When we moved to Florida, my husband and I were drawn to the beautiful waterways and beaches. “Wouldn’t it be great to live on the water?” we said. “Just a little house with a view?”
But as we started our home search, it became clear that even though Florida has some of the lowest prices for waterfront property in the nation, we still weren’t going to be able to afford what we wanted.
Even though living on the water wasn’t possible right away, we turned that desire into a long-term goal. That’s how we got started in real estate investing. By actively getting involved in our local real estate market in a methodical and intentional way, we were eventually able to purchase the home of our dreams. Here’s how we did it.
The short-sale primary residence purchase
Okay, so we weren’t going to be able to live in our dream home immediately — but we did need to purchase a home for our family. With the help of our expert real estate agent, we focused our search on the following criteria:
- Homes that were below our budget. This was important for later parts of the plan. We didn’t want to tie up all our savings, and we didn’t want a mortgage that would eat up a big portion of our income. Though we were approved for more, we wanted to find a home under $220,000.
- Homes that were undervalued for the neighborhood. We needed room to build equity, so we wanted to look at the least expensive houses in well-established communities. Most of the time, this criteria meant that the homes needed work.
- Homes that were structurally sound. Although we were prepared to put time into renovations, we didn’t want to do major repairs to the foundation, plumbing, or electrical systems.
- Homes that fit our family’s needs. Since we’d be living in this house with our small children (ages 1 and 3), it needed to have the potential to feel like home for several years. Size, layout, and community played a part in the decision.
Our real estate agent helped us find a short sale property that fit all these points. Basically, a short sale means that the owners owed more on the property than the current market could support; the house was not worth what they still owed on their mortgage.
These particular owners had abandoned the property, which meant the house was not very pretty. The finishes were outdated and broken. The air conditioner didn’t work. Mold grew in one of the bathrooms. Some of the appliances were missing. Birds had made a home in the chimney. The yard had become such a jungle, we literally could not even see through it to the back fence.
Still, the bones were good, it met the investment potential criteria, and the numbers worked. The list price was around $230,000, and other homes on the street were valued in the $300,000s. We negotiated to around $215,000 — right where we wanted to be so that we could save for the next step.
Though the house was in bad shape, it had a park nearby where one of us could take the kids while the other worked on renovations. So we looked past the ugliness, and we made it a home.
We did run into some problems that are associated with buying a short sale, however. For example, a couple of years after we moved in, we were told that our address was on a recent foreclosure list, but we’d never missed a payment. Turns out, the paperwork hadn’t been filed correctly at the previous owners’ bank, and they were claiming foreclosure.
The rental income property purchase
A few years later, once we felt established in our primary residence, my husband and I moved into the next phase of our real estate investing strategy: we started looking in surrounding areas for a smaller home with rental income potential.
We did extensive research before beginning the process and found several important elements to consider.
- The tenant. We wanted our initial experience as landlords to be as easy as possible, so we actually lined up a tenant first. She assisted in our home search, since we wanted to make sure it would be a place she liked, too.
- The layout. Our first tenant would be moving in with roommates, but we wanted a layout that would be conducive to both roommates and families for the future. Any unusual floor plans were eliminated. A split-bedroom plan was ideal.
- The neighborhood. For this aspect, we imagined our own family living in the home. Would we feel safe, have access to good schools, and be close to major conveniences? Our tenants would want those same things, too. We also took any HOA fees into consideration, since that would affect our rental income.
- The slight fixer-upper. We already knew that good values in real estate investing often go hand-in-hand with doing some work. But because our tenant wanted to move in quickly, we didn’t want extensive renovations. We wanted the kitchen, flooring, and at least one bathroom to be immediately usable. Other updates could be made over time, as long as the tenant was comfortable.
Again, with the help of a top real estate agent in our area, we found a cute home in a great area that only needed a little cosmetic work. We negotiated the price to around $80,000, whereas other homes in the subdivision were valued around or over $120,000. We could update it quickly and rent it for around $1,100 per month. A good investment.
Because we had intentionally spent less on our primary residence than we could have, we were able to pay cash for this income property. This meant that after setting aside money each month for property taxes, homeowner’s insurance, and a maintenance fund, all the rest of the rental income could go into savings for the next phase in our real estate investing plan.
