Trying to make some decisions here, and any input would be helpful! My hubby and I are sitting on about $100k that isn’t making much money for us at the moment. We’re considering using half of it to purchase our first investment property, a single family home that we would rent out. The rent would easily cover the mortgage, insurance, etc. and leave some extra for future repairs, property management, etc., but probably won’t provide any significant income immediately. Looks like a good opportunity to our inexperienced eyes for a rental property that at least breaks even comfortably. It’s a bank owned foreclosure, is in good shape and under priced for the neighborhood.
However, I’m starting grad school this summer. My husband does well at his day job; he makes well in excess of what we need to pay our bills. The schooling is for something I think is fascinating and a fun field to work in, not for more $$. If we’re frugal his income will cover the majority of my school expenses. Once I start this program it will be extremely challenging to take a break and make some money if we find we’ve taken a risk that didn’t work out, and resume the program at a later date. Between his job and my schooling we’ll probably need to utilize a property management company while I’m in school as well.
We can’t help but pay attention to what a buyers market it seems to be in our area, and the current low interest rates on mortgages. There are no guarantees that the buying climate will be nearly as opportunistic in 4 years when I finish and we’re back to two incomes. We’re obviously careful people most comfortable with low risk options, at least until we get some experience, cash flow and equity under out belts.
So my questions:
-Does the remaining half seem like a large enough cushion considering our monthly bills (~$5500/mo), and my education ($30k/year) should things go awry with the rental?
-Does this seem like an ideal low risk starting opportunity?
-Would you buy and sell immediately, or buy and rent out in hopes of creating consistent passive income?
-Are there questions or things I should be thinking of that I haven’t mentioned here?
Sorry for the length and I hope this makes sense; it’s hard to explain the details with brevity.
I would not use any of the $100k to buy a rent house. I would find a house that you can buy cheap enough that the purchase plus fix up is under the 75% of the after repaired value. I would buy that house with hard money borrowing the money to buy and fix up the house using the hard money loan. After I complete the rehab refinance to a 30 year fixed and then rent it out. If you limit yourself to only buying houses after you have saved up $100k you will limit your growth to the amount of money you can save. You can’t save your way to getting rich you have to develop a business strategy and then cookie cutter it until you are as big as you want to be.
Thank you for your thoughts! The method you’re describing does seem like a better way to make more money faster. My concerns are that we’re pretty ignorant when it comes to evaluating house values, cost of repairs, and navigating that process. Seems like a lot of moving parts, if you know what I mean? We’d also like something relatively hands off, due to time constraints of my being in school and his day job. The return would be less for sure, but it would be a start; the question is whether this would be a smart start. It doesn’t have to be the smartest start; it’s just hard to ignore the many opportunities in what seems to be a great buyers market and if there’s a way that we can take advantage of them without compromising our other agendas I’d like to pursue it. I suppose I could put off grad school for one year, and concentrate my efforts in becoming more knowledgeable and experienced in REI, but I’ve worked really hard to get accepted and I’m not sure I’m ready to let that go.
amtrem what you need to realize is that we are in an industry that is in a parallel stream to “real life” or the world that everybody else lives in. Everybody lives in what I call the retail world and we live in the investor’s world. These 2 worlds run side by side with the retail industry but ours is different. For example there are mortgage brokers, attorneys, title companies, realtors, contractors, etc. but none of the ones you see advertised on TV or somebody’s cousin, or come up on a Google search can do what you want done. They will say a lot of the things that you want to do are impossible. That is because there are retail professionals. What we want are investor grade professionals. We want the people that have not just heard of private money but have a list of people with it and have done deals with them in the last week. We want the kind of people that don’t raise an eyebrow when you say you don’t want to leave any of your own cash in the deal, or the kind of Title Company that can facilitate a double close.
What you need to do is find your way into that bizarro world where money is made. I literally stumbled into it. I went into the front yard of my lake house to get the newspaper and whole I was out there stumbling around looking for it saw the guy that owns the house next door out in his yard. I asked him what he did and he said that he did nothing. When I pushed him on what that meant I found out that he bought real estate and lived off the cash flow. He literally did not do anything. He introduced me to his mortgage broker who in turn introduced me to one professional after another. Later I went to a real estate investor’s club meeting and that is where I got the idea for how to get into this business. You can either do it like I did and buy lake house after lake house until you end up next to a neighbor that does real estate to find out how to do it or you can go to a local real estate investor’s club…
I would go my local real estate investor’s club meeting. I would not go for the snacks or speakers, but to find out what mortgage broker, title company or attorney or whoever is a sponsor. Contact that person he will be in the network of all the investor grade professionals that live in our Bazarro world. These are the types of investment grade professionals that will show you how to buy a rent house that you have none of your own cash in that spins off to you $200 to $500/month.
I agree with the use other people’s money. Using your own money real estate is about as good as other investments: leveraging borrowed money is what boosts the ROI.
Blend your plan with what bluemoon suggests. Use your money as the hard money loan, buy low, fix, rent, refinance, repeat.
Hard money is expensive (probably worth it though), but since your money isn’t doing anything else, use it.
Wow, thank you Mike and Blue Moon for all the replies!
I decided that if I’m better educated about this stuff I’ll feel more confident with a higher level of risk, than what I’m used to at the retail level, as you put it. There is a local real estate club that meets monthly so I think I’ll go to their next meeting. I picked up a $3 book at the used book store that has a lot of formulas for evaluating potential rental properties for cash flow, and I’m experimenting with applying them to properties listed on the homepath.com site. I think I’m getting a better understanding of how to really make these things work. I like the idea of blending both plans and using our $ for the hard money, and networking at the meetings to find better opportunities and meet ‘investor grade professionals’.
It’ll be fun to see what I can accomplish in the few short weeks before my program starts! :biggrin Thanks for the encouragement and ideas!
BlueMoon, that was probably one of the better posts I have read on this site. Your point on the “bizarro world,” I think clarifies a lot for beginning investors- me included. The view point that I had coming in was, “in what world does this work?” Luckily I took a risk and purchased my first rental property, it worked out but even with that experience it can be a daunting task.
Keep-up the awesome posts!
I wanted to mention that when I purchased my first (and only thus far) property I was entering my senior year at university. For me, it was hell because I was taking 6hrs of summer classes, working 40hrs a week at an internship, and trying to do all the remodeling myself (with a lot of from friends and family and select contractors of course). For you it may not be this bad but trying to manage a job site, go to class, and complete assignments all at the same time can be very time consuming so expect some late nights.
As for the management, don’t stress out about it too much. If your contractors do quality work and you screen for good tenants it should be a breeze. There are horror stories about tenants and we all will likely have them during our REI careers but it’s pretty simple stuff really. Read some material about landlording (The LandLords Kit is pretty decent) before making a final decision; property management companies typically charge around 20% of your rental revenue, a hefty price to pay.