This week was a fun week for me, I finally saw some of my favorite clients find a fantastic home for them and close on it! I love watching people who have searched and searched finally find a place that makes them so excited. This photo is from when I was just about to jump in the car to go to the closing, Drew took the photo, it’s certainly not our best since Elle is in the middle of crying but I love it anyway. 🙂
I’ll start the FAQs with what I anticipate people’s two biggest money-related questions regarding investment properties is…
Do you have to be rich to start?
In Massachusetts you are required to put 25% down on an investment property that you aren’t going to be living in (a two-family that you will be living in one side doesn’t count as a property where you need 25% down). Real estate is higher priced than a lot of areas of the country where we live… California, NYC and DC are probably the few areas that are more expensive than Boston area so if you are investing in these areas you definitely need to save really well. AJ started investing the old-school way of just saving saving saving… on a teacher’s salary. The first property AJ bought, the condo he lived in when we met, was with a down payment that was made up of a combination of savings and a first-time home buyers grant (check out your city to see if they have something like this, sometimes they are offered as a zero interest loan instead of a grant).
How do you keep buying investment properties? Do you have loads of cash that you keep forking over for down payments?
AJ quickly realized the tax benefits of having a mortgage and every year would put his tax return into savings which allowed him, every few years, to have enough money for another down payment. We kept using this method until AJ was fortunate enough to receive an inheritance from his grandmother that allowed us to put 25% down on a condo.
Shortly after that condo purchase our real estate broker, the one that mentored AJ through the 15 family, told AJ about commercial loans. The advantage of this kind of loan is that you can use equity in another property as the down payment. We have primarily used this as the method to fund the down payment for some of the more recent properties although sometimes the bank has required our down payment to be a mixture of equity and cash. The bank will sometimes make you do both to ensure that we are a smart investor for them to partner with because they certainly don’t want a risky client who may default on their mortgage. Commercial loans have changed the ball game for us. We’ve developed a great relationship with a local bank (Cape Ann Savings Bank) and have developed a relationship with their loan officers and just met some people on their board of trustees at a fun event they hosted a couple of weeks ago.
So… what is equity?
When we first started I never really understood what equity is so I’ll dumb down the explanation if you are having a hard time understanding it like I was. Let’s say we find a great house. Properties identical to it are selling for $150,000 but somehow we get it for $100,000. You are buying a home an instant $50,000 equity in it. Almost every property we purchased has had significant amount of equity in it (purchasing a foreclosure or a short sale is generally a great way to get a home with built-in equity).
Did we keep our jobs after investing in real estate?
What do you look for when purchasing an investment property?
Primarily two things if it’s going to be a rental: that there will be equity in the house within a few months and that we can get it for low enough that the house will make a fair return based on rental market values.
You can increase the equity in the first few months by simple things like doing some repairs, painting, replacing fixtures or carpet. AJ is incredibly handy and I love to research deals so we can do things fairly inexpensively. With some rentals we’ve replaced the kitchen and baths, with others we’ve done massive cleaning and just ripped out heinous carpet and painted. It depends on the home. In general the homes we purchase are pretty gross at first because we’ve found that’s where the money is if you are willing to put a little elbow grease into a project.
Do you always make loads of money on your properties?
No, but even if they don’t they are still worth it. We have a couple of properties that are at the breaking even or making just a little more than that each month, like a two-family AJ bought when the market was at it’s height. That property taught AJ an important lesson: really know the market. You can bet your bottoms he never bought high again because it’s been almost ten years and we are just about getting to the point where it could be sold and not lose money. Now AJ studies the market and what houses are selling for on a daily basis. Another reason we are keeping it is because we have dynamite tenants in each of the units, it’s a mother and daughter who are so low-maintenance. They really love the home and take care of it like it’s their own.
But there is a bigger reason… that property will be paid off in 15 years and someone else has paid the mortgage each month. Sometimes it’s so easy for me to get caught up in the mentality of “that property isn’t making a good enough return” but it is… I just need to think about it in future terms and not necessarily what it brings in each month.
Guess what is happening in 15 years? College tuition bills. If we have no mortgage in 15 years + that rental income – necessary upkeep then the lean years have paid off! Patience and being in it for the long haul is HARD but we are already finding out that it’s worth it as we see the mortgages go down each month.
Coming in the next FAQs post: getting over the fear of purchasing your first property and choosing tenants… plus a few more answers to questions you’ve submitted. If you’ve missed the first post in the series click HERE.
If you’re in eastern Massachusetts and want to meet to talk with AJ and me about real estate investments, buying your first home or purchasing your forever home we would LOVE that. Send me an email at firstname.lastname@example.org.