Top 5 Real Estate Questions Answered

Photo by Maria Orlova on Pexels.com

What’s the best market to invest in real estate?

This has to be the most common question I see in the BiggerPockets forums and real estate Facebook groups. The answer (like most tough questions) is: it depends. Also, there is no “best” market that fits every investor! There is money to be made in every real estate market in the country, it’s just a matter of figuring out which market fits your strengths, your goals, and your strategy the best. The ‘best market’ question always leads me to ask follow-up questions, such as: what are your long-term goals? What is your risk tolerance? Where do you have an advantage in the form of local knowledge, boots on the ground, or insight into the local economy?

I recommend people first determine their long-term goals for why they are even investing in real estate. Do you need the cash flow now or do you have a high-paying W-2 job that will allow you to focus more on markets expected to appreciate over time? Next, figure out how much capital you have access to for purchasing real estate. This is an important factor. It’s much more expensive to purchase an off-market single-family home in Southern California than Tulsa, Oklahoma. 

Another important consideration is: how much time do you have to devote to investing? If you work a demanding 9-5 job or just don’t have the desire to put in the work to actively invest (and it is a lot of work!), maybe focusing on 100% passive real estate investments like syndications is a better fit. More on that strategy later….

I don’t have very much money at all. How do I get started in real estate?

You must have a strong foundation in your personal finances before you get started in real estate investing. You will need a good credit score (650 or better), cash reserves, and steady income to qualify for mortgages. If you only have $500 in your bank account and a 550 credit score, you need to focus on the fundamentals of personal finance before you make the jump to real estate investing. 

While you’re working on this (Dave Ramsey’s teachings are a great way to establish a strong finance foundation) you can begin building your real estate knowledge base by reading books, listening to podcasts, watching youtube videos, and most importantly – connecting with other real estate investors! My favorite ways to connect with people are via the BiggerPockets forums, real-estate Facebook groups in your local area (or the area you want to invest in), and in-person meetups.

Once you build up some real estate knowledge and a network of real estate investors, I recommend you partner up with someone on a deal who can bring capital, and you do the work! If you’ve done enough research, you should be able to put a team together, find a deal, and get the whole process started. Then you can own 50% of a cash-flowing property with little or none of your own money.

Photo by Jonathan Meyer on Pexels.com

Should I buy a property at every duty station and rent it out when I move?

Again, it depends. You can’t use your VA loan an infinite number of times. Yes, you can sell a property and free up your entitlement, but if you’re buying and selling a primary residence every 2-3 years, are you really building long-term wealth? The transactional cost of selling real estate is high (usually 7-8% of the purchase price including commissions and closing costs) so that will likely eat into any appreciation you have if you only hold for 2-3 years.

If you want to rent out your property once you move from that duty station, you have to analyze the property as a rental before you commit to purchasing that property. Think of it as a long-term rental that you happen to also be living in for a few years before you rent it out. How much would that property rent for? What would the expenses be? How much is property management? If you keep that property, will you rent at your next duty station or purchase another property? How will you purchase that property – with a conventional mortgage or a VA loan?

My point is it’s not a simple answer. You need to do some research and determine if it makes sense to buy as a long-term investment or not. It might make more sense to rent! If you’re having trouble figuring out what to do, feel free to message me on Instagram @honorandequity and I’ll give you my thoughts on your situation. 

How many times can I use the VA loan?

The purpose of the VA loan is to provide a low/no money down mortgage to military members and veterans for a primary residence. You can’t just buy an investment property with your VA loan. That being said, you can use your VA entitlement multiple times. The thing to remember is that you have a limited amount of VA entitlement, and once you hit that amount, you have to sell (or refinance into a conventional mortgage – which you can do one time) that property to free up your entitlement. 

For more information about the VA loan, check out the interview I did with Jon Lallande, and make sure you read the article I wrote about the San Diego VA Loan house hack we did. This is the best way for military members and veterans to get started in real estate!

Photo by Aleksejs Bergmanis on Pexels.com

What is a real estate syndication?

A real estate syndication is a method of investing in which multiple investors pool money together to purchase an asset. This is commonly used for assets like apartment complexes, self-storage facilities, and mobile home parks.

A real estate syndication is comprised of general partners and limited partners. The general partners are core team members doing all the work on the deal, which can include finding the property, underwriting the deal, raising money, managing the property, and more. The limited partners are the individuals (or entities) that invest in the deal. They are called limited partners because they do not have a say in how the deal is structured or how it is managed: they are strictly passive investors. 

Syndications are a great option for individuals that have capital sitting in an account but don’t have the time or desire to put together their own real estate deal. 

I have personally invested in one syndication as a limited partner – a mobile home park in Colorado. You can read more about it here

I hope you found value in this article. Please let me know what you think by sending me a message on Instagram @honorandequity, or email me at doug@honorandequity.com

How We House Hacked in San Diego Using the VA Loan

As some of you know, my wife and I are both active-duty military. A few months ago, my wife received orders for a command in Virginia Beach, VA so we started making plans to move to Virginia from San Diego. We told our landlord in San Diego that July would be our last month, and we found a real estate agent in Virginia and started submitting offers on homes. 

Then, the Navy threw us a curveball. 

