OK, I want to buy a building. What do I do first?

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Call me. J/k. Sort of.

The first thing you need to do is take stock of your current position. Here is what you need to get started:

  • A decent credit score. FHA will loan down to a 580 score, but ideally you’d be north of 700.
  • A stable work history. The ideal loan applicant would have worked in the same job for 2+ years with stable or rising income which is reflected in his/her tax returns.
  • A bit of cash. Depending on where you want to buy, you’ll want at least $25,000 in the bank for a minimum of two months. FHA will allow you to get the money from someone as a gift, but you’ll be better off it’s been sitting in your account for two months before you even begin the loan process.

If you’re missing one or more of the above, don’t worry. Cash can cover up a lot of sins. If you can get together enough cash to put down 20-30% of the purchase price, you’re almost definitely going to be able to get a deal done, even with bad credit or a non-traditional employment history (though the terms of the loan won’t be optimal). If you do have all of the above, or if you have a bunch of cash, you’re ready to get started.

The next thing you need to do is determine what sort of property you’re looking for. For a first time buyer who fits the loan criteria, I strongly recommend an FHA mortgage, which means you’ll be limited to 2-4 units. My advice is to be open minded, but to favor 3-4 units over two. (If you already own property, or are going to be putting down 20-30%, go with more units, since you’re not getting the benefit of a high-leverage FHA loan anyway.)

Next, you want to determine where to look. All other things being equal, I recommend areas where the rents are increasing. Buying a building for a fair price with a fixed, 30 year mortgage in an area with increasing rents will turn your good investment into a home run without you having to do much. To find increasing rents, look for gentrifying areas (in LA, try Echo Park, Highland Park, etc.).

Finally, you want to find an experienced agent… hence my semi-joke above. I am sometimes guilty on this blog of making buying buildings seem easy. But you have to remember that buying a building with a mortgage is basically equivalent to doing a leveraged buy-out on a small business. Leverage (debt) magnifies outcomes. This means that, if you do a good deal, you do very well. But if you do a bad deal, you can do very badly. You wouldn’t do a leveraged buy-out without getting advice from someone who knows what they’re doing. Don’t make that mistake with an apartment building!

So find an agent you trust. Tell him/her what your resources are, what kind of building you’re looking for, and where. And listen very carefully to what he/she tells you. You’re probably 60-90 days away from buying your first cashflowing asset.

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