Yey, my second post… I haven’t yet invested in anything, and as I mentioned (if you saw), I’m gearing up to getting started. Currently only reading up and looking at whats out there. My plan is to purchase at least 1 property to use as a rental. The market here seems to be full of distressed properties of all types, even FSBO are way reduced.
Anyhow, I have $120,000ish to use in REI. I could use it to pay cash for 1 property (or a big down payment) or down payment on probably 2 properties. Assuming I stick with 1 property (to learn wtf I’m doing) I’m not sure how much to put down… My ROE drops the more equity I have in the property, but I’m also paying less per month in mortgage costs. Since the market is still dropping, but somewhere near the bottom? it would seem best to flat out own the property and use the ownership as leverage for purchasing additional properties once I’ve gained some experience.
Thoughts?
Thank you in advance and this looks like a great group of people helping one another out!
First of it is important if your going to make portfolio investments to have a prudent reserve of cash for the water heater that suddenly goes out, for the furnace that refuses to light, or for that leaky roof around the front porch, as a landlord it is important to keep and continue to contribute something every year to your prudent reserve for just such an emergency.
With that said I would stick $20k in strictly prudent reserve and would parlay the remaining balance into 3 or 4 properties with gross FMV’s less than $100k and utilize the opportunity to start a diversified portfolio that the tenants are effectively paying down the mortgage.
Make sure you buy properties that are in really good condition, check market rents and work your numbers backwards to insure your offer will be supported by the market rent’s.
I agree with Gold River. I like to add that I always suggest that if a person is going to buy a rent house then buy 3. I say that because if you have 3 houses with payments of $900 each and $300 positive cash flow and one of them goes empty for whatever reason you don’t have to cover the $900. You have the $600 from the other 2 to help pay the mortgage of the empty one until it gets rented.
Real estate is no better than any other investment if not for leverage. If you have $120,000 to invest that is huge because of leverage. I believe that you should use leverage as much as possible. If I have $120,000 I would put $10,000 down on 10 houses before I would buy 1 outright. This is my reasoning. If you buy a house for $100,000 and pay cash, that house goes up 10% you now have a house worth $110,000. You control $110,000 worth of real estate and you have made $10,000 on your $100,000 investment for 10% on your money employed. If you put $10,000 down on that house and take a mortgage of $90,000 and that same house went up 10% it is still worth $110,000 but since you made $10,000 but only have $10,000 employed in that house you just made 100% on your money. If you had done that 10 times you would have control of $1million worth of real estate. Leverage allows you to get bigger faster.
Also the key to real estate is cashflow. If that paid off house rents for $1000/month you make $12,000/year when it is rented. If you make $300/month positive cash flow on each of your 10 rentals that you have financed you would make $3,000/month when they are rented or $36,000/year. That with the same $120,000 to invest.
Thank you for the feedback, the logic in having multiple homes makes sense. I guess it boils down to how much risk/debt I’m willing to take on. Having 80k in debt with 1 house, or having 500k+ debt in multiple homes.
I do agree with the downpayment on multiple homes but since I have no experience in this maybe I should start with one to learn the ropes a bit, then take on multiples when I’m comfortable. I’ll just operate with a small downpayment on the first home so I still have the rest of the capital to invest in other homes once I’m more comfortable. I’m definitely the more cautious/conservative type; I’ll take risks, but try to make them calculated.
Why not outsource property management to the professional property management firms. Concentrate on learning how to make profitable investments. The professional managers don’t have a learning curve to overcome and generally won’t make expensive mistakes.
For your investment plan, run a spreadsheet with various purchase scenarios. Lenders today want at least 20% down. Calculate the cash flow, and the return on invested capital, for downpayments ranging from 20% to 100%, in 5% increments. There is a diminishing return with a greater downpayment.
Pick the downpayment that generates the greatest return on invested capital, then over time use your investment capital to purchase as many properties as you can comfortably afford.
Thanks Dave T… that’s a good suggestion about having a property management company help out in the start (if not the whole time). I’ll have to research what that will cost.
