Buying First Rental Property. Thoughts?

25 Replies

Hey all, my name is Jay and I live in the central Texas area.  I'm currently in the process of selling my condo and possibly purchasing my first rental property.  Here are the details:

1) I should net $30k-40k on the sale of my first property.  My condo has appreciated greatly in the last three years because we have a solid location in Austin.  

2) I'm going to use my VA loan to purchase my next property. It will be minimal money out of pocket.

3) After all costs, I estimate I will have around $35k-$45k in a money market fund (sale of property plus around $8k in savings, atm).  

4) I hope to purchase a $120k or so rental property for $20k-$25k down, and have the rest of the cash as working capital.  

That all being said, any thoughts?  Advice?  I have a great loan officer who's doing everything he can to work with me and get this project up and going.  

Hi Jason. It's a good starting plan. Before you jump into it I'd make sure you narrow your scope down a lot. You'll want to consider things like location (a HUGE criteria), Are you planning to "house hack" (buying a duplex/triplex/fourplex as your primary; renting out the other units) or renting an apartment and having a separate investment property? Depending on your age and family status (no wife/kids) I would suggest house hacking because you can basically live there for free while your rents pay your mortgage. Also, what are the demographics of the area you are looking at? What do rents in that area look like (rentometer.com)?

Also, why are you planning to sell your condo? If it's really appreciating a lot I would consider keeping it and just renting it out

Alex,

1. Going to go with the house hack if I can.  Just the wife and I at the moment, and we'd love to buy a duplex, live in one side and rent out the other.  However, in our area there are not many duplexes.  

2. If that's the case, we'd like to buy a 2/2 or a 3/2 that's slightly distressed with the VA loan and live there for a year. After a year we'll use our second VA loan to do it again.

3. Rents in central Texas are solid.  Single families rent from $1000 to $1500 or more depending on the location.

4. Long story short, we cannot buy another property and keep this one.  I won't go into the details, but it has to do with the down payment assistance we received from the city of Austin.  Our options are to keep living here or to sell and purchase something else. 

Thanks for the responses. -Jay

Promotion
Roofstock
Buy & sell single-family rentals online
Radically accessible real estate investing
Get access to exclusive property listings, proprietary data, and support to build your portfolio.
Learn More

Why not rent the condo?  A lot of investors start out renting out their starter property.  I normally wouldn't buy a condo as an investment, for one because I feel you compete with apartments, but if you already own it and it is in a good location in Austin and your board allows rentals, why not?  You don't have to worry about the yard going to hell because the tenants don't water or mow--and a 120k property will not have a sprinkler system.

I do think appreciation and rental demand is steadier for single families so I can understand wanting to switch into SF long-term.  However, while I know nothing about south of the river, north you will be hard pressed to find something worth buying for 120k.   I can't see sourh being much different.   

Are you moving somewhere else?  

Marian,

I received down payment assistance from the city of Austin.  If I move out I have to pay the city of Austin $10,000.  However, if I sell my property for $145k, and currently there is $87k on the note, I'm in a good place, most likely netting around $35k after final closing costs and paying back the city.

I'm looking to buy in the North Austin, Cedar Park, Leander, Round Rock or Pflugerville area.  Mainly because that's where work is for my wife and I and we want to stay close.  

Thanks, -Jay

We have used our va loan to get started.  we did really well using the va loan and than conventional loans when we used up the va loan. Have you thought about using the money down to buy a new investment. So do a personal and than buy a new investment at 20% down so now you have 2 houses?

Originally posted by @Elizabeth Colegrove:

We have used our va loan to get started.  we did really well using the va loan and than conventional loans when we used up the va loan. Have you thought about using the money down to buy a new investment. So do a personal and than buy a new investment at 20% down so now you have 2 houses?

 Elizabeth,

That is also a thought we had, considering how much capital we'd have left over.  We could easily put $25k toward an investment property.  The challenge in our area is simply finding one!  Lots of demand for real estate in the Austin area and not much supply!

We also deal with a very hot market. We have found during the winter time has been the best for us. While there is less supply those who sell usually have too. The demand is not as much because people don't want to move in the winter. The other key is to make your deal as air rigt as possible. You would be surprised at how many times we have own over other buys for just having a solid offer not even more money 

Thanks, Joe. As of now 3-4 units are out of my price range, as my loan officer is only able to use my personal income at the moment. However, next year I'll be able to use my rental income as a part of my income, and use my VA loan for the second time.

Ideally, with both VA loans + my cash from the sale of my condo, I should be able to have 3 or 4 properties in about two years. Just working on getting the first duplex!

Any other recommendations?  

@Jason D.  

If you sell your condo and buy a single family home instead of a duplex, what's your plan then? Live in the house for a year or two and then rent it out after you can buy another house to live in? Or just sit tight in the condo for awhile longer? How long do you have to stay there before you no longer have to pay the city back for leaving? Is it really worth it to buy now in this market and forfeit that money to the city?

Rents are solid, but house prices are at near historic highs and the taxes are huge, so finding something that cash flows is a challenge. I'm seeing that most of the investors are flipping.

You're right about there not being many multi-units in Austin; from what I've seen they're all in the central area. I haven't seen any listed in North Austin, Round Rock, Cedar Park, etc. As I'm sure you know, it's pretty much all suburban housing developments up here (I'm renting in Avery Ranch myself). On top of that, most of them are "weird" -- and not in a fun, quirky "keep Austin weird" way, more like an annoying, "how would I deal with this mess?" way. 

Personally I'm wary of buying something too far away from the center where there's liable to be a lot of development nearby in the next few years. Speaking of which, you might want to ask yourself how long it'll be before all the developers in town overbuild and the market slumps while demand catches up. 

