Investment Real Estate for Beginners

To a young friend considering buying a two-flat in a tough neighborhood

You raise a lot of interesting questions - I'm going to have to think about them. Here are a few first impressions -

 >Looks like I might not break even
Residential 1-3 flat real estate is priced as you describe - the rentals roughly cover the mortgge payment at with a normal down
payment. If you're looking for 100% financing (no down payment) then it's going to be tough to break even. Lenders want you to do better than break even, so it's tough to get
started this way. You're better off with a down payment
 

> I saw a neighborhood that looked good, so I'm all set.
Take your time picking the neighborhood. Get to know the city, if you haven't already. Get on your bicycle (I'm a bike nut) and ride around. If you aren't willing to do this, you won't be happy living there. Really check out the neighborhood - be there from 6-8 in the morning and see who comes out of the buildings. Sit in your car on a Friday
or Saturday at 7-9 PM, and see who comes and goes. Walk around. Go in the convenience store. Walk to/from the train. Find out if this is your place or not.

>I was going to get someone else to collect the rent, and pretend to be a tenant in the building so nobody bothers me.
Collect your own rent - that'll give you a peek in the door, and let you know what's really going on. By all means, I like your plan to hide your ownership. My Dad built homes when I was a kid, and I
was forbidden to tell my neighbors that he'd built them.
 

Sweat Equity

Your willingness to live in an up-and-coming neighborhood (that's not quite there yet, but on the move) and to do a bunch of work is a one-time gift - when you run out of friends with the time to help you, and when you get into a household yourself, you won't think it's fun anymore. But in the meantime, it's hugeley educational, fun, and makes you money.


Money

Match your borrowing period (the term of your interest rate lock-in) to how long you'll be there, plus a little. I hope for your sake that five years out of school you'll be in a much better situation than you are when you start - so why would you get a 30-year-fixed mortgage, unless you plan on holding the thing for 30 years. As a grown-up, you won't want the things you could afford at age 21 messing up your investment portfolio.

Polish your credit - get a free copy of your credit report, look for negative things and clear them up. There's a zillion web sites on this. If you aren't using your two credit cards, use them to buy a tube of toothpaste and pay it back immediately. Having no credit history makes it difficult to borrow.
 

For your first loan, expect to get help from family (co-signing, small loans etc.) - If they can. It's the American Way.
 

Look at a bunch of property. Waste realtors' time - and don't worry about it.
 

Read everything about consumer finance that you can on quickenloans.com, and on other consumer finance websites. Make a spreadsheet laying out your income and expenses, and figure out whether you're going to get into trouble if a tenant can't/won't pay for a few months.
 

Condo? - If it's already a condo building, much of the money has already been made. Consider buying a building that's in rental, running it for a few years, then take it condo.
 

Many think residential condos are overpriced right now - there are people buying them for speculative purposes, who think that because they've gone up 20% in a year, that they'll do it again. Don't fall for it - Buy something you can stand to live in, in a neighborhood that's on the rise, that'll pay its mortgage for the units you don't occupy, and fix it up.
 

Be financially honest - If it can't pay for itself without taking a teaser mortgage with an artificially low rate, then IT CAN'T PAY FOR ITSELF. Be careful not to lie to yourself.


Carry a reserve - air conditioners die at bad times, roofs leak. It's one thing if it's your own home - open windows, duct tape and
mac 'n cheese until you can afford the repair. But when it's your tenant, they can move out, skip the rent, or sue you. Set money aside, and expect to spend it.


Get handy, if you're not already - buy the Readers' Digest Do-It-Yourself Manual and Fix-it-yourself Manual and see if you can do the stuff in it. If you're at the mercy of contractors and handymen, it'll be hard to get rich owning a two-flat.