The first is always the hardest, so please help!

11 Replies

I have been recently working on the analysis stagy of my first investment property. I have developed, with a friend, a web scraper and algorithm that finds undervalued houses/duplexes to ensure a positive cash on cash return based on local loan and rent values as well as the asking price of the property. I was planning on using this system to do most of the work for me and then purchasing a house/duplex under FHA or FHA 203K loan (depending on rehab requirements for the property). After living in the property for a year (minimum required by the FHA) convert it to a rental. This investment would thus cost me the carrying cost of the first year and as long as I am factoring proper insurance, tax, maintenance, etc should then provide me with a positive cash on cash return to just hold the property and develop the equity/income for my next investment. My major concern is that this is a long haul strategy and thus the income from equity/rent will take years to accumulate. This may cause the expanse of future properties to be slow at first but my hope is that this method insures the continued ownership of the property thus laying the groundwork of a portfolio rather then the flipping game of constantly owning and selling properties.

I was wondering if this is the most effective method or if there may be another method of going about your first investment property?

Also, as this is my first investment, I am sure there are oversights in my analysis and I was hoping people could point out problems that my arise in the method I am choosing to pursue. 

I appreciate any help.

Thanks. 

Alex

Alex,

What you've described will definitely work. It's what Brandon Turner refers to as the "slow, boring" approach to REI. (Read his awesome blog post here...

http://www.biggerpockets.com/renewsblog/2014/08/02/passive-real-estate-investing/)

How well the strategy works to fulfill your goals depends, at least partially, on what your timetable is.  If you want to be able to retire on passive income in 5-years or quit your corporate job in 12-months, it's probably not the strategy that's going to get you there.

If you haven't fully fleshed out what your objective(s) are...and note that they could change over time...I would encourage you to do that.  But, if you want or need to accelerate your timeline, don't get caught in an either/or mindset.  You don't have to do all buy & hold or all flip or all wholesale.  You can set your primary business model as buy & hold and then use an occasional flip or some wholesale deals to add capital and acquire additional properties.  Also, you can make use of hybrid investing, best explained in another excellent blog post by Brandon Turner...

http://www.biggerpockets.com/renewsblog/2012/12/16/hybrid-real-estate-investing/

My 2 cents!

If you do go that route, buy a duplex (or triplex or fourplex) so you will have rental income from the beginning. If you are going to buy a single family house, just buy a rental  and get going.  You will waste time and money moving in and out and spending nights and weekends doing work that a competent contractor can do in 2 weeks.  12 months of cash flow vs. 12 months hard labor? I'll take the cash flow. 

Hi Alexander,

go for a fourplex. with FHA in order to get the loan the rents of the other units must cover the ENTIRE mortgage payment. So at least for the first year you'll be living "mortgage" free. i cannot speak for 203k because i stay away from them. primarily because you cannot do the work yourself. you need to hire lender approved contractor. and that will cost.

a lot of people assume they'll get an FHA 203k and do the repairs themselves. they get neck deep until the lender says nope.

[email protected] | 360‑927‑0959 | http://www.patbritton.com | WA Agent # 120557

It's a very good strategy to start (although why not look for a fourplex?). Buy and hold is a great business (the best in my opinion), but it takes time. Real estate is a quick rich slow scheme. So don't feel like you're in a rush.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

Originally posted by @Patrick Britton:

Hi Alexander,

go for a fourplex. with FHA in order to get the loan the rents of the other units must cover the ENTIRE mortgage payment. So at least for the first year you'll be living "mortgage" free.

Originally posted by @Andrew Syrios:

It's a very good strategy to start (although why not look for a fourplex?).

 I was told that new regulation require that the owner occupy at least 50% of the building that is being purchased. Also that they have stopped giving loans on fourplexes and only give to 1-2 unit buildings. If this is not the case that is great news! How drastically do the rules change depending on which area you are looking to buy? I am looking to buy in CA anywhere from SF to Sacramento.

That sounds cool! It's kind of what I'm doing (I'm just about to start renting out the property I purchased last year and have been living in, just posted a discussion about it today) and it seems like a pretty legit strategy.

I'm interested in the scraper, though, that sounds like a great idea! I imagine you wouldn't want to give out too much detail, but do you mind saying how it works? Does it scrape the MLS? Or one of the websites like Zillow/Trulia/etc? Does it automatically determine things like current loan rates, etc. or do you have to manually enter those?

(I'm a software engineer and these things excite me, haha! I understand if you want to keep it to yourself, though.)

Originally posted by @Anthony McDougle:

I'm interested in the scraper, though, that sounds like a great idea! I imagine you wouldn't want to give out too much detail, but do you mind saying how it works? Does it scrape the MLS? Or one of the websites like Zillow/Trulia/etc? Does it automatically determine things like current loan rates, etc. or do you have to manually enter those?

(I'm a software engineer and these things excite me, haha! I understand if you want to keep it to yourself, though.)

 We scrap Zillow/trulia/redfin etc. and currently we are in the first iteration of the development. Automatic loan rates are not currently implemented but we are looking to make that addition in the next couple of weeks as further development gets implemented. As far as the details of how we determine undervalued properties, or any further specification of how it works is of course, as you can imagine, a bit of a guarded secret until we can see the full effectiveness of the system.

@Patrick Britton  Good info on the 203k loan about doing the work "themselves". I wasn't aware of that.

I would be interested in that program you are developing.  I have been looking for the same thing.

yeah it's nutty...BTW I just got word from a higher up that there will be a conventional loan 203 product available within a month.  details to come :)

[email protected] | 360‑927‑0959 | http://www.patbritton.com | WA Agent # 120557

here's the guideline re: FHA 3-4 unit:

Three and Four Unit Property Mortgage Limit per 4155.1 2.B.4.a

The maximum mortgage amount for three and four unit properties is limited so that the ratio of the monthly mortgage payment divided by the monthly net rental income does not exceed 100%, regardless of the occupancy status.

I English, this means that rent > pirinciple, interest, taxes and insurance. 

[email protected] | 360‑927‑0959 | http://www.patbritton.com | WA Agent # 120557

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