Newbie Looking To Get Started in D/FW Area

General Real Estate Investing
1

My wife and I live in SoCal. I just ended employment with a company and have been using the last month to reflect on where I am in relation to where I want to be financially for my age (43). In the process, I have done a bunch of reading and have come to the conclusion that real estate investing is a good long-term vehicle for financial freedom. I plan to continue being an employee for the next several years and to build a portfolio that would eventually allow me to step out of the “rat race” should I so desire.

My financial situation is this: My FICO is around 700. It should be higher, but I am disputing an item that is bringing it lower right now. My wife’s FICO is in the mid to high 700’s. I have about $50K to invest and am trying to get a HELOC for another $100K. I am working on a business plan that is very conservative IMO. It involves the purchase of two single family houses per year with a requirement of neutral or positive cash flow. I am looking at houses that are 5 years old or newer for maintenance issues. The plan is a 20-year plan and will obviously be updated and evaluated on a continuing basis. I plan to file for S-Corp. status in CA and file with TX to do business as a foreign corp. However, I have heard that there are issues with being a corporation in TX for a long-term hold strategy.

Any help that people can give is greatly appreciated, especially from those of you in TX who are in the business. I consider myself to be pretty intelligent, but I am not so prideful to not want OPE in the areas of investing, legal issues, financing, taxes, etc.

2

Howdy Vargha:

You do sound intelligent. IMO your plan is too conservative but I have been too aggressive in my plan. I like the idea you have a plan just do not spend the next 3 to 5 years making the plan too perfect and never getting started at all. I would suggest you buy discounted financially distressed property at 80% or less of retail. Tim Randle has a course on the process he developed. Basically he says that if you pay retail and have to bail you will lose money getting out of the deals. If you only pay 80% LTV you could actually have a positive cash flow and be able to weather a financial down turn and at least break even if you need to sell fast.

I personally prefer multifamily units as the cash flow may be a bit better. I am currently buying low end duplexes for $30,000 that rent for $600 per month and other small multi family units. You will not find newer properties with this cash flow but you probably will have greater appreciation.

Hope this adds to your ideas and goals.

3

Welcome to the board Vargha.

From your post I have deduced that you plan to stay in California and invest in property in Texas, that you are currently unemployed but do not feel that employment will be hard to find, and that you have no experience in managing real estate. Please correct me if I am wrong about any of these deductions.

Long distance investing in real estate is difficult. To buy a property, you need to be here to find the property, negotiate the sale price, close on the property, and find renters. After you have done that, then you will need to manage the property (fixing problems, collecting rents, paying bills, etc.) if the property is residential. You might be able to do away with a lot of that if you invest in commercial properties, but commercial has its own set of problems that can bankrupt you if things go wrong. Have you decided how you are going to handle these problems? I would suggest that you find a good property management company to handle the day to day transactions. A management company will reduce the profit that you make on the property and may actually cause the cash flow to become negative. Since I am managing all of my properties personally (and have a full time job), I have decided that I do not want any properties that are more than 30 minutes driving time away. That way when I get a call on Christmas morning saying that a pipe has broken on one of my houses, I do not have to spend all day going over to fix the problem or trying to find someone else to fix it for me.

Doing business as a foreign corporation has its own set of problems. Texas will tax you on the money that you make in Texas and California may tax you as well. I looked into creating a Nevada corporation and doing business in Texas, but it was not economically feasible. You might be able to set up a Texas corporation even though you are in California, but I am not sure about the requirements for “person of record”. They may have to have a Texas address. Also, I have been advised that it is not wise to hold more than $500,000 in real property in a corporation. It has been several years since I got that advise and have forgotten the reason, but it made sense at the time.

With all of that being said, let me congratulate you on your financial situation. It seems that you are about at the position now that I was 3 years ago (except that you are a little younger). I had decided that retiring with my current retirement program and medicare together would be just about enough to starve at a slow rate. I have since bought 4 houses, sold 1 and am in the process of selling another. The other 2 properties I am keeping for rental. I have a positive cash flow on one rental, a slightly negative cash flow on one, and own mortgages on the one that I have sold and will have a mortgate on the second. The propety that I have a negative cash flow on will be improved this year to have a positive cash flow. Eventually, this property will have a positive cash flow of approximately $1500 per month if everything goes as I plan. My goal is to have a $10,000 per month cash flow by the time I retire. I figured that if I buy 1 rental property per year with a positive cash flow, I can sell half of them when I retire and pay off the mortgages on the others to get the cash flow that I need to live in my current life style without working.

Good luck with your investing.

Wilson

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Both of you – thanks for the responses. From what I can tell, to do business as a foreign S-Corporation will result in double taxation. I will pay franchise tax in TX and I will pay personal income tax in CA. Opening a corporation here in CA will allow me to make some worthwhile financial choices, especially for my wife’s small photography business that will more than outweigh the costs of the corporation.

Dallas/Fort Worth offers me a couple of advantages. Property here in CA is absurd. Even if I were to go 90 minutes away to a place like Bakersfield, I can get a 1,500 SF newer home in the $250K to $300K range. Where I live, a similar home is about $500K+. Within 30 minutes of me the price range is $400K - $700K, depending on the community. I don’t like the idea of having so much property “value” tied up in a single-family residence. I definitely will use a property management company even though it will run me 8-10% to do so. I would be curious as to how people get the management companies down from their stated 10% fee.

Additionally, I lived in that area for 3+ years and have a general familiarity with the area. My father-in-law lives one hour west of Ft. Worth and I can use his address to satisfy the legal requirements of a resident agent. Plane flights are often and fairly cheap out of this area to Dallas, so I can come out there rather easily if required, especially to finalize house selection. I do need to find a good realtor who understands real estate investing (preferably one who is doing it as well) and a good property management company. Hopefully I can do much of my due diligence over the phone. With long distance rates at about 7 cents/minute (and free on my cell phone up to plan limit) this part can be rather inexpensive.

I don’t fully understand LLCs and limited partnerships to know if that would make sense in TX. Again thanks for all of your help and any other areas that others can fill in is of course, greatly appreciated.