Ashley:
Today’s rookie reply is for the listener who has past the dreaming stage, but still wants to make sure they are moving in the right order. They have a goal, they’re talking to lenders, and they are studying deals, but the next step still feels intimidating.

Tony:
Today’s questions come from the BiggerPockets forums, and we have someone reverse engineering a first house hack, a rookie weighing 100% financing, and a young investor who wants a real step-by-step path before buying.

Ashley:
This is the Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson. With that, let’s get into our first question, which comes from Trey in the BiggerPockets Forums. And Trey says, “My goal is to purchase my first rental property by house hacking a two to four unit property using an FHA loan. I’ve identified when I want to buy, and I’m now focused on reverse engineering the steps needed to execute confidently and efficiently.” So what he’s done so far, save for a down payment and closing costs, actively building his cash reserves, has funds parked in a high yield savings account, got really clear buy box criteria, focused on educating himself, wrote a bunch of different books and podcasts and all those different things, became a BiggerPockets Pro member. Kudos, Trey, congrats to you. And planning to join the next local real estate meetup. So next steps are get pre-qualified with the local lender, use that to understand ballpark on buying power, complete the pre-approval process, and then build out his team.
So what he’d love advice from the community on is pre-qualification versus a pre-approval. For an FHA house hack, is getting pre-qualified early enough for meaningful planning or should certain steps wait until I’m within 90 days and pre-approved? Agent timing. From an agent’s perspective, would connecting after the pre-qualification but before the full pre-approval be appropriate or would doing so earlier be too soon and potentially a misuse of the agent’s time given my timeline? Number three, building the vendor bench. As a first time investor, what’s the best way to proactively build a reliable vendor bench or plumber or handyman electrician before owning a property? How early is too early to start those conversations and what’s the right way to approach those folks? And then number four, just blind spots. Looking back on your first FHA house hack or small multifamily purchase, what do you wish you’d done earlier in that process?
All right, so lots of context and lots of good questions here. I think first just one clarifying piece because the first part of this question was pre-qualification versus pre-approval. And they’re really the same thing. So you go to a lender, you get pre-approved. Ash, I’m not making that up right now. I’ve never heard of a difference between a pre-qual and a pre-approval.

Ashley:
I think it’s more of just a pre-approval. I think they do a little bit more like maybe a soft credit pull or something where a pre-qual is just very basic to basically get you a letter to submit with your offer. I think there are lenders that use it difference as in this is just like we’re looking at your stuff. Yeah, it looks good. And then there’s actually where they verify what you told them as the next step. Because actually there was a lot of controversy with that where you literally would fill out an online form for this one investor and one of his companies, you could print off a pre-approval letter to show for proof of funds or something like that. But I think it’s something like that, but I don’t know for sure, but I think there is a difference.

Tony:
Let me reframe that then. Well, I think the first piece is the whole idea of pre-qualification versus pre-approval. Ash and I, we’ve both done a lot of deals. We’re also not lenders, so maybe we can get a lender to come on here and clarify this for us. But I’ll tell you my experience. My experience has always been that the pre-approval or pre-qualification I’ve always kind of used interchangeably. There might be some differences technically behind the scenes on those, but for me, the pre-approval is me going to a lender, them taking a quick look at my background and saying, “Hey, we feel pretty good about what we see here and here’s a ballpark pre-approval that we can work with.” Now, once you actually have a property and you’re under contract, that’s when you go into full underwriting. And it’s during the full underwriting process, they come back with all these different questions and conditions and, “Hey, you got to do this to be able to qualify and do this and do this and do this.” It’s like when I bought my very, very first piece of real estate, which is my primary residence, I got a pre-approval.
I went out there, I was shopping for the deal. Now when I got into full underwriting, they’re like, “Hey Tony, you got to sell your BMW. I got my first big boy job and I bought this three series BMW and hey, we can approve you, but under the condition that you sell your BMW because it impacts your DTI too much.” So that’s always been my experience is you do the pre-approval, they give you a ballpark on what you’re pre-approved for from a price point. But then for the specific property, they run you through full underwriting to say, “Hey, here are all the nooks and crannies and things that we need to go dig into.” And then they get you the ability to actually close on the deal. So I would say start the pre-approval process now so you actually have an idea of what your purchasing power is and that will help you further refine your buy box to make sure that it actually aligns with what you’re pre-approved for.

