Like many of you I have been sitting on the sidelines, trying to learn as much as I can by reading about others’ experiences in real estate investing. My husband and I plan to jump into the market as soon as we see a deal where we can make money. Given the hot market we are in (Eastern MA), finding properties at a discount is tough. I have seen a few that I feel are good deals, however, we are at a loss as to the type of property to start our portfolio with.
A little about our situation. My husband and I both work full time and have great credit scores. We own our own home, which we bought in Oct 04. I am an attorney (although non practicing) and my husband is an engineer by trade and is incredibily handy.
Given our situation…we are at a loss for what type of property to begin our portfolio with. I am inclined to start with a rental property to generate a positive cash flow. Which is difficult, but not impossible. Given rental rates in the area we are looking, after tax, rent loss, insurance, maintainace etc., we could generate a positive cash flow between $250-$500 a month depending on the house and rent rate. MA has strict tenant laws, but I am familar with all the loopholes and could handle any legal issues myself.
Our second option would be to find a rehab property below FMV and invest some sweat equity to flip the property. In this market these properties go fast. I look at MLS everyday and have seen a few good deals based on area comps, but they move quickly. Also, having spent the last 5 months rehabbing our own home, I know that whatever turn around time we would anticipate on a rehab, we should expect double. My husband is very handy and can do all of the cosmetic stuff (paint, flooring, general carpentry, light plumbing and electrical). He has some time but not a ton (weekends and one weekday). I don’t mind getting my hands dirty either, but he has the real skills. However, depending on the house we could certainly make out on the deal. Also, we could afford to hold the property if we had to for a period of time. My fear is that the market is going to bottom out at some point in the near future. The market in MA is way over inflated and is due for a correction.
So I thought I would put it out there for the experts. Rehab or rental. Where to start? Any thoughts or comments would be appreciated…
The bottom is going to fall out in MA is a risk that you and every other investor is in fear of. Thats something that you will have to think to yourselves, is it time to do it now? of course it is! REI has been around for a long time! if you invest the correct way, when the bottom DOES fall out, you won’t have anything to worry about, because you will have everything under the fire!
Now for rehab or rental. I personally specialize in both. But my rentals turn into Lease Options. I purchase ugly houses that i can get for 20-40% below retail and I spend the time to make it a pretty house, making a killing off everything I do. Remember. Every 1 dollar you put into the house, You raise the value up in most markets between 3-5 dollars. “Not bad if you ask me”
Than what I do is sell the house w/a Lease Option. This leaving me free from being a landlord! And ontop of that, I get cash flow on the property for a year or two, sometimes more. I get option money up front that is non refundable, than i get the appreciation on the house when the Tenant buyer descides to take advantage of the option.
Freeing me up from being a landlord and time to find another property.
You might not get the LONG term portfolio your looking for, but L/O’s are less of a risk and if the bottom does drop, and i say IF, you won’t have anything to worry about!!!
I have a very simliar background as to you and have been buy houses that need some work and then renting them out. Once you get them fixed up, the maintenance is pretty minimal.
The key is to purchase careful and know a good deal when you see it. While you can purchase places at a discount, the amts. suggested by the othe rposter are not possible in hot market unless you are buying a place with very serious issues and mdoerate to high risk (probably not a great first choice).
As for the market, do you have sufficent resouces to weather some vanacy and perhaps having to cut the rent 20% to get people in there. While a drop or several years of price stagnation are possible, unless you see a major demographic shift taking place in that area (i.e. jobs disappearing; towns getting smaller.
Unlike most people on this board, I always think about if I have to hold a property 5 years to get my return out of it. Sure I have done some short holds of 1 year or so, but rehabbing always takes longer than you think as does selling/finding a buyer at the right price.
As for picking rehabs, don;t pick any old crappy house. Pick one with things you can handle (junk in the yard, horribely outdate kitchen and baths, ugly faded paint) and has “the basics” like great location, good layout, good foundation (thinsg that are very expensive/impossible to fix).
Last but not least you need to be able to visually the property fixed up depsite the neglect and the curent owners rustig junk in the yard.
