You may have heard that the first step to financial freedom is to own a house. The American Dream is a little harder to come by these days, and first-time homeowners in Boise, ID may find that the houses they can afford aren’t that great. Been there! When my husband and I bought our first house, we had over $140,000 in student loans and just enough cash for a 3% down-payment. A second renovation and seven years later, the student loans are paid off and we were able to put 20% down on a house worth more than twice what our past two houses cost combined. This isn’t all because of the two homes we “flipped,” as both my husband and I have made huge strides in our own professions, but my point is that it’s hard for young people to get going! And even harder to get ahead! That’s why I would encourage any 20- or 30-something with an interest in residential rehabilitation and motivation to learn a physically demanding trade to take a stab at it. And honestly, I personally think every homeowner should have a basic understanding of home improvement. If you can YouTube, you can make repairs on your house! Check out our 1st Renovation, and Parts 1, 2, and 3 of our 2nd renovation, and then read some suggestions to do it right:
- Buy the right house
It’s true: location, location, location. A good agent will help you find and decide on the right location to buy. You may have heard the suggestion to buy the ugliest house on the block, and this is sound advice; don’t buy a run-down house in a run-down neighborhood. Don’t buy a condo or manufactured home either as they do not appreciate like a “normal” house does.
The property you want to buy is the most outdated and/or neglected house in a middle income community. You also want to buy a home that has some redeeming features. Maybe it needs all new siding, but has a brand new roof. Maybe it has hardwood floors under the pink carpet or solid wood cabinets that can be salvaged and painted. You’re going to want to look for all the things you can work with to save money, because there will be enough difficult and costly improvements as there is!
As far as buying the house, an entry-level real estate investor (and that is what you are) probably won’t be purchasing in cash, and that’s okay. However, lenders won’t finance a property that needs significant repairs, so many Boise, ID sellers of investment properties will only accept cash. You may find your options limited in this case, and buyer-competition high among the properties that will accept financing. Sometimes a seller who normally would only accept a cash offer would be open to accepting an offer with a rehab loan. There are two types of rehab loans, and I’ll say this: only get a rehab loan if you must. They aren’t fun. We got a rehab loan on our 2nd house, and our experience was so, so stressful. I’ll write a blog on that later.
Your best bet for financing your first rehab project is to get a conventional loan. They usually require at least 3% down and a decent credit score, but the appraiser won’t be picky about the property’s condition. It is possible to get an investment property with USDA, FHA, or VA financing, but you’ll need to rely on your agent for this one. USDA, FHA, and VA appraisers are especially strict when it comes to homes needing repairs, and a Boise, ID agent experienced with this type of financing will know the kinds of things an appraiser will look for. If the seller is desperate (and able), they may agree to do some repairs prior to the appraisal to increase the chances of a successful transaction. Also, keep in mind you’ll probably want to have some extra money leftover as there will be at least one big repair you’ll want to do immediately after closing. After all, your new house needs to be liveable! Which brings me to #2…
- Live in the house while you work on it.
This is going to be your house for the next couple years. First of all, since you’re new to real estate investing, you probably don’t have the assets to pay for two mortgages by living in one house and working in another (that will take at least a couple flips). Secondly, the tax benefits are the best reason to rehab (thank you, Mr. Clinton)! In its simplicity, the tax law states that if you live in a home as your primary residence for at least two years, you don’t have to pay capital gains on the profit you make. Our closing checks were over $40,000 on our first house, and $128,000 on the second, income we didn’t have to report. Don’t close on that house a day before the two year mark!
And I’ll warn you: it’s not heaven living in a house you’re working on. It’s easy to get cabin fever when your house and “office” are in the same place, let alone living with drywall dust, tools laying around, piled up debris waiting for garbage day… You will have some bad days, and your weekends will be monopolized for months on end as you try to get to a place where you can even remotely enjoy your home. Just tell yourself it will be worth it come closing (and try not to do it with kids).
My husband and I lived and worked in both of our renovation homes. The first one was the most emotionally challenging, especially since we had only been married about a year and were both new to rehabbing. We were better prepared for the second house, and while we still had some arguments about features we wanted to add, there weren’t drag-out fights!
- Your Budget & Time
It will happen to you: you’ll forget this is not your forever home, and you’ll want to, say, install that amazing soaker tub. Be careful with your budget – the financial dangers of over-improving are real! Rehabbing the home you’re living in involves a very fine line because it’s just as costly to under-improve. Read more about that here. When debating a high-dollar feature, always ask yourself if it will be a value-add when you go to sell the home. Solicit the advice of your REALTOR®!
As far as getting the best value for your home, winter is a great time to buy in Boise, ID. Prices may be lower, buyer competition has thinned out, and sellers may be more willing to help with repairs or credits for repairs. Real estate investors can still get a fair deal in the spring and summer, though it really depends on the current inventory. Sometimes your personal situation dictates that you buy during the busy season, and that’s just something you’ll have to roll with.
You’ll need some power tools. You probably don’t have an arsenal of quality tools, nor a lot of money to spend on them. For our first renovation, we were broke. The tools we had weren’t that great, but we got by with a mitered chop saw, drill, power mixer, power sander, and a jigsaw. We eventually added a pneumatic nailer, sawsall, Fein multi-tool, and Skilsaw, and I admit to taking advantage of Home Depot’s return policy a couple times when we needed a tool but really couldn’t afford it. We had a friend with a table saw, and another with a hammer drill. I got to know the nice old man at the hardware store pretty well who saved me hundreds of dollars when we had to rent the tile saw. The best way to save money is to make friends!
Another way to save money is to keep in mind the seasonal climate changes when planning improvements. Needless to say, planting a tree in the dead of winter is a great way to kill it and waste your money, but if you have a black thumb like me, landscaping may be the very first thing you’ll want to spend your time on; sometimes it takes a couple seasons to get your grass, shrubs, or flowers to come alive. Another example is that in extreme environments like Boise, ID, it’s a good idea to install your hardwoods in the winter. The last thing you want is to finally be finished with your home and ready to get all your hard-earned money back and then you see gaps between your floor boards… that could cost you if the buyer notices!
- Designing the Home to Sell
Right now, the rustic farmhouse style is all the rage in Boise, ID and everywhere else. That trend could change, but in the meantime, embrace it by using stock lumber wherever you can. You can make wonderful things with stock lumber, even furniture if you need to stage the home or can’t afford to buy furniture – it’s expensive, especially when you’re house poor! In both of our reno houses, we built our bed from stock lumber (and never found room in the budget for a living room couch). Our first house already had farmstyle elements, so we played on that as much as we could, with stock lumber barn doors, floating shelves, and built-ins. Ana White was my constant inspiration.
- Getting Physical
Perhaps the most important aspect of rehabbing your house is the demands the manual labor will put on your body. You MUST start a stretching regime if you don’t already have one. Do it every night even though you’re just going to want to fall in bed with a beer. Yoga is great because it gives your body an opportunity to tell you which muscles you need to work on (because some are less obvious). If you’re not one for yoga, or don’t know where to start, think about the basics you learned in high school PE. Even now, over a year since my last renovation project, my left shoulder and my right wrist are still angry with me, and my hamstrings seize up even after a short walk. We won’t even start on my back, but let’s just say I’m too young to feel this old. Pay attention to your body and don’t let a house do you in.
Of course, there is more to rehabbing than just these five tips, but you’ll learn so much along the way. If you need help, ask your Boise, ID real estate agent for suggestions. Or send me an email – I’m happy to help!