Last week as I was coming back from the Irish Festival, a friend of mine reached out to me out of the blue about a conversation we had a little while back. He said he was looking to start building a rental portfolio and asked “What are 3 things you wish you knew before getting your first property?”
My initial response was…
After spending some more time to think about it, I came up with 8 lessons that I wanted to share with him, so I thought I’d share them with you too
- A balanced market is measured by days on market to sell a home.
30-60 days to sell a home is a balanced market. Over that, and prices will begin to flatten. Less than that and prices will appreciate above normal rates. Watch the trends in the area and for the specific product type you are looking at. For example, the overall market may be great, houses selling in record times, but if every builder decides to start building 1500 sq.ft. townhouses, flooding the market for that product, you will see days on market increase, and sales prices fall for that product. Simple supply/ demand formula.
- On your first home, as far as the lender is concerned, you are an owner occupant.
Circumstances happen that can always change your intent, but as far as the bank is concerned, your intent is to occupy.
- Don’t get a 30 year fixed loan if you aren’t keeping it for long.
First time buyers keep their loans for an average of 3 years. Even move up buyers keep their loans for an average of 7 years. Therefore, on your loan, remember this: Everyone likes the 30 year fixed. But it is the highest rate, because you are paying a premium to guarantee your rate for 30 years. If you are not keeping the loan that long, why pay the premium. Ultimately what you want is an 80% LTV conforming conventional loan. That means 20% down. Therefore get the cheapest rate ARM, fix up the house to drive appreciation, then refinance when the value goes up, using your equity for the 20%.
- Think in terms of the unchangeable.
Do not be seduced by the sexy finishes. You can make any home as sexy as you want yourself. But you can’t change structural items, lots, or locations. A shit house on a great lot can be fixed. A great house on a shit lot can’t be fixed.
- Dull, average, boring wins the race.
The hottest stuff out there draws all the eyeballs, and the higher prices but then trends change and hot stops being hot and prices drop. Yet, the average standard run of the mill product is always good. Think long term. If something has been a slow steady consistent producer for 30 years, it will likely continue (think of your mom’s house). But the hottest thing out there may or may not be hot next year.
- Real estate outperforms on every level except one.
It is NOT liquid. Therefore think of LSD. Like running an ultra marathon. Think: Long Slow Distance. Real estate is a long game. Think about all your options. What if the market shifts (which it always does)? What do you do? Real estate always wins in the long run; but, you never want to be forced to sell at the wrong time. Therefore, what are your options? Can you rent it? Can you Airbnb it? Can you rehab it? Can you convert it into a multifamily or commercial property? You do not know what the market will be when you go to sell. Have all your options.
- Known is better than unknown.
Higher priced homes, surrounded by fully developed land, is far safer than a slower priced home surrounded by farmland. It is possible the undeveloped stuff could enhance the area and your values; but, also possible that they could put in a sewer treatment plant, subsidized housing or strip clubs. Even if it is zoned, zoning can change. If the product you are buying does not sell well enough, the builders and developers will change the zoning to what they think will sell… good or bad. There are some strategic moves here, but risky, and better to avoid on your first home.
- There are exceptions, but as a rule I do not like condos.
More accurately, I do not like condo associations. They are run by a bunch of petty people with dead end lives and nothing better to do. If they like pretty flowers, they can triple the condo fees to have fresh pretty flowers everywhere, dropping your value. If they want lower condo fees, they could cement in the pool, lowering your values. If you buy a condo, know their power. Best to stay with fee simple ownership.
If you know anyone looking to build a real estate portfolio or actively doing it, feel free to send this over to them! I would’ve paid a lot to know this all before I started and not have to pay for the mistakes I made.
Also, if you want me to share more of this type of content let me know in the comments below!