HELP A YOUNG INVESTOR!!

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Paul Sorgi

Thank you so much for your great advice! I am definitely going to start applying the 3 Ds. You are right I think that I am being pretty specific when it comes to the deals that I am trying to find I may have to adjust. Right now together with my father I could put down around 50-60K but I am looking to use an FHA loan for my first deal. I am just really waiting for the perfect deal but it seems like all I have is Zillow, Trulia, and Craigslist so I know I have to start networking with local agents and join my local REIA.

@Tiffany S.

How is the house hack going with the SFH? I was interested in doing that especially being able to find a better deal on a SFH in California.

Tiffany S.

Investor · Portsmouth, VA · Member since 2016 · 289 posts · 107 votes

9y

it's actually working very well. I was not really into REI when I began looking so I could have done better as far as getting more bang for my buck. But the extra money from having a room mate offsets my cost nonetheless. I lucked up with a sane responsible roommate from craigslist. Didn't do a background check but I was specific in the demographic of tenant I was looking for. Haven't had any issues on that end. I also have kids so I can't rent out all the rooms. I am thinking about making the den an extra room and renting that also. Both rooms are also on the opposite end of the house so we are not that close and affords us both some privacy.

Tiffany S.

Investor · Portsmouth, VA · Member since 2016 · 289 posts · 107 votes

9y

If I were into REI at the time, had the capital to put down, and didn't have a family I would go with a MFH though. I had a lot more criteria as far as space I wanted because it wasn't just me.

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Tiffany S.

That makes a lot of sense! Thank you for all your advice. I may have to take that approach into consideration with SFH being much more afforadable in the Bay Area market.

Matt Millard

Lewisville, TX · Member since 2015 · 341 posts · 264 votes

9y

If you can partner with your Dad & pool together at least a $25k minimum I would highly recommend finding a deal as a passive lp in Texas or Oklahoma. When the cycle shifts find something active you want to do & get after it with your larger seed capital & experience.

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Matt Millard

Great advice! That would help me get started now and still hit my goals in the future. Two questions:

1. I was planning to use an FHA loan on my first purchase so that I could get a high cash on cash return. Do you think your idea of investing now at a lower entry point area then putting more down in the future when the cycle shifts is better then what I had in mind?

2. There is some areas in the Central Valley of California (Fresno, Stockton, Modesto) that have much lower entry points then the Bay Area would this still achieve the goal you stated above. This would allow me to be within driving distance of the properties.

Thank you for all the help and I apologize for the rookie questions still learning a lot.

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

9y

Welcome, @Anthony Navarro.

Unless you are finding deals off-market, it is very hard to get FHA offers accepted for 2-4 unit properties. Everyone (buyers) wants to do it, no one (sellers) wants to take those offers over the competing 25%-35% down professional REI offers.

Some people have luck with properties that are SFRs on paper, but still have rental potential.

Bay Area crew is super helpful, don't hesitate to reach out to anyone.

Wes Blackwell

Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes

9y

Hi @Anthony Navarro! Great question!

Here's my take, and hopefully I can help you make the right decision, as there are currently a lot of options available:

San Francisco Bay Area -- You're right... the numbers simply don't make sense. When you're in an area where $250k only buys you a burnt down house with extreme fire damage, it's time to look for something else. The Bay Area will continue to have low inventory and affordability issues, and will continue to see appreciation because of the unmet demand. But just like New York, that's a real estate market for the "big boys" who can wipe their behinds with a couple million dollars. You don't have that luxury, and the numbers aren't working for you anyways, so I'd suggest looking elsewhere for your first deal.
Stockton, Modesto, Sacramento -- these are going to be your best opportunities in California. The prices are much more affordable and you can still find plenty of cash flowing deals to work with. Although you could commute, you're probably better off just putting the 20-25% down and continuing to live near your job. I've done a ton of analysis for other investors looking in these areas, and I know of several multifamily properties priced under $300k that beat the 1% test and could show you a return of $10,000+ per year. Sacramento also has a great rental market, and was just selected by Realtor.com to become the 4th hottest metro market in the US for 2017. I plan on making a killing because of it :-)
Out of State Investing -- this may be a better alternative than investing in CA. Why get yourself $200,000 in debt when you can purchase a duplex in Wisconsin for $55,000 and rents for $1,250 per month? This would free you up to get a loan, and earn you gross ROI of 27% annually without having a to take on a lot of debt. The downside is the distance away obviously, and finding a local property manager you trust to look after the property for you.

