Buying investment property to rent
Investor · San Jose, CA · Member since 2016 · 30 posts · 5 votes
Hi,
I am interested in buying a property in a city like Orlando FL, Miami FL or Ocean City NJ. They seem like good locations for value retention and the houses are in the $100-$120K range. If I pay 20% down and get a mortgage, I could rent the place to cover the mortgage costs and HOA. All I would have to pay are the property taxes. I plan to hold for longer term (5+ years).
Here are the questions:
1. What are good cities for rental properties?
2. Is there a way to find a property manager that finds renters? If so, what are the costs?
3. Is there a way to use money in 401(k) for the 20% down payment? This would also be an investment (better than 401k funds in my opinion).
@Jash Sayani Denver is a great place but there are no $100K SFRs. You really need to reconsider your criteria. Buying a property and then paying out of pocket each month to own it (paying property taxes) is a sure way to become a real estate investor casualty. The other costs that you did not mention that you would be paying out of pocket would include, maintenance, vacancy, property management, capital expenses (new roofs, new ACs and etc). I think it would be foolish to consider those to be less than 25% of the rents you collect. Most people are closer to 50%. What that means is that if your property rents for $1,000 per month you would need at least $250 per month to cover minimum expenses and probably should be closer to $500 per month. It doesn't take long to own 2 or 3 properties you are feeding at the rate $500 per month per property for you to decide that real estate investing is not your thing. At a minimum, a property should pay for itself.
1. I'm biased, being from Texas, but I'd suggest looking in the midwest. It isn't perfect, but I like the rent-to-value (R2V) formula as a quick gauge. If a property costs $100k and can rent for $1k, that is a 1% R2V ($1k/$100k). The higher the rent-to-value, the more cash flow the property will produce. Generally, you'll see higher R2V in the midwest than on the coasts.
2. I think BiggerPockets is probably a great place to find property managers. Just ask the forum for recommendations in your target city. Property managers usually charge one-half the first month's rent to place a new tenant plus 10% per month for ongoing management.
3. You can use a self-directed IRA to invest in real estate. Google "Quest IRA" to find a group that does self-directed IRAs for real estate. I do not know if such a product exists with a 401(k), but I'm guessing you'd have to ask your employer's 401(k) provider about that. I doubt such a vehicle exists, but I've been surprised before.
1. I think Texas is awesome! But places like Austin are expensive too. About mid-west... I think Denver would be nice. I wouldn't touch Nevada with a ten-foot pole. Same with Idaho or Dakotas.
2. Thanks for the tip. Will look for them once I decide on a city.
3. Ok, I don't have an IRA. I can just fund it from savings.
@Jash Sayani Denver is a great place but there are no $100K SFRs. You really need to reconsider your criteria. Buying a property and then paying out of pocket each month to own it (paying property taxes) is a sure way to become a real estate investor casualty. The other costs that you did not mention that you would be paying out of pocket would include, maintenance, vacancy, property management, capital expenses (new roofs, new ACs and etc). I think it would be foolish to consider those to be less than 25% of the rents you collect. Most people are closer to 50%. What that means is that if your property rents for $1,000 per month you would need at least $250 per month to cover minimum expenses and probably should be closer to $500 per month. It doesn't take long to own 2 or 3 properties you are feeding at the rate $500 per month per property for you to decide that real estate investing is not your thing. At a minimum, a property should pay for itself.
Hi @Jash Sayani Welcome to Bigger Pockets and to the Texas Investing forums, Bigger Pockets has a wealth of information for new investors and offers lots of support for those just getting into real estate investing, especially in Texas. Make sure you check out the BP Beginners guide and start listening to the BP podcasts. I have learned a lot from reading and listening to both of these.
I specialize in investing in distressed property and providing distressed property leads. If you need any help with getting involved in distressed property investing let me know and I can try and point you in the right direction.
Welcome to BP, @Jash Sayani.
You might want to consider rolling your 401(k) through your employer into a solo 401(k). If you Google "solo 401(k)", you will find plenty of information on it and plenty of brokers offering the product. The product isn't widely marketed because brokers can't make much money off of it.
The solo 401(k) has the same benefits as a traditional 401(k) plan, but gives you the check writing authority. You can then loan the 401(k) funds to an LLC that you manage for purposes of investing in real estate.
Of course, you will want to talk with your tax professional about any tax implications.
