I have friends who have ended up with 10 or 12 rentals because they bought there starter home owner occupied and as they have moved up over the years (about every 3 years) they have bought and financed a new owner occupied home and kept their old ones as rentals!
Yes, this means moving every 3 years or so but owner occupied financing is easily available and buying a home correctly provides a foundation to create a future rental property! You only really have to save around 6% for down payment and closing cost’s and as long as you stay in it for at least 2 years you fulfil your FHA obligation and can then move on to another home!
Yes, you can find a mediocre deal that way. They’re a dime a dozen. However, how many deals can you buy conventionally that way? So what you make 10% cash flow annually on your $30,000 down payment on a $150,000, bread and butter home in any smaller, California or New York suburb? That’s a whopping $3,000 a year!
Now, if you’re buying cheapo properties in the $75,000 range, you can imagine the tiny dollar amount that a 10% return represents on a $15,000 down, with a 10% return. That comes to $1,500 bucks a year. Hey a rebuilt transmission costs $2,500. Better hope your car stays running.
Of course you’ll need 10 of those bread and butter deals to make $30,000 a year in asset growth or cash flow. And whoops, you’ll be paying taxes on that cash flow by that time, because the government hates entrepreneurs and does it’s best to undermine achievers …so they’ll demand you redistribute part of your wealth to cover their exorbitant, government union pension plans.
Of course again, to buy 9 more properties with 20% down you’ll need another $270,000 in down payments. Of course you can’t possibly retire on $30,000 a year before taxes, so it’s another 10 properties, with another $300,000 in down payments for you.
Now we’re talking nearly $600,000 in equity just to generate a measly $60,000 in gross, pre-tax, passive income. That’s a lot of conventional investing dough for so little return wouldn’t you say?
Notwithstanding, I think you’re seeing a lot of strategies on these boards, because they are necessary for those who don’t have highly-disposable, six figure incomes, or large nest eggs to start with. And many of these strategies are necessarily creative and represent high-leverage, higher-than-average returns, because very few people have over a half million to invest in 20 properties ---- that produce enough income for their retirement …the conventional way. (A meager retirement, that is, too)
So, yes, you can do what you say, but where’s that gonna take you in the long run. You need a much more aggressive strategy. And that’s why I absolutely love this business. You can get much better deals on your own with much higher leverage, much better prices, much better financing, and finally much better returns if you bypass all the conventional approaches that the sheople are willing to settle for. FWIW.
I’m certain that’s why I’ve been attracted to flipping Subject To deals for 19 years. It’s huge leverage, high cash flow, and no down… And nobody tells me I can’t do it. :beer
There is NOTHING wrong with that method, but it is by NO MEANS the best method of real estate investing.
A 7 to 10% interest rate…honestly sucks. It will take a really long time to get rich or wealthy that way, and additionally if you have one big uninsured expense one year - e.g. a complete replacement of the HVAC system or a need to drop $10k cash on a foundation repair - that could turn your tiny +7% return to a -25% to -50% return one year eating several or many years worth of profits!!!
I pay CASH for properties, which is even a more conservative method than putting 20% down on a property…but I buy properties so cheap its insane. I get a minimum 20% annual percentage yield (interest factoring in compounding) on every single deal I do, and many deals are much higher than that. A couple of my deals are netting me in the ballpark of a 50% APY…freaking crazy. And nope, I am not investing in mobile homes, I have paying cash for old fashioned, wood & brick structures.
I am pushing nearly two dozen properties, virtually all debt free, in just a few years. Sooner or later I will have 50 to 100 properties.
I don’t use a real estate agent to find deals NOR to manage my properties, which has saved me money and also yielded me much better results when it comes to managing my properties. I have leased a property to a highly qualified tenant in a week or two, while the neighboring house took 6+ months to lease one time by a licensed real estate broker…and it was nicer than my property. Interesting, eh? I have gotten very good at sales, and in turn very good at leasing properties.
I get the cash to buy the properties from my earned income, which is a couple small businesses (I make a very nice six-figure income). If you don’t have a six-figure income…you can always do the 20% down deal on the same type of deals and actually get a better return than me because you’d be leveraged … granted you won’t make quite the NET cashflow each month however you could still do it fairly easily and it’d be a great way to invest. The key is - find a deal that gives you a huge return by buying at a below wholesale price.
To the OP, thanks for posting this. It’s a thought I have had too. REI can be a daunting thing to jump into, as I’m finding out. Most of what I am reading is that, as an inexperienced invester, I should steer clear of foreclosures. Most of the books I have read point to finding a mentor, which is hard because I do not currently interact with anyone in this arena.The thought of knocking on doors, dealing with distresed owners, negotiating my own contract, etc, seems a little out of my league at this point.
I have quite a bit of equity in my own home to borrow from, and I would like to purchase SF homes to rent and keep long term. What would some of the more experienced people here say is the best way to get started? A real estate investing group/club? I continue to read and learn, but it can get to be paralysis by analysis after a while. When you say “find a house to buy below wholesale”, how did you first do this?
