When to Start - First Purchase - Guidance Needed

General Real Estate Investing
1

Hello,

This is my first post here. I apologize for its length. My future posts will probably not be this lengthy. I constantly read posts from this and another forum and have been doing so for weeks, if not months. I know there is a wealth of information on this site that will be beneficial to me and others for years to come. I look forward to any ‘general’ advice you can give me regarding my situation.

I say general advice because I am months away from my first purchase and undoubtedly, I will aim to acquire more specific advice later. For right now, I could use assistance regarding two areas: a) when to start and b) what to purchase.

WHEN TO START

I will be graduating school in May and will of course have student loans to repay. The total student loan is $80,000 (approx). Because $20,000 of that is a personal loan from a friend, it doesn’t show up on my credit report. There’s also no interest associated with that loan. The remaining loan is entirely from the Government. Monthly payment on the $20,000 personal loan is $300 minimum (again, not reflected on my report for any debt-to-income analysis, though the inclusion of it in any such analysis would of course be sound policy), and I expect monthly payments on the student loan to be another $300 per month.

While I own a car, it’s already paid for, and therefore the only payments I have associated with my car are insurance payments and costs of maintenance. I virtually have no credit card debt (less than $1000) and I try to keep my balance at or below 30%. I have ‘good’ credit rating with a middle score of 670.

Upon graduation, I expect to earn $50,000 for the first year where my employment will be in D.C. I live in Virginia now. After the first year, There is the distinct possibility of relocating to any one of the following areas for a permanent job (at least three years): Florida (Miami), New York, or Georgia with a slight possibility of remaining in the District. My income then would like not exceed $50,000 greatly.

Question: Since I know that I’m going to be here for another year, do I a) continue to rent while ‘aggressively’ paying down on loans (specifically that of the personal loan) and begin saving for the purchase of my first property, or b) purchase a home with as little down as possible while having my job as a cushion for any emergencies - while also ‘unaggressively’ paying down on my loans? If i exercise option-b, I would attempt to live with roommates for the year to help with the mortgage payments (or otherwise have tenants if the property is a multifamily home - see below).

Part of the reason why this question have some difficulty for me is the realization that I don’t know where I’ll be after the first year. One possibility is to purchase a home now and rather than selling it before moving to another state, I would simply hold the property as an out-of-state property (probably a no-no for someone just starting out).

WHAT TO PURCHASE

Assuming I decided to stop paying rent and start paying a mortgage, the next question for me to decide is what I should purchase. Specifically, do I a) purchase a single family rental or b) a multi-family property up to 4 units.

Having preliminary reviewed various investment strategies, e.g. foreclosures, lease options, etc, I have determined that the buy-and-hold strategy fits best with my long term goals of owning real estate coupled with the demands of my full-time employment. One thing I was contemplating is to make my first property a fourplex (if possible) so that I could live in one of the units and rent out the others. Ideally, my income from my job would be able to cover the mortgage even if I had zero tenants.

The one thing that concerns me about purchasing a fourplex is the exit strategy, since it’s not as easy to sell or get rid of as a single family rental. However, I feel that the relatively small size of a fourplex, triplex, or duplex, would provide the dual benefit of having an owner occupied property as well as the opportunity to gain valuable management skills.

So basically, that’s where I am right now. I don’t want to make this post too long and I’m sure I could have simply ask my question more concisely. However, I felt that since this was my first post that a little bit of information might be helpful to you in order to provide me with some guidance.

Thank you.

PS: I will of course join my local Real Estate Investment Club.

2

My suggestion would be to keep renting because your future is so unsure. If you might be moving in a year, I would not buy a house or small mult-unit. What I would do is to live as cheaply as humanly possible and save as much cash as possible. Then, when you get where you will be in a year, you will be well positioned to start investing. Running a rental property business long distance is exponentially harder and is not advisable.

If you keep your expenses down, save your money, and then build a proper rental property business, you could easily be semi-retired by the time you’re 30.

You have a great opportunity! A little sacrifice now combined with some hard work for a few years will result in a GREAT FUTURE!

Good Luck,

Mike

3

Rent for now, and really work on paying down the credit card debt and the personal loan. Even though the personal loan is at 0%, you don’t want to risk any issues with your relationship with that party if things go wrong.
The student loan debt is ‘good’ debt, and you can deduct the interest paid on that from your taxes (up to $2500 a year, I believe).
Paying off the credit card debt and making payments on time will get your credit score up. Aim to increase it into the 700s over the course of the year, and you will be much better off when trying to obtain financing.

4

Thanks for the advice guys. I’ve posted this question on another forum and in consideration of the combined posts, as well as my own personal considerations of the matter, I will lean on the side of continuing to rent for the next year.

However, I will look for properties to purchase and will ‘likely’ only do so if it’s a great deal - one that is purchased below market value (at least 70% or lower) that can produce positive cash flow after factoring “real world” expenses.

Sufficed to say, I won’t be in a rush to buy. Regardless of the property I purchase, if any, I would post the numbers here for further guidance.

Again, thank you for the comments.

P.S. Whether I decide to go with a SFH or a multifamily property up to four units is still somewhat unclear. However, given my inclination to simply continue renting, building up my credit AND cash reserve, it might be a decision I won’t have to be concerned about for a whole year.

