Los Angeles, CA · Member since 2008 · 16 posts · 0 votes
Im fairly new to these forums and very new to the world of real estate. I am 25 years old and currently saving for my first real estate purchase.
My question is, which do you see as a better way to get stated in investing?
Option 1: Buy a 3-4 unit building, live in 1 unit, rent the other 2 or 3.
This option would mean investing with my father who is also interested in investing. The costs would be split 50/50. and he would be, more or less the "silent partner" leaving the property managment to me ( which I am perfectly ok with).
Option 2: Buy a single Family home for my first purchase, forget renting any properties, and forget investing with dad, for the time being.
I currently saving and will be looking to invest around 30K at the time of down payment (60K for downpayment if I go in on the rentals with my dad. 30 from him and 30 from me.)
Any thoughts?
and by the way if I do decide on option 1, is it likely I will I need a 20% down payment on the property becaue I will be renting some of the units?
Real Estate Investor · Dallas, TX · Member since 2008 · 148 posts · 50 votes
18y
Basically, keep it simple. Buy a home for yourself, first.
Learn about home ownereship and all that this business is based around. It is a great way to get started and you personally benefit by living in the home. No more 'rent money' out the door.
If you must learn the ways of renting & property management, then 'rent out a room or two'. PM is a whole other adventure and should not be taken likely.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
18y
Either option is good, just get in the game.
I like the idea of the 4 unit better. Being an owner occupant of a four unit you can get better financing. You can always buy you own SFH later.
While a SFH is nice and can be a good investment. Buying a 4 unit really puts you in the investing game. You will learn about tenants and what it takes to manage rental properties. You won't get that experience from owning you own single family home.
Los Angeles, CA · Member since 2008 · 16 posts · 0 votes
18y
Originally posted by Ned Carey:
Either option is good, just get in the game.
I like the idea of the 4 unit better. Being an owner occupant of a four unit you can get better financing. You can always buy you own SFH later.
While a SFH is nice and can be a good investment. Buying a 4 unit really puts you in the investing game. You will learn about tenants and what it takes to manage rental properties. You won't get that experience from owning you own single family home.
Thank you for the response Ned.
I was thinking along similar lines. I am still young and would like to learn as much as possible REI, and PM. I see this as a way to gain experience, have a place to live, and most of all, to make some money.
I agree that a SFH is something that I will hopefully be able to purchase later on,but right now I believe the 4 unit will be a good way to get started.
Los Angeles, CA · Member since 2008 · 557 posts · 70 votes
18y
Hi Mike -
I see you're in LA. What areas are you thinking about living or investing in?
Originally posted by Mike Rubino:
Im fairly new to these forums and very new to the world of real estate. I am 25 years old and currently saving for my first real estate purchase.
My question is, which do you see as a better way to get stated in investing?
Option 1: Buy a 3-4 unit building, live in 1 unit, rent the other 2 or 3.
This option would mean investing with my father who is also interested in investing. The costs would be split 50/50. and he would be, more or less the "silent partner" leaving the property managment to me ( which I am perfectly ok with).
Option 2: Buy a single Family home for my first purchase, forget renting any properties, and forget investing with dad, for the time being.
I currently saving and will be looking to invest around 30K at the time of down payment (60K for downpayment if I go in on the rentals with my dad. 30 from him and 30 from me.)
Any thoughts?
and by the way if I do decide on option 1, is it likely I will I need a 20% down payment on the property becaue I will be renting some of the units?
Rental Property Investor · Syracuse, NY · Member since 2008 · 131 posts · 17 votes
17y
Try the 4 unit if it is a good deal.
My first purchase was a 2 family that I also lived in. It allowed me to learn the basics of dealing with tenants and at the same time I lived very cheaply!
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
17y
I also would select the first option, but don't plan on staying a long time. My first rental I bought was a duplex. I was fixing it up and a buyer drove by and offered to purchase it.It became my 1st exchange, and I've now owned over 1000 different rentals in the last 35 years. I guess I got hooked!!
