BiggerPockets

Hello all,

This is my first post on biggerpockets, nice to (e)meet you all! I'm excited to have finally found an online forum with such a vast collective knowledge. The purpose of this post is to gather as many viewpoints as I can regarding 2 possible strategies that I am considering implementing in my initial REI strategy. I appreciate any and all input you may have.

A bit of backstory; I'm a 29 year old design consultant in Los Angeles who has been very much into commodities and equities trading for the last 5 years. I have been successful in this and have wanted to diversify my portfolio to include REI, with a goal of moving a significant portion (>50%) of my portfolio into REI over the next 5 years. The main reason for this is because I don't think the current stock/bond/sovereign debt markets are sustainable for much longer and real estate has deflated just enough for me to become more comfortable with it. Although this will be my first rental property purchase, I have read voraciously about REI for the last 3 years. In some ways, I feel as if I've over-studied this industry on paper and have not engaged in enough "actual" situations. So, my goal for the next 12 months (hopefully by the time I'm 30) is to have my first rental property closed.

I have an odd advantage that a friend is just starting out as a real estate broker, so as she is getting started in her career, she is acting as somewhat of a birddog for me. She'll send me about 3 properties a week that look to have potential for free, which is a great advantage.

So, here's where I need some advice... I am looking to start with purchasing at least one duplex, triplex, or SFR in West Los Angeles near where I currently live. I figure that having a low-unit-count property that is close to home will make learning more easy, especially since I have a full-time job outside of RE. I have roughly $100k worth of liquid assets that I can convert to cash for these purposes. What I am undecided on is whether to sink this $100k into one property or whether to distribute the $100k into two properties (i.e. $50k into each).

In West L.A., these types of properties are typcially in the $400-550k range and may not turn a rental profit if I put much less than $100k down at the start (unless I find a killer deal or magic foreclosure or something). My initial hunch is to go this route so that I can focus on one property only, but I know that I'd be putting my eggs into one basket so to speak.

The other option is to look outside of west-LA and find cheaper properties inland. This would be difficult since I would be further from them, but would any of you recommend one situation over the other? I wouldn't be opposed to bringing in investors to help with the $ side of things, but I don't have any experience in that side of things yet. I'd obviously get more leverage this way, but I'm not sure that I'm comfortable with this type of situation on my first property.

If anyone can categorically recommend one over the other, can you please provide reasons why? Or, simply describing your experiences with both would be very helpful to a newbie. Thanks for all your help!

-T

Thanks for the reply Steve. I was actually just out in R.C. yesterday; small world.

I do have a full-time job (consultant), but it's not in stock investing or real estate. Stocks/Commodities trading is just one of my hobbies and I've been fortunate enough to do well in it over the past 5 years.

You read my mind in regards to living in one of the units of a triplex/quadplex, that's exactly my plan for the short term. That way, I can be a live-in property manager. I had always thought that an FHA mortgage would be the way to go, but isn't there a salary-threshold over which one becomes inelligible for an FHA? I'll have to look it up.

Thanks for the advice of 100k per unit, I'll try to stick to that as close as possible, but it's nearly impossible to find anything in West LA in a decent area for less than $400k out of the gate. If I could find a quad for that, that would be ideal, but most duplexes seem to be going for that. That's why I'm not sure whether I should start in such an expensive area.

Anywho, thanks for the input!

-T

Welcome to BP Thomas! This site has many wonderful pros that are willing to share their knowledge and expertise. Don't get discouraged if you haven't received many responses yet. They tend to answer many questions often early morning or throughout the day lol... I think you will find a multitude of comments tomorrow. I would offer advice myself, but I too am a newbie and any advise I would offer would be a guess from previous reading on BP. I will leave your answers to the pros! I just wanted to welcome you aboard and if I can ever be of assistance I would be happy to help!

Sherry

What are your goals for owning rental real estate? Ultimately, there is only one goal - make money - but there are a number of ways to get there.

If you're looking for cash flow right out of the gate, you'll have to buy properties that are priced well vs. the rent you can get. You have little control over rents. The market sets that. You have some control over what you pay, though many areas, as you've found, are priced so high you will have to put money into the property rather than take it out.

You would do well to spend some time reading the Rental Property forum, and to understand the "50% rule" that says expenses plus vacancy plus capital will run 50% of gross scheduled rents. Now, if you manage them your self (for free), your ratio will be lower.

Don't think putting in cash improves the deal. Putting in cash, or paying all cash, improves the cash flow, but that extra is from your cash, not from the property. Compute your "cash on cash" return (total cash flow per year / cash invested) and make sure that's 1) high enough to meet your goals, and 2) higher than alternative investments.