Ashley:
Now agent timing, I would connect with an agent as soon as possible. You can get set up so that they are sending you automated emails that fit your buy box of properties. So you can go ahead and start getting alerts, seeing what information you’ll actually get from the agent on the property. A lot of times there’s more information when the agent sends you the direct listing than you would see on Zillow. So there’s a lot of times you’ll be able to see any attachments. I was looking at a Zillow listing earlier and it said in the listing description, see the attached letter from the seller for more information. And on Zillow, you can’t see that. But if you get on the agent’s list and you actually get sent directly from the MLS, you can a lot of times see that different information. Sometimes even the rents that they’re paying and they don’t put it on the Zillow listing, I don’t know why, but I would get with an agent as soon as possible to start understanding deals and maybe even connect with a couple different agents and see the different things that they’re sending you, who is sending you more information, who is more helpful.
I just love the story of Tony matching with an agent on Agent Finder on biggerpockets.com in Oklahoma City and her just sending him this overwhelming amount of information about the area that he wanted to invest in, which was like, Tony, you hit a pot of gold, more information than you even needed, but this was just the agent going above and beyond to give him this information before he even looked at his first property with her, right?

Tony:
Yeah, absolutely. And I contacted several different agents through the Agent Finder and some sent small emails, but she sent this massive repository of everything I need to know about investing in OKC. And that was part of what gave me the confidence to go into that market. So yeah, the sooner you can have that conversation with the agent, the better. Part of an agent’s job, I don’t think you need to feel like you’re wasting anyone’s time. Part of their job is talking to potential clients. So I think they’ll be happy to have that conversation, which actually kind of leads into the next question that you had here, which was the vendor bench and how do you build your roster of electricians and plumbers and handymen and so on. And I think going back to the agent piece, if you can find a really good agent in that market, oftentimes they have that bench for you and they can connect you with those folks.
Now, I think if you know that you’re going to buy a property that’s going to need some work, then yeah, maybe find a general contract where a handyman is your first step is probably going to be the place that I’d go, but I might not invest too much time going super deep into the sub-trades, like someone to do drywall repair and someone that can do woodworking, carpentry, those things, making cabinets, all those things. I maybe just focus top level GC handyman, someone that can knock out some of those things you’ll need to get the property ready. And then just naturally, as you’re owning and managing, you can start building out that roster of folks to do some of those other things that maybe weren’t present on day one. But if the plumbing checks out pretty clean for the property and nothing comes back as a concern, maybe I don’t spend a ton of time on day one going to search for a plumber.