Homeowner · Wichita, KS · Member since 2008 · 1 post · 0 votes
17y
To the one that want the 4 units. How many people own a house? How many people have had plumbing problems? How many people have had electrical problems? Multiply that by 4. Unless you are a plumber/electrician/landscaper/tree trimmer/... start with a small rental proper and work you way up to the 4 unit. a small unit you can learn the "pit" falls and deceide if this is for you before you are stuck a 4 unit apartment. Who knows what the unit above you is flushing down the toliet. :roll:
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Lots of different ideas with lots of different opinions posted here.
The thing YOU need to consider, is your abilities and your goals, not others opinions as they do not know you.
Buying a SFR to live in does not make you a RE investor, so if that is your goal (RE investor), that option should be thrown out.
Mike said he would never want to live next to his tenants. Perhaps in your situation and your area where you will be investing, you will have a different thought on th matter.
The multi unit WILL get you into the RE investing biz and give you some initial and needed experience without biting off more thna you can chew. It also offer more cash flow (if you buy right) than a sfr can, particularly in CA. Very hard to have positive cash flow in CA on a sfr, unless you buy it with large down payments.
As far as the repairs/maintenance factors mentioned by Ovetta, I disagree with the negative perception. Even if you are not an electrician or plummer, all you need to do is hire one. The key is to buy a property in great condition so these problems are not rampent.
Get into the game as soon as possible, this buying opportunity has never been seen before in our lifetimes and may not ever again, at least to this degree.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
That is a good point, but may or may not be true. There have been many recent discussions on cash flow in CA, including aprtment buildings, and so far, not one person has shown a deal that actually cash flows in CA.
This is certainly not to say it can not be done, because it can, but they are few and far between.
Real Estate Investor · Vancouver, WA · Member since 2008 · 387 posts · 8 votes
17y
I recommend this book if you are looking at a 4 unit property.
Investing in Duplexes, Triplexes, and Quads: The Fastest and Safest Way to Real Estate Wealth
Investor · Commerce Township, MI · Member since 2008 · 98 posts · 10 votes
17y
You could always buy a SFH and rent out the extra rooms in your house to your friends or even people that you dont know. I rent a room out at my house to a friend right now, and another friend of mine rents out 3 rooms in his house to random tenants and still lives there with a covered mortgage payment. You might even get a cash flow out of it.
If you are young and single then I would definitely opt for the 4-plex. In fact, if you plan to owner-occupy one of the units I would hunt around and see if you can find 90% financing and skip the partnership with your dad. I don't know if it is out there but you have a much better shot if you plan to live there.
Real Estate Investor · Modesto, CA · Member since 2008 · 13 posts · 0 votes
17y
Mike,
One of things to remember, especially in the economy, is seller financing. If you go for the 4 unit you could look for an owner that is tried of the investing business and he might work a deal with you to provide owner financing and terms that will help you cash flow. Always work the deal from what the property can afford not what the owner wants for the property. Better the terms the better the price.
I currently do not buy anything with bank financing. I use private lenders (not hard money) and owner financing. I have gotten deals where the seller is providing zero interest financing. I got that by asking for it.
I also do not recommend going in on the deal with family and especially not 50/50. You are finding the deal and managing the property; that is a big cost that you are giving to a partner just for the use of their money. At that rate a hard money lender would be cheaper. You should be paid to manage the complex because that is an extra service you are doing in addition to providing money for the deal.
There are tired landlords out there. Try looking at the eviction notices. Good Luck.
Mike
Certified Public Accountant · Chattanooga, TN · Member since 2008 · 279 posts · 151 votes
17y
Mike,
One of my first properties was a nicer duplex. I lived in one side and rented the other. It was in a part of town that I liked and I have always been able to get good quality tenants in it. I never had any problems. On a duplex that you are occupying, you should be able to get at least 85% to 89% financing at your local bank. Especially, if you have good credit and $30k for a down payment.
