Stay Renter While Investing...or Buy House With Private $$?

Question

Hi there,

I'm brand spanking new to this forum. I"m just about to turn 30. I live in Ontario, Canada. I work in commissioned sales as well as market online. I really want to get things going in Real Estate and become a fulltime investor. My ulitimate goal is to have a 6-figure/yr cash-flow, but also have a portfolio of propertied which are held are for long-term wealth creation. I'm starting basically from scratch. Here's my situation.

I currently rent an apartment for $800/month. I've done so for the past 4 years or so(different locations around town). I have very little in savings. I have read a few different books on investing. Mostly, I've stuck with "creative" real estate resources since I've heard this is a good place for someone with little cash or credit. I'd like some input as to what my best strategy would be to inable me to generate short-term cashflow in order to go fulltime and also to build wealth. I've recently joined my local Real Estate club, but they meet just once a month and the next meeting will be in April. From what I've heard, there doesn't seem to be anyone who's been very successful with lease/options or subject tos. Sounds like there are many people into rehabbing. Anyway, let me know how you think I should approach this business. Thanks.

Best regards,
mede

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Prohabber,

When I spoke of the $3k-$5k/month I was referring to the chunks of cash as option consideration by my potential tenants.  I figured that maybe I'd be able to generate $3k-$5k/month by doing 1-2 lease options per month.  At the same time my "passive" cashflow would be accumulating through the leases and quantity of properties in my portfolio.  Is this a realistic plan?  Keep in mind that I have under $1000 to invest at this point.

As far as wholesaling, I'm also intrigued.  I live in Ottawa.  How would I go about finding the deals to sign up(same method as for lease options?) and the end buyers/investors to whom I would flip these properties?  I live in Ottawa and I know that the same "creative" deals can be worked here even though the logistics are a bit different.  Let me know which strategy you think I would be best to focus on at this point(with the goal of $3k-$5k/month in mind).  Thanks.

Best,
mede

P.S.  What kind of monthly income could you generate wholesaling 3-4 properties per month? Just curious.

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juzamjedi,

Wow!  Sounds like a nightmare.  Are things going better nowadays?  Overall, would you recommend that I go for a multi-unit or am I better off just paying for rent until I generate enough income from wholesaling and lease options and then go into the landlording strategy?  Btw, how did you purchase the place that you live in?  I'm low on startup capital, so there's no way I could do a down-payment.  I'm also self-employed in my sales job so I'll have some difficulty with qualifications.  Any suggestions on how I could use creative strategies to get into my own place?  Just thought it was a waste to pay $800/month in rent and have nothing to show for it after 3 years.  Let me know what you think.  Thanks.

Best regards,
mede

Jason Barnett · Answer

All of those gurus sure do make it sound easy, but it hasn't been that way for me.   :oops:  I started out as a landlord a little over a year ago and made so many mistakes and spent so much time fixing things.  The problems that I dealt with during my first year as a landlord:

Water pipe burst / total rehab of 1 unit
Pay-as-you-go general contractor that didn't finish the work on the unit
Mold / complaint filed with Health Department
Crack in foundation that let water come into 1 unit every time it rained
Got locked in to a below-market-rent section 8 rental
Marketing for vacant units
Tenant disputes
Section 8 dispute (although in this case it earned me $1900 :mrgreen: )

Fortunately I haven't had to deal with evictions yet, but I know they'll come in due time.  Maybe my tenants felt bad for all of the problems that I had to fix so they decided to actually pay on time  :lol:

So what is my point with all of this?  Being a landlord is not going to be easy.  It can be done as a part time job, but it requires some help when you have big problems like a water pipe bursting.  However, it is very nice being able to live rent free in 1 of the units while making a small overall profit.  The first year really is the toughest no matter what part of the business you decide to do.

Bryan Casteel · Answer

Well, as far as landlording goes, it would be easiest to get started in a building that you live in for sure.  You can stay on top of things pretty well.  The most important part is to heavily screen tenants before renting so that you weed out the bad apples.  This approach would really help your personal cash flow and you would learn about that aspect of investing.  There is no better way to learn than to jump in.

juzamjedi, if you are reading this, what are your thoughts on buying a multi for your first deal and handling renters?

As far as generating an extra $3K to $5K per month.  It would be a long process to get up to that level in creative deals, but it is certainly possible.  If you assume that you are going to get, say, $200 per month cash flow per property, that would be 15 to 25 properties.  In your 15 hours per week, if your goal was to get one deal a month, you would be doing really well by the end of your 2nd year.  You also would be getting a small chunk of cash when you lease/option the property (option premium) and a large chunk of cash when the property is finally purchased.  These chunks of cash could be used to reinvest into your business.

Another option that is a little more "hand-to-mouth" would be to try to wholesale one property per month that had $3K to $5K profit for you.  The reason that I say it is hand-to-mouth is because there is no cash flow stream and if you don't get a property that month you don't get paid.  It is very possible to do though if you start networking with investors that would buy your deals.  I work with a couple investors in Cincinnati who wholesale several properties every month.  I personally get into 3-4 deals per month, but I am doing it full time.

Bryan Casteel · Answer

Mede, you have all the right ideas.  You are right about the small chunks of cash from the downpayment on lease/options.  You could probably expect about 2% of the option purchase price as the option premium downpayment.  Depending on your market, this may get you your $3K to $5K with one or two deals.  Also, you are right that over time, doing the creative deals (or what I call the "Pretty House Strategy") will build up passive income and chunker income at the same time.  It is actually an exponential growth curve if you put one of these deals into your portfolio on a regular basis (i.e. one per month).  After about 2 to 3 years, you will have a huge income.

As far as wholesaling properties goes, it takes the least capital of all (usually just enough money to put down an earnest check that you will get back on top of your profit when you sell the contract).

A good wholesaler will make from $3K to $7K per deal in the inland markets (i.e. the Midwest).  I think the numbers are a little better on the coasts.  So, if you average $5K per deal and do 3-4 properties per month that would be $15K to $20K per month.  You will have some marketing expenses and the rest is yours to keep.  Not a bad living, but it is hard work.

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Yeah, I thought about that.  Do you think it would be a bit overwhelming for me to have a multi-family as my first place?  Also, I was just wondering if you think that lease/options are a good way to make an extra $3k-$5k/month on a regular basis.  Starting from scratch, how long should it take to get to this level if I have say, 15hrs/wk to devote?  Thanks again.

Best Regards,
mede

Bryan Casteel · Answer

Mede, since you are trying to maximize your cash flow maybe you should keep your eye out for a good deal (or a creative deal) on a multi-family building that you can live in and have the renter(s) in the other unit(s) pay your PITI for you.  As a renter now, you are paying someone elses mortgage - why not turn the tables?

Bryan Casteel · Answer

Mede,

I do not have any idea on how the rules change in Canada versus the US.  As long as you can get good advice for Canadian laws, one way to generate the cash flow you are looking for is to find properties to purchase on lease/option, land contract or subject-to and then sell them to other people on a lease/option.  You should have a profit at the beginning when you get an option premium (downpayment) and some cash flow while you hold the property.  When the buyer converts the option, you should have a nice payday as well.  This takes very little capital as long as you search hard for the right deals (i.e. no money down, very little work to do to the home, good market for rentals).

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Prohabber, Thanks for the quick response.  Should I continue to rent or should I find a house to live in myself?

mede