In the last post, we looked at how we arrived at the decision to see if we could find a house that fit us. In this post, we’ll follow up on that and look at how we went about the search and what we found.
What we were looking for
Our requirements were a short commute (I bike to work and am not willing to give that up), 2+ bedrooms, a safe neighborhood, and for it to make sense financially. Ideally, we were looking for something that either needed non-structural work that we could cheaply do ourselves to increase the value or had rental potential. Stretch goals were to be located in a growing neighborhood that is likely to experience value appreciation, to embed some safety margin by purchasing at a discount, for the rentals to completely pay for the mortgage, and for the property to have space where we could host small yoga events. There were other considerations that were mostly related to lifestyle and aren’t super relevant here.
Searching for a home
We took a two-pronged approach to start our search. After getting clear with each other on what we wanted and why Mrs. Wallet and I began scouring the internet. At the same time, we reached out to friends or friends of friends who were either in real estate or had mentioned knowing someone in real estate. We also drove around and kept our eyes peeled (our apartment had never been listed after all), but we mostly focused on the other two channels.
A few things became immediately obvious. Homes are expensive near the city. Quality properties at a discount or with rental opportunities would probably be difficult to find. It’s easy to get information overload and be overwhelmed or worn out by the sheer number of houses to look through.
Luckily, our blend of requirements and desires wasn’t super common, so after the initial onslaught as we got a better feel for what we wanted it was relatively easy to trim our scope and filter out most of the noise.
Neither I or Mrs. Wallet were interested in any of the new townhomes that were being built, which was most of what was on the market in our price range. That left discount properties that needed work and properties with rental opportunities (preferably that also needed work).
Mrs. Wallet and I put in many nights and quite a few weekends of boots on the ground checking out homes. Luckily, the friend we found to serve as our real estate agent seemed honestly interested in and excited by our life plan and financial goals and how he could help us find the right home to help support them.
Surprisingly, we actually ended up going with the first property he showed us (although it was far from the first house we looked at). While we initially loved it, we’d heard cautions against falling in love with the first house you see, so we continued looking at other properties for a few months. Eventually, we circled back, realizing we were unlikely to find anything of similar quality at that price, especially that met so many of our wants and needs.
Funding secured
An important part of the search for a home is securing pre-qualification from a bank or financial institution. The pre-qualification process involves giving a bank some preliminary information about your income, assets, etc. and finding out how much money they’re willing to loan you to buy a house. You’re not required to get your loan from the same lender you were pre-qualified with so you can do this with anyone.
As a rule of thumb, banks will lend you far more debt than you can afford to service, so you should know what you can realistically afford before ever talking to them. They are for-profit institutions, after all – not charities. In our case, for example, we were pre-qualified for over 3X our max budget. Go figure.
Two areas that can tend to result in decision fatigue in the home buying process are financing and the search for the home itself. In the case of financing, especially once you find a property you want to make an offer on, the amount of documentation and paperwork can be staggering. From paychecks to IDs to bank statements, you will spend your fair share of time gathering documents and signing paperwork.
We found a small bank that had a special deal with our city offering some outrageously good terms. 0% down, no PMI (Private Mortgage Insurance – usually required if you put down less than 20%), and an interest rate a whole percentage point below market. We were excited by the cheap financing and ability to save our capital for improving the property or investing, so we happily went for it.
Unfortunately, within 24 hours of our option period ending (where you can back out of a deal without financial or legal liability) with earnest money already deposited with the title company, the bank informed us they had never actually looked up any details about the property and it didn’t qualify for their cheap financing program after all due to the garage apartment (it couldn’t have any associated rental income… Unless it was a duplex…?). However, we could take advantage of their normal loan program, with 20% down, PMI, and an interest rate an entire percentage point above market! No thank you.
Was this a bait and switch tactic? While we are talking about a bank here, I don’t think so. I honestly believe this was just a case of utter incompetence on the part of the loan officer, whom we had mentioned the garage apartment to multiple times. We know others who have taken advantage of this program, and in the end, it was just unfortunate we couldn’t take advantage of it with this property.
This financing debacle could have lost us the house and exposed us to losing capital and other potential legal and financial liabilities, but luckily the seller was understanding and agreed to extend closing and our option period to allow us time to find a new lender.
We were able to find another lender in time, and while the terms were not quite as good, they weren’t bad either and within our budget. As it turned out, I had overestimated property taxes by roughly the same amount as the difference in monthly payments, so we ended up around where we started.
What we found.
We ended up going with a home that had recently been ripped down to the studs and remodeled but had a garage that needed some work. The second floor of the garage had been converted into an apartment with existing tenants. There was room to expand the bottom floor of the garage into a second apartment with some work on our part, and the main house needed some fencing built to create the privacy we wanted.
We looked at quite a few other houses, but this one seemed like the best fit for us for a number of reasons. The primary house was good to go and would be a significant upgrade to our lifestyle. The house also has an open floor plan, which both made the house seem much larger and provided us a space to host small yoga events. The extra bedroom would provide an office/gym/yoga studio that would support various activities as well as private yoga lessons. The fact that none of the work was on any timeline other than our own (compared to a property where our living space required major work) allowed us to get right down to living and removed much of the stress and pressure on our designs to improve the property.
Not only did the property come with immediate cash flow to offset the higher cost compared to our previous home, but the option to expand the bottom floor into a second apartment that could either be rented out or furnished and used as an AirBnB would make a big difference once we got it up and running. Even conservative calculations indicated once both spaces were being rented after some initial outlays, our all-in cost of living would at worst be about the same for a much larger and nicer space, and more likely prove to be cheaper than our previous setup, which was only costing us roughly one thousand dollars a month.
Taking stock.
So far, repairing and upgrading the property has been a bit more expensive than expected, which of course, is to be expected! That being said, we’ve significantly upgraded our lifestyle, we’ve been able to host events at the house which has brought in additional cash to offset costs, and the property has already appreciated nearly 10%. Along the way, I’ve also built things, repaired things, learned about being a landlord, and generally enjoyed life and not worried too much! More on all this later, of course.
Are you thinking of getting into real estate, or are you already? What factors did you evaluate, and how did your search go? Think I’m missing something? Share your thoughts below!
Love,
(Your) Wallet
