Need advice for Starting Investing Journey

[Damien C Hyatt]

The goal is to acquire enough rental properties to generate $10,000 in monthly cash flow after expenses. Short-term goal/first milestone: acquire enough rental properties to generate $2,000 in monthly cash flow after expenses.

In my current situation, my wife and I are dealing with a mortgage of $74k at a 3.5% interest rate on our primary home. We’ve secured pre-approval from Chase for a $200k conventional loan at 8% interest with a $40k down payment for our first rental property. My credit score stands at 780. We’re targeting the Florence/Hebron/Burlington area in Boone County, Kentucky, near Cincinnati, OH. We’re actively participating in auctions, but unfortunately, we missed out on our last bid by one bid higher. For preliminary numbers analysis, I’m using an online calculator available at this website: https://www.calculator.net/rental-property-calculator.html. We’re eager to acquire our first rental property and are looking for any advice that could expedite this process.

[Randall Alan]

@Damien C Hyatt

Hi Damien,

I wish you all the best on your journey.  What follows will probably sound somewhat pessimistic - but I put it out there for your consideration...

Understand that your journey will be a long one, as real estate is usually not a get rich quick game.  A descent cash flow from a typical property in today's market is probably $300/month.  So to reach $2,000 at that rate you need 7 homes; and to reach $10,000 at that rate, you could need 33 homes.  

We have 37 units (25 properties), and have over $1 million in up front cash invested in those - and that was with rentals purchased between 2018-2021 - when both real estate and mortgage rates were cheap relative to today's prices.  It would likely take $2,000,000 in resources in today's markets to achieve your bigger goal.  

Much of what we purchased was done through MLS listings - but we have also purchased multiple homes through foreclosure auctions. Know that while you can find them cheaper at foreclosure - often it is at the expense of the risk you are taking not knowing what is going on inside the home. We had one home that the owner had 5 cats and 10 litter boxes that were never changed. Once we got possession of the house we literally had to wear respirators to be able to enter the house the cat urine smell was so strong. Even after stripping out all the soft surfaces (carpet, etc) it still had a strong smell because it seeps into the walls. Point being - you don't know what you don't know about what you are buying at foreclosures - so you are getting that discount for taking that risk.

I would also point out that at 8% interest - VERY LITTLE cash flows well. You need to run your numbers and do some serious thinking about your return on investment. It's not worth spending $6,000 in closing costs, and paying 8% interest to net $100/month on a rental. When doing your calculations - be sure to include principle, interest, property taxes (what your new ones will be - not what the current ones are - because after 1 year they reset to what you paid on the property), property insurance, and a maintenance reserve (we use $100/door/month on maintenance). There is also Capex expenses that must be considered. We have replaced 7 AC units in the past 2 months in our portfolio - which is really extreme... but it's $35,000 in expenses we had to incur... so it deserves consideration regardless of what scale you are at.

You might think - well I can just refi it when rates come down.  Which is true - but the refi is going to cost you $3,000-$5,000 in closing costs again - which actually moves you backwards by a couple of years to recoup those costs at the $200 more per month you will make once rates get back down to 5.x%.

My bet is that unless you can find some seriously undervalued real estate that your numbers won't look pretty at 8% interest (all in).  Which is probably 'code' for - real estate can be a great investment vehicle -but today may not be the best time to jump in as to returns on investment.  The Fed is expected to start cutting their interest rates in September, which should have a knock-on effect for mortgage rates coming down.  They meet 8 times a year - and if they cut rates 1/4 point a meeting that could mean that by mid next year we could see a 1% drop from todays rates... and maybe 2 points in a year if we were really lucky.  My guess is somewhere between those two.  

As for ourselves, we are always looking, but not buying at the moment as we think our money is better off sitting in a high yield savings account, versus locking in a high rate on a mortgage.

I'm not trying to be a nay-sayer - as real estate is awesome.  It is our full time job and income.  But we bought when cash flow was easy.  I'm just suggesting it might be worth waiting for the rates to come down before you pull the trigger.

All the best!

Randy