Originally posted by @Scott Pigman :

@JASON DEGRAAF 

If you sell your condo and buy a single family home instead of a duplex, what's your plan then? Live in the house for a year or two and then rent it out after you can buy another house to live in? Or just sit tight in the condo for awhile longer? How long do you have to stay there before you no longer have to pay the city back for leaving? Is it really worth it to buy now in this market and forfeit that money to the city?

Rents are solid, but house prices are at near historic highs and the taxes are huge, so finding something that cash flows is a challenge. I'm seeing that most of the investors are flipping.

 ******

Scott, all good questions.  My wife and I are still deciding.  

1) If I can't get a duplex, the plan is to buy a SFH and then use the capital gains from our sale to buy either another SFH to rent out or a duplex if it cashflows. We'll see.

2) I'm happy to sit tight in our little condo for a while.  It's a great location and I love it.  

3) I have to live here another 7 years for the 10k forgivable loan to go away.  

4) Is it really worth it now. Such a good question. To sell my condo, yes! To purchase a SFH... maybe. Depends on what we can find. We're open to buying a cosmetic fixer-upper as well.

Lots of variables.  -Jay

@Jason D.

You know, $10,000 doesn't seem like a lot to spend to hang onto a property in Austin if it would cash flow for you after taxes, condo fees, vacancies, repairs, etc.

How about this scenario: You figure you can sell for $145K. Just for argument's sake, let's say the bank would appraise it at $140K. 

Instead of selling, refinance the condo at as an owner-occupied unit at 80% LTV for $112K. After paying off your existing mortgage of $87K that leaves you with $25K, minus whatever the closing costs are, let's say $3K. So you have about $22K in hand.

Now go shopping for your next house, but benchmark $10K to pay back the city when you move, leaving you with $12K for a down payment. It's not as nice as having $35K for selling, but now you're on your way to having two properties.

Of course, the condo still has to cash flow and you do have a condo association to worry about.

Promotion
Guaranteed Rate
Guaranteed Rate is a top mortgage lender
Save $1,290 on your next home – no lender fee*
Get special perks like $1,290 in lender fee savings when you buy a second home with Guaranteed Rate.
Apply Now

A great thought, Scott, but know that if I 1) move or 2) refinance the loan (I should have clarified that), I still have to repay the 10k immediately.  

I don't have to worry too much about my down payment of my next home because I am a Veteran and have access to a VA Loan (which I wasn't able to use on the purchase of my condo b/c they were not accepting VA Loans).

Other options? 

Originally posted by @Jason D. :

 if I 1) move or 2) refinance the loan (I should have clarified that), I still have to repay the 10k immediately. 

The only thing that changes is that you pay back the 10K when you close the new loan instead of when you move.

@Jason D.

You know, there are a ton of real estate meetups and clubs in this area. Why don't you come to a few and ask some of the people there for ideas. I especially like the one Thursdays at 11:30 at Big Daddy's. That starts back up in January.

The only way it would work if the bank were to appraise it at 140k.  Would that be a stretch?  Tax appraisal is significantly less, and only one property has recently sold for 144k, all the others were under 129k.   Also, my mortgage would go up because my note is now 112k instead of 87k, which would mean my cashflow would be minimal, if any. 

I am getting a 5 year ARM HELOC for $250--costs more if they do not use the county tax assessor appraisal but order one. If you could get a 10k HELOC and not have to pay it back in the event of a move (no idea if HELOCs typically stipulate that) then that would be a cheap way to go. Unless you save more refinancing to a lower interest rate.

Originally posted by @Jason D. :

Also, my mortgage would go up because my note is now 112k instead of 87k, which would mean my cashflow would be minimal, if any. 

Okay, I was assuming that your balance meant that you had been paying it down for several years already and that by stretching it back out to 30  years you'd be lowering your payments. Guess I wasn't putting 2 and 2 together in regards to amount of time left on your deal with the city.

Originally posted by @Jason D. :

Hey all, my name is Jay and I live in the central Texas area.  I'm currently in the process of selling my condo and possibly purchasing my first rental property.  Here are the details:

1) I should net $30k-40k on the sale of my first property.  My condo has appreciated greatly in the last three years because we have a solid location in Austin.  

2) I'm going to use my VA loan to purchase my next property. It will be minimal money out of pocket.

3) After all costs, I estimate I will have around $35k-$45k in a money market fund (sale of property plus around $8k in savings, atm).  

4) I hope to purchase a $120k or so rental property for $20k-$25k down, and have the rest of the cash as working capital.  

That all being said, any thoughts?  Advice?  I have a great loan officer who's doing everything he can to work with me and get this project up and going.  

 Hi Jason,

I actually just wrote a blog for Bigger Pockets about 3 things to consider before buying a property.

Please see link -

http://www.biggerpockets.com/renewsblog/2014/12/20/first-investment-property-important-things-consider/

I hope you find it useful.

Thanks and have a great day.

I think you know your choices.

Sell condo and risk not finding a place.

Buy and risk not selling condo fast or top dollar...often it is either or even in hot markets.

Wait and interst rates climb and market softens or not, who knows, but you will lock in at 30 years at a higher payment if rates go up and prices do not react downward.

Kind of depends on condo....2-2, close in and near bus, low fees, ability to rent unit if desired...if all of above you are probably good either way.  

Okay, everyone, here's a belated update:

Looks like after all expenses of selling our condo and buying a new home, we'll have around $30,000 to reinvest.  We'll be in the Round Rock area just north of Austin.  Both houses are u/c so hopefully everything will go smoothly (we got a nice cash offer on our condo). 

What are you thoughts on the best way to reinvest this?