Ashley:
Now the last question is around blind spots, like anything that they’re missing with the first FHA house hack or a small multifamily purchase. And one thing I will say is people talk about the FHA inspection as to some things might come up or whatever, and you have to be prepared how you’re going to handle if anything comes up in the inspection. Are you going to ask the homeowner to make those repairs? If the homeowner says, no, I’m not making those repairs, are you willing to go and make those repairs on the property without even owning the property yet just for it to pass inspection? So with the inspection, things that will come up like peeling paint, a handrail, some of the stuff won’t be a big deal, but to the seller, it could be an inconvenience to them. So as you’re getting ready to approach the inspection for the FHA, when you get the list of information back, is there anything that you are willing to either pay for or tackle or you definitely want the sellers, but just go into that kind of having a game plan of what you are comfortable with so that if things do come up during the inspection, you can go ahead and start moving forward to get through that as fast as possible because then it’ll delay closing until those issues are resolved.
And when you are viewing the property, just go online, ask Claude ChatGPT for a list of things that would make a property fail inspection from an FHA loan. And when you’re walking the property, see if there is anything that you notice. Is there no handrail going down into the basement? Okay, not a big deal. You can pick up a handrail at Lowe’s, you screw it into the wall. Peeling paint. I have a property right now where we completely renovated the whole inside. The exterior of the property is painted and there are a couple different spots where the chip is painting. $7,000 is the quote that I got. Anybody else can’t do it until spring, which is a long time from now. So that is actually a really big deal that we didn’t see coming up because we didn’t think it would be that expensive to paint this house, but the way it sits on the property with the neighbors and how they have to get to it and all this stuff or whatever.
So some issues that seem like they’re little actually could be very big and expensive issues, so you have to be prepared for them. Okay, coming up, a rookie has access to 100% financing, but someone close to him is warning him not to use it. We’ll talk about when leverage is helpful and when it becomes dangerous.
Okay. Our next question is from Jason Watts, who has found a lender willing to finance the whole purchase and rehab, but he is hearing some strong warnings from someone in his circle. I’m on my journey to buying my first investment property and I’ve spoken with a couple lenders and one gave me the name and number for a private money lender that would fund 100% of the right deal purchase and a rehab on a six to 12 month term at probably 10 to 11% interest only. Our family has a close family friend who is an aggressive agent that I pretty much have to use. I spoke with her today and she warmed me up one side and down the other not to try to get into real estate investing right now, especially with a 100% loan at 10 to 11%. Her concern being that I would use all of the loan for the purchase and have nothing left over for the rehab and that anything I find that’s been on the market for more than 90 days can’t be a good option because in the market, because there’s not going to be anything that a more experienced investor hasn’t looked at and decided was a bad investment.
All that to say, after my call with her, I’m feeling a little discouraged, but I still want to have my first property before the end of the year. The first thing you need to do is ask this agent how many people she works with that buy their primary residence, how many people she works with that are actually investors. And I’m going to bet that the pendulum swings the majority of people that are her clients are buying for their primary residence and are actually not buying in investment properties because there are deals out there and a good agent that works with investors is going to help you find these good deals, not tell you not to buy anything right now. Let’s just start with that. The second thing here is the financing piece, the 100% financing. So are you comfortable with estimating the rehab that you’re making sure you’re getting enough money on this loan to cover the rehab?
Do you have enough reserves in place so when the property is finished and you go to refinance or you go to sell it and it doesn’t appraise or it doesn’t sell for the full loan amount, maybe there’s $20,000 that you need to bring to the closing table because it didn’t sell for however much you borrowed from this person. Are you able to cover that? And what is a gap that you are comfortable with that you think there’s no way it could sell for less than this? Because the agent is right that the market is not great right now, but the market also could go down. So it could get even worse where you are stuck with this 100% financing and you have no equity in the deal for wiggle room and you have to sell it at that price to pay back that lender. So I used 100% financing for my first couple deals I took a partner on, but I gave him equity in the deal.
So if for some reason we missed a mortgage payment to him, it wouldn’t be as bad of a thing because he was also an owner missing paying half of that mortgage payment to himself. So I think you have to look at, are you able to buy this property under market? And that was something that I was doing was like one property I bought for 37,000 right after closing, I put an $800 refrigerant and five days after closing it appraised for like $52,000. So I was buying undervalued properties. Those are way harder to find now. So I do agree, be cautious with the 100% financing, but I strongly disagree that there aren’t deals out there and you shouldn’t be investing right now.

Tony:
Two things I’d say. Yes, great point on the agent, Ash. Go find a new agent. I get that she’s a family friend and you said that she’s quote aggressive, but if she’s not an investor focused agent, that she’s the wrong agent for you. So go to biggerpockets.com/agentfind or find the right agent. Number two, let’s just assume that what this agent is telling you is true. Let’s just assume that your market right now really is a terrible place to go by. That’s fine. Just go pick a different market. There’s 20,000 cities in the United States, and even if your market might be an absolutely horrible, terrible place to buy right now, which I don’t think it is, there’s always someone making money in some market. But even if that is true for your specific city, there are other cities out there and you just need to go find a different city.
So I wouldn’t get too caught up in one agent’s sentiment about one specific market when there are many, many more agents in many, many more markets to go tackle. So if your goal is to become an investor, find the right agent in the right market and go get the deal done. All right. After the break, we’ve got a 20-year-old investor with a young family who wants some rentals, but he’s worried about making the wrong move. So we’ll talk about how to turn fear into a concrete action plan right after the break. All right guys, our last question today comes from Ocasio. Ocasio is 20 years old. It’s a really great question, so we’ll get into it. Ocasio says, “I’m 20 years old with a wife and two kids, and I want to make my wife a stay-at-home mom. I’ve been studying rentals for a while, specifically multifamily homes, and I feel like I’ve found good multifamily homes to buy, but I don’t fully understand the loans and the paperwork behind everything and everything else that I’ll need.
I wish I had a true step-by-step guide in detail of what to do and how to do it and what I need from agents, the paperwork, to the money to understand loans. I’m trying so hard, but I’m scared that I’m going to get a rental and I’m going to mess it up and I’m going to mess it up for my family and wind up struggling. I wish I had someone who I could talk to to teach me face-to-face.” First, Ocasio, kudos to you for even being on the BiggerPockets forums at 20 years old and asking these questions because there are a lot of 20-year-olds who are being far less productive with their time. There’s a lot of 30 and 40-year-olds are being far less productive with their time, so kudos to you for that.
I think as someone who was a parent young, I was a teenage dad, I also wanted to get into real estate early as well. But what I found Ocasio as the best path forward for me, it was to really focus aggressively on growing my income at my day job. And once I got to a level of comfort there and we had an abundance of income, then diverting the excess toward real estate investing. And when I finally pulled the trigger on my first real estate deal, the stakes were so low that even if it didn’t work out, my family would still be fine. And I would hate for you to be in a position where even if you do find a really good deal, what happens if COVID happens again? What happens if the world goes to war and the economy crumbles? What happens if the AI bubble pops and then the economy crash?
There’s all these different things that could happen. Or what happens if you just didn’t do a good job on underwriting the deal and you take some hard lessons on your first one. I would hate for you to also be in a position where your family is struggling. So my actual advice, which is not advice that I give to most people, is get yourself financially in a position where you have the cushion and the balance in the breathing room so that even if you do miss on this first deal, it’s not a catastrophic thing. Go focus on building the income.