If your goal is long term appreciation, buying in an area with better appreciation prospects may be a better approach.

Something to consider is that multi-units have a much smaller pool of buyers than SFRs. If you decide you don't like the landlord business, its harder to dump a duplex than two SFRs. Around here, it seems small multis tend to be higher priced relative to SFRs. A friend just sold his one and only duplex saying it was a pain because the tenants were always complaining about each other.

I do realize that buying an OO multi has advantages for financing. However, you're mixing your personal living situation with your investments and that may result in compromises on both sides. IMHO, a residence you live in is nothing but an expensive doo-dad, same as a car or boat. Maybe it appreciate and is worth a lot in the future, but once you realistically include all the costs (interest, taxes, insurance and maintenantce, just for starters), residences are rarely good investments. If you realistically do the math, you'll often find that living in the cheapest hovel you can stand and investing everything else will put more cash in your pocket 30 years from now. That said, many of us choose better living arrangements than "a hovel". Choose what you like and what you can afford. Then choose investments that maximize the return toward your goal.

Also be very cautious of publicly saying you have $100K to invest. You'll find a long line of people who will help you invest that, and the returns may be less than you desire. Learn any business you invest in inside and out before putting down anything.

Tom you should do some research-particularly into the 50% and 2% rules, which are good back of the napkin guidelines for analyzing property.

Also, Investing in LA is tough. The numbers just won't add up. You will be upside down in most cases, so it's likely to be a loosing proposition if you're looking to do buy and hold.

You can go into places in the high desert area to find deals, but also the quality of the clientelle will decrease accordingly.

I'm in orange county, in a similair situation, and I'm looking in places like Arizon and Texas, which while remote, will give you a much better cash flow in decent areas. Not to mention your cash will go further as you can pickup homes for a fraction of what you'll pay in LA.

With good planning and good property management you can remotely manage your properties and you'll get a better return on your investment.

Unless you're going to be real estate gambling, i highly suggest you look somewhere outside of SOCAL. You really aren't going to cashflow well at all in comparison to other parts of the country. When I lived there, i went to NV / PHX to get two of my properties. Had i known what Cincinnati offered while I was in CA, i would of never bought those two investments.

Again, highly suggest getting OUT OF CA to invest. Too many 1 and done / asian money driving potential cashflow properties prices up.

Last question first. Buy one property. Put in as little cash as you can, IMHO. OO is "owner occupied" and that gets the best rates (the ones you see advertised) and lower down payments. NOO (non owner occpuied) rates are going to be about a point higher and will require 20-25% down. That's enough. Keep your powder dry and just put in what's required.

By buying just one property you concentrate your focus. Focus is very important. Focus on getting one deal completed and rented then start looking for another.

If you're looking for cash flow you may have to look further inland. A simple estimate of cash flow is (rent/2) - P&I (the principle and interest part of your payment.) That's the "50% rule", which just says that vacancy, operating expenses and capital items will eat 50% of the gross scheduled rent. The 2% rule (monthly rents must be at least 2% of the purchase price) only works for rents around $500, and I suspect anywhere withing driving distance is going to be higher. The 50% rule of thumb appears to be accurate pretty much everywhere. You don't have harsh winters in your area, but you do have very tenant friendly laws. An eviction will be expensive and lengthy for you.

Divide your annual cash flow into the cash invested to get your cash on cash return and compare that to alternatives.

I've been accused of being too focused on cash flow, with some justification. Realize that even if you're just break even that the tenants are paying down your loan and eventually you'll have a nice asset with only your small initial investment. Then the returns look much better.

And, as you mention, there are alternatives to rentals. I do have a couple of rentals, but also have investments in mini-storage (bad), development (also looking bad), and hard money lending (much better.)

Congratulations on getting this far at such a young age and being so focused on your future.

Yes, looking else where is vital right now. As mentioned earlier, the MidWest has been an overlooked opportunity. I regularly buy or help others buy 4-6 units in Indianapolis for under $125k full purchase price! With gross rents well over $2k.
Couple that with creative financing, joint ventures or good leverage - it's hard to beat.
I drank the Rich Dad Kool Aid several years ago & wish I had acted sooner - as most people do. I found that first "big" purchase to relative easy and not near as scary as I had imagined. At the time, I lived in Calgary, AB Canada & bought my first rental here in Indy. So long distance investing is very possible with a good team on the ground.
I've also found that, for me, paying a property manager is well worth the 9%-10%. This allows me to focus on the things that I'm good and while not worry about sinks & toilets.
In the end a strong "Power Team" is key to make any opportunity a Great Opportunity. Once you have the team in place, the rest is "easy".
Good Luck and welcome to BP!