@Jash Sayani Actually, there are companies which specialize in setting up SelfDirected IRAs which can be used to fund Real Estate transactions directly and not as a loan from your 401K. An LLC would need to be setup to isolate the owner from the transactions, but the owner still directs the "business" and makes the decisions. Additionally, you may not be able to convert a 401k with a current employer. This depends on the rules of your current 401k program. A 401k from a previous employer which is separate from the current one can be converted without a problem though.
One thing to note though, you mention using the IRA as a "down payment". Obtaining a loan to fund the remaining portion of the transaction within this environment is a bit different. You cannot obtain a "normal" mortgage. A Non-Recourse Loan needs to be obtained and these are a bit different in that a higher down payment is required as well as a higher interest rate. Additionally, the use of a Non-Recourse loan makes a portion of your "profits" subject to a UBTI (Unrelated Business Taxable Income) tax from the federal government. I have been considering this method of funding for a portion of my Real Estate investments and do not know much more about it, but be sure to investigate it thoroughly before acting.
1. I think Texas is awesome! But places like Austin are expensive too. About mid-west... I think Denver would be nice. I wouldn't touch Nevada with a ten-foot pole. Same with Idaho or Dakotas.
LOL! You have an interesting understanding of "Midwest"!
Idaho & Nevada, though not coastal, are definitely western states.
1. I think Texas is awesome! But places like Austin are expensive too. About mid-west... I think Denver would be nice. I wouldn't touch Nevada with a ten-foot pole. Same with Idaho or Dakotas.
LOL! You have an interesting understanding of "Midwest"!
Idaho & Nevada, though not coastal, are definitely western states.
Yeah of course everybody ought to know the Midwestern states are mostly in the EASTERN time zone like Michigan, Indiana, and Ohio.
Growing up in Arizona we thought we were Midwest and New Mexico was Mideast and Texas well that was way East.
I think the term Midwest was made up when the country ended at the Mississippi River.
I posted in an online forum once that I was going on vacation. "Headed to the east coast - South Carolina." I was told that's not east, it's south.
LOL!!!
Hi Jash, hope all good. I would agree with some folks here that the most important item will be that your properties are all cashflow positive at the start. Or said otherwise you dont want to pay any additional money besides your down payment and your assumption of risk to take on the loan as otherwise your model will be very difficult to scale as they more you buy the more you need to pay = no good. Other way around better. :) hope it helps.
@Bill S. I am open to Condos as well. Does not have to be SFRs. I think Condos will have lesser maintenance costs over SFRs. Also, thanks for the insight into capital expenses. I will keep in mind the 25% to 50% overhead to cover those costs.
@Drew Fein You are awesome! I will read up more on the Solo 401(k)
@David Chwaszczewski Not sure what you mean by "investment strategy". I plan to buy and rent the property (while staying cash flow positive) and just hold on to the property till the mortgage is paid off and I own the place.
@Andrew Nevins I will checkout Cleveland and Atlanta as well. Would be really scared to touch anything in Michigan, specially Detroit.
@Alan Meyer Thats interesting as well. I am open to using an LLC for investments. Will do more research on Self Directed IRAs.
@Dom K. Thanks. I will definitely strive for cash flow positive.
I posted in an online forum once that I was going on vacation. "Headed to the east coast - South Carolina." I was told that's not east, it's south.
Not if you start in Missouri . . .
I'm originally from Minnesota, and grew up thinking I was from the Midwest. Now, living in St Louis where people say this is the Midwest, I say I'm a northerner. Which is why I also dismiss any complaints about "winter" - if you can wait for the snow to melt rather than shoveling your sidewalk it's not a real winter.
@Bill S. I am open to Condos as well. Does not have to be SFRs. I think Condos will have lesser maintenance costs over SFRs. Also, thanks for the insight into capital expenses. I will keep in mind the 25% to 50% overhead to cover those costs.
@Drew Fein You are awesome! I will read up more on the Solo 401(k)
@David Chwaszczewski Not sure what you mean by "investment strategy". I plan to buy and rent the property (while staying cash flow positive) and just hold on to the property till the mortgage is paid off and I own the place.
@Andrew Nevins I will checkout Cleveland and Atlanta as well. Would be really scared to touch anything in Michigan, specially Detroit.
@Alan Meyer Thats interesting as well. I am open to using an LLC for investments. Will do more research on Self Directed IRAs.
@Dom K. Thanks. I will definitely strive for cash flow positive.
I am in bay area and I am in same boat as you are in. I invest in cleavland. Lets connect I will send you pm