Ashley:
My advice would be to utilize some of the free programs and classes that are available to first time home buyers. So the information that you will learn there will be applicable if it’s your first time purchasing a home or your first time purchasing an investment property. So I just Googled first time home buyer programs at Buffalo, New York, and a bunch of them come up. All of the Section eight vouchers for the area are giving out by Belmont. I’ve taken landlord classes from them. They also have classes in different programs you can enroll in if you’re a first time home buyer or if you just want to learn the process of purchasing a house. They have free counselors that can assist you and walk you through the home buying process. Another one is Home NY in the Buffalo area, the homes and community renewal. So there’s a lot of free education and you had said specifically you wanted the face-to-face that offered these, either they do have the Zoom ones, but there’s also a lot that are in person that you can attend and go to and they’ll walk you through that process to be comfortable with it.
And even if you take Tony’s advice and you don’t start investing or purchase a property today, at least you can take your time learning and researching and attending some of these free programs that they have out there. I remember when I first attended their landlord class, it was so informative. They even give you a little book and everything to take home with you and it was completely free. Some of the classes are maybe like $10 to attend, but I would do that. I would look in your area for the different classes that are offered by some of these housing programs that you can attend to learn this stuff. And also too, I think a huge benefit of attending one of these and not just talking with an agent about the process or talking about a lender about the process because they’re trying to sell themselves to be your agent or your lender, where this way you’re getting a third party that’s not trying to solicit their services from you.

Tony:
I think the last thing I’d add too, Ash, is just for someone who’s looking for that face-to-face, like Ocasio, at 20 years old with the desire that you have, there’s probably a lot of other seasoned investors who would love to let you come work with them for free in exchange for helping them out in their business. So you go approach someone and it’s like, “Hey, can I do this one thing for you just to learn from you? I’ll give you value in this way. Hey, I’ll do all the cold calling or I’ll field the phone calls for all of the direct mail that you send out and I’ll be that person for you. I’ll go knock the doors or hey, I’ll be the person that goes and takes the pictures for you on your rehabs to make sure that they’re moving along the right way or there’s property that you’re thinking about looking at and you want some photos of it, I’ll go do that.” Or, “Hey, you need someone to unlock the door to let a vendor in.” Any of those little things, just offer to be that person for someone in your area in your neighborhood, and that could be the way that you end up building that network of folks.

Ashley:
Today’s episode was about getting ready without getting stuck. So whether you’re reverse engineering a house hack, looking at 100% financing or trying to understand the first deal step by step, the answer is to make the next move smaller and clearer.

Tony:
You don’t need to know everything before you start, but you do need to know your own numbers, understand your own risk, and build enough of a team that you’re not making the biggest decisions long.

Ashley:
Thank you guys so much for joining us today on this episode of Real Estate Ricky. If you have questions, you can submit them in the BiggerPockets forums and we may pull it to be played on the show. I’m Ashley, he’s Tony, and we’ll see you guys next time.