However, Sheila Smith, a top-selling real estate agent with years of personal real estate investing experience in Boise City, Idaho, says that our cash strategy isn’t the only way. Plenty of people choose to get mortgage loans on their investment properties. As Smith says, “Using other people’s money to make money” could be a financially feasible way to get into real estate investing and see a great return on your investment, as well.
The flip home investment purchase
A few years later, we had enough saved for a down payment on another fixer-upper. This one we considered a flip home, or one we intended to renovate quickly and sell for a profit. We watched the market diligently and made offers whenever we found an undervalued property with a good layout in a nice neighborhood. Before offering, we made sure to run numbers based on the following questions:
- What will the monthly payment be? Because we did not have cash for the entire purchase, we got prequalified for a mortgage loan. We calculated what the monthly payment would be based on the money we had set aside for the down payment and the current interest rate.
- How much will renovations cost? After doing a walk-through of the property, we determined our projected remodeling costs. Did we have enough additional cash to cover those projects?
- How long will the repairs take? This is an important consideration because it affects total carrying costs. Each month, more mortgage payments, insurance costs, tax fees, and utility bills would accumulate. A shorter timeline for repairs meant fewer overall carrying costs.
- What’s the potential ROI? A good ROI, or “return on investment”, creates the foundation for a solid real estate investing strategy to be built upon. Before investing time, work, and money, we needed to make sure there was a decent potential for profit. Looking at comparable neighborhood sales with our real estate agent was key. If a property cost $80,000 in a neighborhood where move-in ready homes were selling for $125,000, and we anticipated spending $20,000 on repairs and carrying costs, we could expect a $25,000 profit, or about a 20% ROI.
Our experienced real estate agent once again helped us in our search, and she stuck with us through offers on multiple properties. Because the investment property market is competitive, losing out to other investors is common. It’s important to find a great real estate agent who will work with you through what could be a lengthy process.
Smith cautions potential flippers to do their research regarding comparable listings. “Never over-remodel for your neighborhood,” she says. It’s easy to dream big regarding design, but will high-end tastes eat away at your profits or add to them? Take a look at the finishes in nearby homes, and model your choices accordingly.
We ended up buying a home in a great neighborhood for around $95,000, flipping it in less than six months, selling it for more than $150,000, and making approximately 23% ROI (*This is a round numbers calculation. Technically, we used “other peoples’ money to make money” this time, so our personal ROI was even higher. But the strategy remains the same.)
Time to move on to the final stage.
The dream home purchase
After building equity by fixing up our primary residence (the value rose to $375,000), creating an income stream with the rental property (fair rent grew to $1,400 per month), and padding our down payment with the profits from the flip house, we found ourselves in a position to start looking for that waterfront home we’d been dreaming about. It wasn’t just a lateral move, though; we still had some aspects to consider:
- Higher taxes. Waterfront property is valued higher, and therefore homeowners pay significantly more in taxes every year. We contacted the local tax office to determine what this move might mean for us and our housing budget.
- Higher insurance. Similarly, a higher property value means higher insurance. We called our insurance agent and asked for estimates before making any offers.
- Additional maintenance. We would have to put away funds for eventual seawall and dock repair. We talked to other waterfront homeowners to determine how much we’d need to start setting aside once we moved.
We took our time watching the local market, waiting for the right home to become available. Our family wanted to settle in and make some memories, after all. This home would be the culmination of our entire real estate investment plan.
Finally, a move-in ready home with beautiful views popped up. It was slightly smaller than our original primary residence, which meant that some monthly utility costs would be lower, helping to offset the higher tax, insurance, and maintenance costs. With a 50% down payment (thanks to the accumulated equity and the flip home profits), our rental income would also cover the monthly mortgage payments. Perfect!
We got started with real estate investing because of a simple dream — to live in a little house by the water with our family. Eight years later, that dream became a reality.
Yes, eight years! For us, real estate investing was by no means a get-rich-quick scheme. It also wasn’t our full time job; instead, it was more of an on-the-side way to increase our quality of life. With careful planning, lots of research, and plenty of work, real estate investing turned out to be the best way to turn our dream into a reality. As Smith says, “Just get in the game!”
Header Image Source: (Roberto Nickson/ Unsplash)