We found out at the very end of June that we would be staying in San Diego instead of moving to Virginia. Our landlord had already found tenants to take over our condo in Little Italy, so we had to find a place to live in San Diego ASAP! We had also just arrived in Hawaii on vacation to visit family for two weeks, so that made matters even more complicated. Thankfully, I used my network of military real estate investors to find a fantastic mortgage lender, Jon Lallande of Cross Country mortgage and real estate agent Herbert Knox of Sentry Residential, and we aggressively started looking for homes in the San Diego area. Jon Lallande was able to provide a very competitive VA loan product which is usually unheard of: the 17 day close on a VA loan. Most lenders advertise 30-45 days to close a VA loan, and we knew that was too long and would not be competitive enough to get an offer accepted.

Finding a Home in a Competitive, Seller’s Market

We had to be especially aggressive not just because of our short timeline, but also because we had to lock down a house in the hottest seller’s market in U.S. history in one of the hotter markets in the country (Southern California). 

We submitted 5 offers on homes in San Diego from Hawaii, solely based on the video walk-throughs our agent sent us. We relied heavily on his feedback regarding the neighborhood, the layout of the homes, and the overall “feel” of the properties. 

When we were shopping for a new home, many of the homes we encountered were being sold by home flippers. These entrepreneurs had purchased a distressed 3 bed 2 bath single family home, fixed it up to look very nice, and put it on the market at full retail. We were not opposed to a regular single family home, however I knew finding a property with the added benefit of a separate unit to rent out would give us a huge advantage, both in the short-term and long-term. 

Finally, a seller accepted our offer. 

Of all the homes we looked at, this one was my personal favorite. It was far from a perfect home like those flips and it needed a fair amount of cosmetic work, but it had something most of the other homes we looked at didn’t have: a second unit to rent out. My real estate brain was magnetically drawn to this property because I know the best way to use the VA loan is to buy a 2-4 unit property, live in one unit, and rent out the others, also known as a “house hack”.

What is a house hack?

A house hack is when you purchase a 1-4 unit property usually conventional, VA or FHA loan as a primary residence, and rent out the other units, or rent out the extra bedrooms if its a regular single family home. Its considered a “hack” because you are using the extra income from the rent you collect to pay your mortgage. 

This strategy is especially effective using the VA or FHA loan because those lending products require little or no down payment, as opposed to a conventional loan which usually requires a 20% down payment. 

Exterior view of the home. Those stairs on the left go down to the downstairs unit.

Our New (Old) Home!

Let’s talk about the house itself. It’s a two-story, single-family home built in 1956 in La Mesa, CA – a suburb about 9 miles east of downtown San Diego. The larger, main floor of the house is the top floor which may seem odd, but the neighborhood is very hilly, and this home is built on the side of a hill. The driveway comes down steeply from the street, and when you walk in the front door, you’re actually on the second floor of the home. There’s a staircase going down to the bottom floor, which previous owners had drywalled off to create that separate living space on the bottom floor. So, all they needed to do was add a kitchen downstairs and they had their second unit to rent out. 

The home has lots of light and an open floor plan as you can see here. We have since sanded and refinished the hardwood floors.

The previous owners had been renting out the unit to a lady and her two sons who did not take care of the unit. There was no significant damage, it just wasn’t kept clean and there was a lot of minor damage from years of neglect. The owner was charging the tenant $1200 per month for the unit which is nearly half the market value for that unit. So we planned to clean it up a bit, get it painted, and find an excellent tenant to live below us. 

The home we ended up purchasing is definitely not one of those homes fixed up by flippers! It has “good bones” meaning there are no significant structural, foundation, or other major issues but it just needed some basic updates and minor repairs. For example, the seller didn’t know how old the roof was, so we had a roofing professional come out and make some repairs. Also, the home has original hardwood floors that looked weathered and discolored in many locations, so we had a professional flooring company sand and refinish the floors and they look fantastic now! We also had a painter come in and apply a fresh coat to the ceilings, walls, and kitchen cabinets. 

This is the downstairs unit we will rent out to a lucky tenant!

The “No Money Down” VA Loan Myth

Something that surprised me during the VA loan process, was the realization that the VA loan does not cover closing costs! You can include the VA funding fee (2.3% of loan amount) in your loan, but the closing costs must be paid out of pocket. Unless of course, you can negotiate for the seller to pay your closing costs, or have a large enough seller credit to offset these costs. Make sure you consult your lender on this so you don’t get yourself in trouble. The VA loan has strict rules on what you can and can’t do. 

Depending on the price of the home you purchase, your closing costs may only be a couple thousand dollars. Most of the homes I have purchased in the past have been investments and have been $100,000 or less, which means the closing costs have been $1000-2000. However, when you’re buying a primary residence in the San Diego area, you’re paying a lot more than $100,000! So the closing costs were significant to say the least. 

Don’t let this deter you from using your VA entitlement. In my opinion, the VA loan is the best way for military members and veterans to get into real estate. 

We should be getting a tenant in the downstairs unit within a week or so, and we’re continuing to make updates and improvements to the upstairs part of the home where my wife and I live. If you’re already a homeowner, you know that no matter how much work you do, there are always more projects popping up! Thankfully, we found a fantastic handyman that can do all kinds of work for us at a reasonable price. 

If you want to learn more about the house-hacking strategy, Craig Curelop and BiggerPockets published a book about it called The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom. I have not personally read it yet, but I’ve read many books published by BiggerPockets and they have all been fantastic.

I hope you found value in this article. Please send me a message on Instagram @honorandequity and let me know your thoughts!