I had coffee with a real estate agent, Dorothy, and I asked her all of my burning questions. I asked her about the biggest mistakes homebuyers and real estate investors make and about her worst experiences with clients (everyone loves gossip). I also asked her for feedback on the some of the most frequently asked questions we get.
Here are my questions, her answers, and some of my thoughts in return.
What is the biggest mistake you see with homebuyers?
They waive the home inspection because they’re too anxious to get the property.
So, what are the consequences of not getting a home inspection? Once the house is settled on, the seller does not have any obligations towards the buyer. If the buyer later discovers an issue with the home, they cannot request any repairs from the seller. The buyer can only comment based on what they see, but a home inspection reveals problems that the seller or the buyer may not have been aware of beforehand.
Related: Why You Should Get A Home Inspection Before Investing In Property
What is the biggest mistake you see with investors buying investment properties?
Another big mistake investors and homebuyers make is putting less than 20% down. Sometimes with investment properties, you have to put 30% down, depending on the bank. However, if you have a good credit score, the bank might consider letting you put down less.
Would you recommend going FHA to those that don’t have the 20% downpayment?
I personally would not recommend the FHA loan because you are still paying the PMI even after the 20% down payment has been reached, unless you refinance or get rid of the FHA loan. Also, the closing and selling process sometimes take too long. The home has to be appraised and pass the HUD Home Inspection which includes some tough standards and can sometimes jeopardize the buyer obtaining the property. Now, they have gotten more lenient about the appraisal but keep in mind, the seller and real estate agent prefer a conventional loan over FHA.
Okay, two important things to remember when using FHA to finance a property: 1) be very patient 2) get rid of the PMIs as soon as possible because that can significantly reduce monthly costs.
So what’s the best way to finance a property if you don’t have a 20% downpayment?
I think the 80/10/10 mortgage (also referred to as Piggyback Mortgages) is the way to go. The 80% is the first loan, 10% is the buyer’s money, and the remaining 10% is the second mortgage. The interest rate on the second mortgage is higher but you are avoiding paying PMIs.
I would also recommend ARM (adjustable rate mortgage) if the buyer wants to live in the property for more than seven years. If they’re planning on staying less than seven years, I don’t think it’s worth it and they should stick with the fixed rate.
The adjustable rate mortgage (ARM) means getting a lower interest for the first couple of years and then going back to a fixed rate – it will increase if interest rates have stayed the same or increased. If interest rates have stayed the same during those years, then your interest rates can stay the same or decrease. For example, if the loan is a 5-year ARM loan, the buyer’s monthly payments will be lower the first 5 years (pro!) but then the rates are adjusted and unknown afterwards (con!).
Related: Financing a Rental Property: What’s the Best Way?
What are some tips for real estate investors looking for investment properties?
Look at the rental income in the area and look at the transition of people and their movement to get an idea of how the vacancy rates would look like.
Is it okay to break-even on an investment property?
If it’s not a renter’s market, you might be forced to break-even. But right now, (in the D.C. metropolitan area) rents are very high – it’s a landlord’s market.
What’s one way someone can increase cash-flow if they are breaking even or barely making a profit?
Have the renters pay the first $50-$100 for the repairs. That is what I do with my rental properties; they pay a portion for the damages and it’s in the contract. It not only increases cash flow but definitely gives them an incentive to be more careful with the property.
What do you require from your client before helping them?
They have to be pre-approved from the bank before beginning to look at houses. You don’t want to be house-broke. It’s so important to get pre-approved because otherwise you will be getting your hopes up.
Tell me some of your worst experiences with clients.
Horror Story #1
Something a lot of people were doing when the market was up was paying above the asking price. I had two clients looking for houses the when the market was very strong. They made offers on two or three houses but were not getting them. My client said he wanted to offer $5,000 above the asking price in hopes of getting the property. I explained to my client that history repeats itself and said “this feels like 80’s, the market is up right now but will crash” – so I advised against it. Unfortunately, the couple decided to get another agent and sure enough, the market crashed, and they ended up paying $10,000 above the asking price, per their agent’s advice. They even called me and I unfortunately wasn’t able to much of help to them.
Horror Story #2
There was a house in Vienna, which is a one of the priciest areas in Northern Virginia, and it was listed at a relatively low price. When my clients and I went to view the property, I stood on the porch and I saw the electric grid. I told them my gut didn’t feel right and this electric grid could cause a lot of hassle, which explained the listing price.
Consequently, they also decided to buy the from another agent, who was actually a relative of theirs. The builder did not tell them there was going to be an easement. Sure enough, the electric grid crashed and it was an absolute mess for the buyers.
An easement is when someone has the legal right to use a property even though the title and land belong to the owner. Easements are usually given to power companies, which was the case with this horror story.
What do you think the real estate vs. stocks debate?
I think at least with real estate, you have rental income tax deductions, you have the opportunity to recover if the market crashes, and you can touch and see your investment. With the stock market, you can’t regain your investment, there’s no time to recover. A lot of investors decided to diversify their investments by getting into real estate after the market crash. I personally lost all of my bank stocks whereas I still have my rental properties after the market crash and recession.
Related: How to Recession-Proof an Investment Property
What do you think of foreclosures, short-sales, and renting out to section-8 tenants?
If you can buy a foreclosure or short sale property, you absolutely should because they are a great opportunity. I bought my personal home at an auction for $300,000 and my home is now valued at above $2 million. I’m very lucky and blessed, but I put a lot of work into my house and should I sell it, the profit will be very significant.
With section-8 tenants, you have to remember that the government does not always pay the full rent amount. So even if there’s a guaranteed check from them every month, it may not be the full amount every time. That is very harmful to the investor because they usually have to do a fair amount of rental renovations and would have to come up with that money on their own and not from their rental income.
How can people find off-market properties?
What I do, if one of my clients says they’re interested in off-market real estate, is write a letter to the owner, letting them know that there’s an interest. It hasn’t worked yet but that is one way.
What do you say to people who don’t want to use agents?
I think people are better off using real estate agents. Especially when selling, you’re able to show off the property more, you can better negotiate the rates, and the house sells a lot faster. When buying, you’re exposed to more houses and better connected with listing agents. Websites are not always updated on time.
Related: How to Find a Real Estate Agent for Investment Properties
How can people invest in real estate with no money?
Well, not everyone can do it. There are other ways to invest besides buying an investment property. For example, your 401(k) can be investing in a REIT.
Also, if you are self-employed, you can set up your retirement fund with real estate. You can set up a SEP (Simplified Employee Pension) plan and the rental income that is received is tax deductible. If you withdraw money from the fund before 59.5, you pay a 10% penalty and you must claim the income on your taxes.
What I Learned
After talking to Dorothy, I realized that “following the book” in real estate can definitely pay off. Although there are different ways to buy homes or investment properties unconventionally, you have to consider everything that comes with the territory, like the extra costs and regulations. There are definitely creative ways to save money and invest in real estate, but it’s important to have a solid plan to deal with those extra responsibilities, as well as having a money cushion.
It’s also important to do things the right way the first time. For example, getting a pre-approval letter, a home inspection, and having a golden credit score really do matter. Keeping your cool in hot markets, like by not offering above the listing price right away is also another great tip.
An agent is like a parent. You may not like what they’re saying, but they’re saying it for a reason and they’ve probably seen a lot more than you have.
Thanks, Dorothy!
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