It touched on a few points that I feel are inherent to hot markets. First, you just can’t find properties that you can get 20-40% less then FMV…they just don’t exist without needing a ton of work. Also, the market in MA is way over inflated and many people are relocating to other areas because housing is so expensive - I know the market is due for a correction at some point. I don’t know if we could weather a huge hit…but we could handle a moderate hit. But after reading your post, I think my first goal is to generate a positive cash flow.
Have you ever owned any multi-family properties? I would be interested in holding and keeping a few multi-families for positive cash flow and then getting into the rehab or L/O for single family properties once the market falls out. Rent rates are strong in MA. There are quite a few college towns in the area that provide a strong base to draw from.
How does having a traditional mortgage on two or three properties, effect financing for rehabs? We both work now, but at some point I want to get out of the corporate world to work for myself…so generating cash flow is probably our first objective.
Thoughts? Are you in a hot market? What kind of properties you like to work with?
You sound excited. That’s great. I’m 20 minutes west of Boston. Purchased a 4 unit in Manchester, N.H. due to the rediculous price/ratios/vacancies in Ma. There are some out there but around here it’s scarce unless you want a high crime rate or are rehabbing with a lot of experience.
Donald Trump makes money in N.Y. so you can in Ma. it’s just a challenge that’s all.
The question is, what are your goals ? If you want a rental for 20 years then holding through a correction is o.k. I say focus on one type until you get experience.
Best case scenario you would purchase in an emerging, expanding market. Massachusetts is definitely not doing that overall. Parts of California, Florida, Texas, North Carolina, Arizona fit this description.
Definitely go to a Real Estate Investment Club meeting(s)and learn, read books, websites etc.
There are a couple of books on timing the real estate market or finding the hot markets at any given time which very helpful.
Also be ready for when there is correction, that’s where the millionaires are made.
You two have a great background and should do very well !
I hope this helped somewhat.
Ed
Thanks for you thoughts. I have looked in NH as well (I grew up in Southern NH). But property taxes are so high!!! I was orginally attracted to NH rental properties becuase of MA’s strict lead paint laws. However, I haven’t found any properties that would generate a positive cash flow.
Do you manage your own properties? What kinds of tenants do you rent to? And if you don’t mind my asking, what are your long term plans for the property - cash flow, appreciation, tax write off? Also, could you recommend a REI club in this area? I too am located west of Boston (about 30 miles). I have read quite a bit on REI, don’t know much about market timing, other then MA real estate is out of control and has to be headed for a down turn. I think that is why multifamily rentals make sense as a business model for us. With the increase in mortgage rates, fewer people are going to be able to get into the market, driving demand for rentals higher. Also, I think in 4-5 years all those people who bought with interest only mortgages are going to be looking to dump thier properties…just a less then educated guess…but something has to give at some point.
I would love to buy in an expanding market, but I think for beginners like us - sticking close to home is a good idea, especially becuase we plan to manage (do the repairs) our selves.
Do you work with any people (real estate professionals, mortgage brokers, contractors etc…) that you could recommend? It seems that this discussion board doesen’t have too many MA investors…I wonder if I should take that as a bad sign…
start by reading this msg board all the way back to the beginning!
never buy something just because its ‘close to home’. if you buy the top of the market like people did in the stock market in 1999, you will get
wiped out!!! contrary to popular belief when it comes to investments
when you buy in a market cycle is more important than what you buy
and its location.
study market cycles. people make the most amount of money buying at the bottom of a market and selling near the top. its dangerous to start at the top. i live in san diego and its insane here. my condo would sell for 375k but rent for 1300/mo. so i’ve moved to utah where i can buy a nice big shiny new house for 200k that also rents for 1300/mo! just becuase its 1000 miles away doesn’t mean i’m scared of the distance. it just means i need to find trustworthy property management. i have a full-time job so managing properties
is low-priority for me, so i’d have prop. mgmt even if they were close to home. i’m also a big fan of L/O so the prop. mgmt factor is reduced.