5

well in my opinion - student loan debt is bad debt. yes you get to “write off” the interest - but the bottom line is, that debt is not making you any money per se. yes it helped you get an education…making 50k, but it isn’t debt that was used specifically for you to make money on - like when a landscaper takes out a loan to buy a second truck, trailor, mower, weed wacker, gas can, some tools and a blower to expand his business that will make enough money to not only pay the debt back, but also put cash in his pocket.

or like a real estate investor - refi’s his house and buys two rental properties that pay for themselves and puts cash in his pocket -

that’s good debt.

most people refi - then pay off their stupid debts like boats, cars and student loans - then after the money is gone - they don’t have any money left to increase their passive income and it’s…you guessed it - right back to the rat race again and in 12 months - big CC debts and in 24 months - a new car (lease) and oh yeah, maybe i’ll go BACK TO SCHOOL - more debt…and another refi to pay off all this same crap again.

yuck.

enough of the babbling - for the next year - yeah play it cool - see where you’re at in a year - but during this year - really map out how you plan to pay off your debts - keep a monthly tab on how much interest you’re paying, how much you’re paying things down - keep track of your payments - make sure they go toward PAYING TOWARD PRINCIPAL - write that on your checks or pay with two seperate checks - one to the minimum and another toward principal.

consider maybe buying a SFH to live in - buy it dirt cheap - buy the crappiest house in the best neighbhorhood - make sure though that it comps well with the area in terms of rooms, baths, extras, etc. live their for 1 to 2 years - fix it up - and sell it - use some of the money to pay down your debts significantly - and the rest to put down on another property. it’s a slow and methodical way toward investing. you could also refi it, hold onto it and rent it, use refi money to do the same as above.

stay single. stay disciplined. stay focused.

6

Using student loans to finance a good education neats the alternative all to Hell – not borrowing and remaining uneducated/ignorant!

I have a saying at work…“It’s better to educate an employee and have them leave than it is to have themuntrained/uneducated and stay!”

Keith

7

One way to look at student debt is that the student loans that are taken out are simply an investment towards an education and now that I am pursuing a career, I am experiencing a return on that investment.

I suppose it’s still debatable whether the return on investment of a particular job was worth the initial investment. I think it was. In my opinion, my student debt has not only allowed me to have a job but it granted me the opportunity to begin what I expect to be a fulfilling career. As such, I can now expect to have a consistent income that will only increase for years to come.

Although, on the one hand, a career is not unlike a job where someone is trading hours for dollars, I view my career as being more than that…so much so that even when my passive investments in real estate equals or surpasses my income in my career, I might still not retire. Money is important and with it I am less dependent and have more options, but it by no means is the sole (or primary) reason for my pursuit of the career path that I have chosen (one that is premised on serving the public rather than relishing in the private sector).

I know that nodoby here is saying (or have said) that education is a waste of money or time, but my points above is just to show that, to me, it is ‘good’ debt even if in a purely economic sense, it could arguably be considered ‘bad’ debt. Even in a purely economic sense, because investment in an education is a long term investment, the returns on that investment, over the long-run, would undoubtedly transform bad debt into a good one. I suppose a more accurate saying is that the cost of education can be a bad debt as well as a good debt - it all depends on how it’s valued and how it’s utilized. (e.g. taking out more loans than is necessary and then using those loans to party the years away).

A lot of people read this forum to get advice. By framing the cost of education as bad debt, it may create an impression that taking out loans to acquire an education (if a person otherwise can’t afford that education) is not worth it. It is with that impression I disagree with which is also why I disagree with the characterization of student loans as being ‘bad’ debt.

Besides, apparently many beginners fail in real estate. At least, having invested in their education, they have something to fall back on. Diversification of investments has rarely been considered a bad thing. That’s just my opinion.

Therefore, I respectfully disagree with the characterization of student loans as bad debt.

8

I think the choice of buying single family vs multifamily will be dictated by the market prices of the area you’re currently in. Traditionally, it’s going to be more expensive to purchase a single family and make the numbers work than a multifamily.

For example in my area, single families are typically in the 300-350k range while multifamilies of two units and up are in the 450-600k range. On a per unit basis the multifamilies are cheaper.

As for your debt, it all depends on what your savings are. Banks like to see 3-6 months worth of PITI (principle, interest, taxes, and insurance) in savings. If you have those in a 401k or IRA, then I would focus on paying down the debt with the highest interest rate. With credit card debt of only $1000, I would focus on not carrying a balance and just paying off the entire amount at the end of the month. Fico calculations don’t really take into account whether you carry a balance or not, they just look at the total amount of debt you have.

Student loans can be considered good debt not only for your education but the fact that they require small monthly payments relative to the total debt. The fact that they’re deductible means the effective interest rate you’re paying on them is even lower as compared to credit card debt which isn’t deductible.

You’re best bet is to save about 5-10% for a down payment. Realistically probably having 5% is probably best when starting out. Doing 100% financing is possible, but you do pay a higher interest rate than if you had 5 or 10%. Your interest rate would be even better if you had 20%, but my theory is that if you wait that long to save up to 20%, you’d lose money in just paying rent and potential appreciation. Now that the market isn’t headed up as before, the first item is still a factor.