I have quite a bit of equity in my own home to borrow from, and I would like to purchase SF homes to rent and keep long term. What would some of the more experienced people here say is the best way to get started?
There are numerous ways to get started. It really depends on how much experience and knowledge you have, how much money you have (savings) and how much income you earn. If you are flat broke and have limited credit and income … well … you will have a totally different (more limited) investment opportunities than if you have a lot of savings and a lot of cashflow - from a job, investments, whatever. YOU HAVE equity in your home and that’s nice…but what are your personal goals? Do you want to supplement your income on a part-time basis? Do you want to go into real estate full-time someday - ie earn enough to quit your day job? Do you want to have 100 rentals some day, or just 3? Are you motivated enough to “do whatever it takes” to be a successful entrepreneur, or do you feel more comfortable working for someone else - in which case real estate investing will always be part-time for you? Are you good at sales?, or do you hate sales? Give us some more details about your dreams/goals/plans and we will try to help you out.
A real estate investing group/club?
I would look into joining one of these myself if one was near where I lived … the nearest one is probably 20-30 miles away from here. I have heard a lot of them are full of newbies with little to no experience, so don’t expect to go to one and learn all the secrets to getting wealthy in real estate. You can probably learn a lot more from books if you are just starting out
I continue to read and learn, but it can get to be paralysis by analysis after a while. When you say “find a house to buy below wholesale”, how did you first do this?
Personally, I get most of these deals via direct mail ads. I have gotten a couple leads off the MLS, from a referral or Craigslist, but those deals are rarer … and note the MLS deals in particular tend to be overpriced for a sophsticated investor
To the OP,
You have to know if the property is a good deal. It doesn’t matter how you find it…MLS, referral, driving around town and spotting a sign, etc. You just have to know it’s a good deal. There’s nothing wrong with buying properties off the MLS if it makes sense. Just because it’s listed doesn’t mean it’s not a good deal. You’re right - things don’t have to be incredibly complicated. Don’t make them harder than they need to be.
Ah yes, it’s all relative to your goals…good point. Obviously I’d like a better than 7-10% return (and don’t want to get eaten alive by expenses), but I do have some constraints.
I love my job. I am an entrepreneur and I help build high growth companies. I’m not looking to real estate as a full-time gig – I’m just looking for diversification (and an investment I’m more interested in) than my paper assets. I suspect I could be pretty good at managing properties – but it’d have to be very part-time.
I (do or will) have money for down payments – so I’m not looking for “start with nothing” strategies. I like running numbers/being creative, but I don’t like knocking on doors – and I’m willing to take a slightly less awesome deal to cater to that.
I live in the SF Bay, but I have family in the midwest (and a few other cities), so I’m not limited to California.
Given those goals, how would you recommend getting started?
You really don’t have enough savings or income yet to get into the apartment complex or commercial property investment game, yet you make too much money to do something like wholesaling or investing in mobile homes, so I would start out buying lower and middle income rental properties with some leverage (0-20% down; note you can still get low % down deals like with Fannie Mae Homepath financing). You can build up some part-time cashflow, and when the market picks up in a couple years you can sell them for a nice profit, and keep investing in the same form of real estate or another form of real estate with your excess cash (with $100k to $250k cash you can begin looking at smaller commercial deals). Good luck!
PS - you are in an extremely expensive area to get rentals - so I would look outside your market area (which I normally would never recommend). Try to stay within the 2% rule = a house that you pay 50k for should rent for $1000 a month … and it will be hard to go wrong. But I doubt you can even think about doing those deals in your state, more or less in San Francisco.
One thing that wasn’t pointed out, and may not be a major issue since you seem to have the income to support it, is, in this market, your debt to income ratio. The banks don’t care anymore (at least for the first 2 years) if you have a signed lease agreement showing cash flow. It’ll take everything you’ve got just for them to cancel out the debt, if they’ll even do that for you. I started the same way you’re talking about (owner/occupant for 2 years, leased that property and bought my next o/o via Homepath). I gross nearly $500/month profit on the first but it took convincing the bank I had 30% equity just for them to cancel out the debt (they wouldn’t even count the income from the property). Once it has been leased out for 2 years and I’m ready to move out of the new house I may be able to do the same and my first property may finally count as income by then (after showing 2 years rental history), but my goals are different than yours. I want to buy faster than that and be full time in real estate before I’m 30, which is why I’ve started wholesaling and working on other, more aggressive, strategies. With your income you may be able to to get 3 or more houses easier than I could and if you are not concerned about making a fortune in real estate then you may be cool with that.
A lot of banks aren’t going to consider all of the rental income from a property until it has been performing for at least two years. So early on, this can count against your debt to income ratio. You can get around this by dealing with a portfolio lender (local bank) that can be more flexible.
aares - 2 years is also important because if you live in a house for any 2 consecutive years out of the previous 5 the current tax code lets you avoid paying capital gains tax if you sell. So, if I live in a home for 2 years and rent it out for 2 or 3 years I could decide to sell it and would still not have to pay taxes on my profits.