Are you a millennial that is ready to dive in and make you first home purchase? Lauren Bowling, a millennial and award-winning blogger and editor behind the personal finance site “Financial Best Life,” recently took the dive into real estate investing and made many costly mistakes. In our recent conversation, she outline the mistakes she made and the lessons she learned, as well as provided a guide for first-time, millennial investors so that they can avoid falling into the same expensive and time consuming traps.
Lauren’s first piece of advice for first homebuyers or investors is, “do all the research you can do, not only on just the purchase itself, but what you’re going to do after.” In order to explain why she provided this advice, I’ll provide some context – what happened on Lauren’s first deal?
Lauren’s first investment was a three-bed, two-bath property in an up-and-coming area in a southwest suburb of Atlanta, which she purchased for $65,000. Her business plan, she said, was to “really get a great deal, buy low, and eventually, in 5 to 10 years, sell high so I can really make my first home purchase make money for me.” After closing, Lauren put in $70,000 in renovations, lived in the property for 3 years, and then rented it out. Currently, the property rents for $1325 a month, which nets her $500 a month in profit.
$500 profit a month? Sounds like a 360-windmill slam-dunk, especially for a first deal! However, when we dig a little deeper, that doesn’t turn out to be the case.
“First of all, it was a complete gut job,” Lauren explained. “It was a massive renovation that I undertook, not only as a first time homebuyer, but also as a first time renovator. We’re talking stripping things down to the studs, which was just such a huge project to undertake. I was 26 years old. I was a young, single woman and I had no clue what I was doing, which was a prime opportunity for a lot of vendors to come in and take advantage of my inexperience and kind of present themselves as trusted advisors and then bait and switch me.”
After major renovations were completed, as well as $70,000 later, Lauren is still fixing things to this day. “It’s the gift that keeps on giving.” She also explained, after the major renovations were completed, “I had another contractor come in and bid some things. He said ‘you spent $70,000 for about $40,000 worth of work.’ The other $30,000 of stuff still needs to be done, not only as a landlord, but also if I want to eventually sell the house.”
The lessons that Lauren learned in order to avoid overpaying for renovations and finding the right contractor:
For more on finding the right contractor:
To purchase the property and pay for the renovations, Lauren used a 203k-renovation loan. She said, in regards to a 203k-loan, “it’s a loan product where you can lump in your costs to renovate in with your mortgage so you’re making one payment every month. It’s a good program. It’s a great way for people to raise money to fix homes … especially as a first-time buyer. Maybe you have money saved up for a down payment, but not enough saved for the project and the fixes.”
For Lauren’s deal, the purchase price was $65,000 and her rehab costs were $70,000. So instead of getting a conventional loan for $65,000 and paying $70,000 out-of-pocket, she was able to get a loan for $135,000, which covered both expenses. That is an upfront cost difference, assuming a 3.5% down payment for an owner-occupied loan, of $67,550 ($72,275 – $4725).
When Lauren was pursuing the 203k-loan, she learned that there are two different types. “There’s the streamline 203k, which is less than $35,000, which is for more cosmetic fixes. Then there’s a full 203k-renovation loan, which is for those bigger projects like what I did.”
Which 203k-loan option does Lauren recommend for first-time homebuyers or investors? The streamline. “I definitely recommend for first-time buyers, only do a streamline 203k because that keeps you out of the bigger projects [so you won’t be] in over your head.” In other words, the 203k streamline forces the investor to keep renovations under $35,000 and to avoid risky projects that require major renovations since those are the homes that are more likely to result in budget creep.
Related: The Most Commonly Overlooked Expenses in Real Estate Investing
Lauren specifically focuses on providing financial advice to the millennial generation. Besides being a millennial herself, the main reason she focus on millennials, she said, is “I think given all the factors, [like] the recession and the student loan crisis, millennials are in a very interesting place financially so they need a different type of advice than what their parents got or even the generation that comes after is going to get.”
That being said, Lauren provided two, millennial specific pieces of advice:
The lessons Lauren learned after spending $70,000 on $40,000 worth of renovations on her first investment property are:
Of the two 203k-renovation loan types, Lauren recommends using the streamline option, which covers renovations up to $35,000. This forces the investor to keep rehab costs under $35,000, so they will be less likely to take on riskier rehab projects.
For millennials who are looking to purchase their first home, either for personal or investment purposes, get your student debt under control and make sure you shop around for interest rates
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.