I also don't recommend going in 50/50 with anyone. In most partnerships it's best if only one partner is the chief and the rest are the indians. 50/50 creates two chiefs. This will save you lots of arguments with your dad. You could probably go at it alone on a duplex.
Los Angeles, CA · Member since 2008 · 16 posts · 0 votes
17y
Originally posted by Michael Rogers:
Mike,
One of my first properties was a nicer duplex. I lived in one side and rented the other. It was in a part of town that I liked and I have always been able to get good quality tenants in it. I never had any problems. On a duplex that you are occupying, you should be able to get at least 85% to 89% financing at your local bank. Especially, if you have good credit and $30k for a down payment.
I also don't recommend going in 50/50 with anyone. In most partnerships it's best if only one partner is the chief and the rest are the indians. 50/50 creates two chiefs. This will save you lots of arguments with your dad. You could probably go at it alone on a duplex.
Best of luck.
Mike, thank you for your response, I really appreciate all of the input.
I agree with you that it would be ideal to not have to partner up with anyone for the purchase. However, I just do not have the kind of money to put down a 10% down payment.
I am looking for a 4 unit buliding, which in So Cal is probobly going to run 800K- 1M. Is there any way to to aquire a property like this for under 10% up front?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
I'm sorry but why in the world would you want such a building? Are rents really $3500/unit/month? That's what you need for this to be a break even deal. At that price you're going to be hard pressed to get any loan, let alone one that will only need 10% down. Prices in SoCal could easily fall another 20% before we're done. Even more for high priced properties such as these.
Los Angeles, CA · Member since 2008 · 16 posts · 0 votes
17y
Originally posted by Jon Holdman:
I'm sorry but why in the world would you want such a building? Are rents really $3500/unit/month? That's what you need for this to be a break even deal. At that price you're going to be hard pressed to get any loan, let alone one that will only need 10% down. Prices in SoCal could easily fall another 20% before we're done. Even more for high priced properties such as these.
Jon, thank you for the reply, and let me state the obvious once more for record: I am very new to this. :)
No, rents are not that high. Probobly would be looking at around $1800/unit/month
My hopes/ideas were to gain experience with managing properties while having a unit to live in that with be mostly covered by my renters, a well as the associated tax breaks.
Like others have posted in here, it is possible to get 85-90% financing, but at what point is the loan amount unrealistic?
Also, at what point does a "negative" cashflow become a bad thing?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
Lets be generous and assume you can buy such a building for $800,000, and that you can get a 30 year 7% loan. I know rates are 5.5% but that's for the best borrowers with conforming loans and 20% down. Lets also assume 40% for expenses rather than 50% because you're going to be right there to work on anything, show a vacancy, etc. Further, you'll have one tenant who will never be a bit of trouble although they will never pay a dime in rent -- you!
So, you're going be forking out $2800 a month in "rent" while you hope for the place to appreciate. You're paying an extra $1000/month over what it would cost you to just rent a place.
Now, lets put 10% down, plus closing costs (about 2%) and loan origination fee (1% typically, though could be more for a loan like this.)
Total cash invested: $103,200
Cash flow: -$2270/month
Cash flow: -$27,200/year
So, you're investing $103,200 and losing $27,200 a year. Yes, there will be some tax benefits. But if you can cover that $2800/month loss, I'd guess your income is pretty good, and you may not be able to take those benefits. The rent income would be tax free, but you don't pay taxes on actual losses in any case. So, the passive loss would only be able to be used to offset other income if your AGI, not including this loss, is under $150K. If your income is under $150K, you're not getting this loan.
Keep in mind, too, that when you sell real estate, the costs each up at least 8% of the sales price. So, if you put 10% down, plus those other costs, and end up selling in three years for the same price, you'll pay $64,000 in closing costs. That will net you $736K. You'll have to pay off a $720K loan, leaving you $16K.
If the property depreciates more than 2%, you'll have to bring more money to the table to sell. If the property depreciates 20%, which is entirely possible in my mind, it will be worth $640K. It will cost you $51K to sell, netting you $589K. But you still owe $720K. So, you have to bring $131K to the closing table.