Another question… how long do you guys hold onto properties and do you always make a minimum downpayment to maximize your ROI? Do you then get rid of properties when the ROI starts to drop as you own more of the home, or do you work to pay down the mortgage until you fully own? I have one girlfriend who buys all her investment properties outright in full, and was trying to figure out the benefit to that. Looking at the math, the best ROI is when you have the least amount of money invested into the property with some good cash flow. I’m thinking the big benefit of fully owning the property is the low risk and safety of not having the big mortgage? hmm… :huh
Real estate is no better than any other investment except for leverage. Real estate will return you 10% or so if you buy it cash. If you leverage it you can make 30% or more. Example put $10k down in a $100k house that rents for $1000/month and yielding $300/month. That is $3,600/year divided by the $10,000 or 30% on your money you have in the house. If you buy the house cash you make $1000/month in rental income or $12,000/year but you have $100,000 out. That is a 12% on your cash. You also have an enterprise that is making you $12,000/year…you can’t retire on $12,000/year.
Had you taken that same $100,000 and bought 10 houses with $10,000 down on each yielding $300/month you have $3,000/month or $36,000/year and a portfolio of $1million. You may be able to retire on $36,000/year.
On a side note on your taxes you will be able to depreciate about $3,000/year on each house. For the cash house since you made $12,000 you will be taxed on $9,000 of income. On the financed houses you will make $3,000/year on each house and depreciate $3,000/year on each house so that $36,000 is tax free so it spends like a job making $50,000/year.
Leverage just puts you in a different league. Being adverse to debt is a good thing but you need to understand debt. There is consumer debt and commercial debt. They are different. Consumer debt is buying refrigerators, meals, motor boats, and vacations with debt. Consumer debt is bad. Like Dave Ramsey says you need to be debt free. I say you need to be consumer debt free. Commercial debt is buying income producing things with debt. Your number one goal in life should be to have $1Billion in commercial debt. What that does is affords you the lifestyle of a person that controls $1billion. Donald Trump used to own the land under the Empire State building. He didn’t own the building just the land under it. He paid $Billion for it. Do you think he saved up a billion dollars and bought that land for cash? No he borrowed the money to buy the land. He owns Trump casino, Trump Tower Trump this Trump that. He has not paid cash for any of that stuff. That is because all that is income producing. He may pay cash for a watch or car but never for an income producing asset.
As I have debt pay down I reevaluate my properties every 5 years. I try to refinance the properties every 5 years and pull out cash to make capital improvements on them. You should never pay for new roofs, water heaters, A/C, stoves etc. Those are capital items. You should let the property pay for its own capital improvements by refinancing.
Wow bluemoon, that was very insightful and helpful. Thank you for taking the time to respond and type out those examples, it really makes sense. :biggrin
That is what we are here for. I have a group of investors that meet about once a month usually at someone’s house and have drinks and snacks etc. One of the guys owns a whole neighborhood. He said something in passing. It was a throwaway line but I pick up on that kind of stuff. He said that real estate is simple…but it is not easy. That is really true. You need a philosophy and then get help from people who have done that philosophy. Do exactly what they do. Don’t reinvent the wheel. Don’t try to make it better do just what they do. That way you never make any mistakes. You want to make sure you are constantly moving forward but never cutting bush. That keeps you out of trouble and allows you to keep it simple.
That was very good for me as well Blue Moon. I am in the same situation as insomne; I just do not have the available capital that insomne has available.
As Bluemoon stated above, leverage is what makes real estate the best investment class to be in hands down.
If you have $120k that you would like to invest, you have a great opportunity to use leverage to acquire several investment properties. Based on your posts above, it seems like you understand the advantages of leverage as it will dramatically increase your return over time, especially when you sell down the road and buy a bigger property. However, it goes without saying that even when leveraged to the max your properties should still be make sense business wise, or put simply they should be profitable for you. Every property needs a budget that is created annually after the initial budget you create during due diligence.