it to your liking.  I also new this guy needed to sell his house quickly because he needed to start his job in four weeks.  We already knew it was going to be hard for him to sell his house.  However, it was going to be EXTREMELY difficult to sell his house within four weeks. 

It’s fair to say I had the negotiating advantage I needed.  Thankfully, this didn’t require much negotiating because I had very motivated seller.  We negotiated the deal and he agreed to the following:

1. He would sell me the house for only the amount he owed on his loan. 
2. Closing costs would be covered by me.
3. No real estate agents would be used for this transaction so that we could avoid any agent fees.  Everything was done through a title company.
4. The seller would leave his refrigerator and washer and dryer without cost to me.

This was all done in relatively short order.  Now I only had to figure out what to do with my existing house.  With the depressed housing market this was an optimal time to rent the house.  As it turns out, the seller needed a few extra weeks to get his things moved out of the house.  With this extra time, I decided to move forward with renting. 

I quickly listed my home for rent.  I based the monthly rent off corresponding rentals in the area and my monthly expense obligations.  I immediately had people interested in the property.  I spent about three weeks interviewing prospective tenants.  By the third week, I had selected a tenant and already received their deposit and a signed leased. 

Eight weeks after this whole process started, I closed on the new house and moved into my new home.  Two weeks later, the tenant moved into my previous home.  I was officially a real estate investor!

I did this successfully by making two very smart money moves:

1. I identified and negotiated the purchased a new house at a significant discount plus bonuses
2. I turned a primary residence into an investment with little effort

What were the keys to my success?

1. Money and Credit:  I had been living below my means for some time and my credit score was high so I was in a good position to purchase a new home when the opportunity was right.  Note: It doesn’t matter what investment opportunity comes your way, if you don’t have money or the financing to make it happen.
2. Discounted Property:  I successfully identified a golden opportunity to purchase a new home.  This included finding a home which met my criteria which was owned by a motivated seller.  Because of this, the property was purchases at a nearly 20% discount even after closing costs.  Note: With real estate investing you make your money during the purchase, not the sale.
3. Motivated Seller:  By finding a very motivated seller, it put me in a very strong position to negotiate a very attractive deal that I just couldn’t pass up.  This increases your ability to get the property at a significant discount.
4. Tenant Selection:  Although I found a tenant in short order, I was diligent in my selection process therefore I was able to select a responsible tenant who is taking care of my investment.  Note: Not selecting the right tenant can cost you a ton of money.
5. Attractive Financing:  Finally by renting what was initially a primary residence, I took advantage of a lower fixed interest rate than would typically be available when purchasing an investment property directly.  This helps to ensure that you can cash flow every month.

Real estate investing is not for everyone.  It takes patient and hard work.  However, it does provide some significant advantages over other types of investments.  If you decide it’s for you, turning your primary residence into an investment property can be the easiest way to launch your real estate investing business.

FMF readers - Are you investing in real estate?  How did you get started?

Comments

[Duane Gran]

I made my foray by purchasing a new primary home and renting the existing one instead of selling it. The timing can be tricky, but in observation this is the most common approach I've seen.

I have to take issue with the following statement: "With the depressed housing market this was an optimal time to rent the house."

It really depends. Rental inventory is a little high right now because some sellers have resorted to renting their home when they couldn't sell it. This gives potential renters more options and drives down the price of rent through competition. It might be balanced out by people who are forced to rent after foreclosure, but that isn't the ideal tenant scenario by any stretch.

[Credit Helper]

Real estate can be an excellent investment right now. Of course the market is down, but isn't that when you should buy? A lot of places are reaching the point where they are becoming undervalued. Some homes can be purchased for less than it would take to build, due to foreclosure or other circumstances.

Like any other investment, real estate is not a sure thing. Being a landlord has its own set of problems.

[Darrell]

I started by buying a duplex in my early 20's and living in half of it.

[ProsperityJunky]

@Duane-

I agree. Optimal may not have been the best word choice there. Optimal is hard to find.

However, becoming a landlord is a bet that you can earn more renting your home and selling later than you would by selling now and putting sale proceeds to work elsewhere.

With the depressed housing market, and large inventory of houses for sale, it was certainly a better time to rent than to sell.

[Kevin M]

I also thought about doing this, but in the final analysis, we determined the equity in our old house is better used as a down payment on the new one. Plus, my wife isn't too fond of becoming a landlord.

[Mark]

Kevin, You do NOT want to be a landloard as a real estate investor. Two word for you: Property Manager.

Prosperity Junk, from your text: "Finally by renting what was initially a primary residence, I took advantage of a lower fixed interest rate than would typically be available when purchasing an investment property directly." Question: How do you protect your assets against a lawsuit from your tenant if you have the rental property in your name and not through a LLC?

[ProsperityJunky]

Mark -

You can still transfer the deed of a property that was purchased in your name to a an LLC to protect your assets. You should check with your lender however because some disapprove of that.

As far aquiring a new investment property, buying property under an LLC will be more difficult because you have to get financing as the business. The requirements will be higher and many lenders won't lend to a newly formed LLC without a credit history.

How can someone with no money and crummy credit get into real estate investing?

[Mark]

ProsperityJunky,

Thanks for the hint, I was not aware of that. I thought that if I were to transfer the deed from my name to an LLC I would need to refinance the property with a higher interest rate. I knew about lenders' disapproval of that, but I did not know there were exceptions. Thanks again.

[RA]

Trying to save fees by cutting out a realtor can be costly. My realtor husband is a champion negotiator and has garnered thousands of $ more for people than they would have gotten for themselves. I can't say the same for just any realtor, but it can seriously pay you more than it cost you if you use one that is known for thier skill. And that can includes pricing a property correcty. Not doing so can be costly in the long run as well. Realtor representation on a new build job is essential as well. I see tons of $ left on the table all the time by those who attempt to save $ by going around the realtor. Makes no sense because a good realtor knows where the builder can give. The builder has already built in realtor cost, and if buyer bypasses realtor, builder pockets the money typically and does NOT pass the savings on to the buyer. Not to mention the cost of letting the seller represent you. How can they get you the best deal and get the best deal for themselves at the same time?