You've got a lot of options, and you've put yourself in a great position to make your first move into real estate investing... now you just gotta figure out which way to go! Best of luck!

3 Reply

Matt Millard

Lewisville, TX · Member since 2015 · 341 posts · 264 votes

9y

I would say because of your location & where the market cycle is at that I personally would invest passively out of state. However, I would meet local investors & continue to learn as much as possible so when things shift you will be in the best position possible & not just financially although if you due proper due diligence & invest in a great deal you can out earn your own active deals. Depends on your skills location & timing though & luck. You also get better tax treatment. I have friends in Dallas that are active that make over 50% in less than a year through flips & more but I shifted from rentals & rehabs into starting a fund & we both do well. Easier to manage a passive fund than 500 rentals or a dozen flips at a time though & different risks/markets.

2 Reply

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

Thank you for letting me know that I was definitely putting all my eggs in the FHA basket hoping to increase me cash on cash return as much as possible. But it does make sense that in this market it is not very attractive. Chris I know you are have achieved a lot in the Bay Area market are you actively pursuing deals or waiting for a cycle shift?

I will definitely be reaching out and being much more active, very nervous that I would look foolish. Also, congrats on everything you accomplished great stuff!

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Wes Blackwell

AWESOME ADVICE!!!! Thank you for taking your time to write all that out and packing it with so much information. After reading all that I am definitely leaning towards 2. Stockton, Modesto, Sacramento or 3. Out of State Investing because of my main goal of cash flow.

I am currently favoring staying as local as possible because of my inexperience. I am definitely going to research this. Thank you again!

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Matt Millard

Thank you Matt! That is a great point I believe that for my goals to be achieved I have to invest outside of my local market. But it is key that I do build relationships in my local markets to be in the best position possible and continue to learn from other investors who have done it. This forum alone is definitely an awesome learning experience. Thank you.

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

9y

Originally posted by @Anthony Navarro:

Thank you for letting me know that I was definitely putting all my eggs in the FHA basket hoping to increase me cash on cash return as much as possible. But it does make sense that in this market it is not very attractive.

A few other options:

95% LTV on a SFR with an inlaw unit (or a large enough SFR that you can throw a kitchen in somewhere for an unofficial 2nd unit).
Freddie Mac has a rarely used 95% LTV MFR option. Income limits by census tract apply, FTHB only.
85% LTV owner occupied duplex.

Scott Schultz

Rental Property Investor · West Bend, WI · Member since 2015 · 931 posts · 598 votes

9y

if you want to house hack, I would suggest moving to an area that rent to value allows for 2% or better for a while, cost of living is lower there too, and its fun to explore new palaces. besides the tax benefits of almost anyplace other than CA are huge. my rule is never leverage more than 60% LTV (after repaired) this allows a 20% market correction buffer and still keep 20% equity for conventional secondary market if you ever need to refi. you create this with a GREAT deal. for example I buy SFR's only, I like my all In after repairs to be $35K with a value of $70K and never borrow more than $42K. just my plan hope this helps.

Kim Stofan

Realtor · Rocklin · Member since 2016 · 128 posts · 67 votes

9y

Hey @Anthony Navarro. It sounds like you are doing all the right things! Reading, learning, listening to podcasts, using the forums. Also, learning to live on the bare minimum of your income will pay off majorly in the future. The fact that you have experience in property management is a huge plus. I would say you are poised to be very successful in REI! I definitely think you are on the right track with househacking. You might need to put 20% or more down as some other members were mentioning but it really is a great starting point. Just keep taking steps every day towards your goals and I have no doubt that you will get there. Have you attended networking events in your area? There are many awesome people in the bay area and I'm sure getting to know them will aid in your efforts. Good luck, and I'll see you around the forums!

Malcolm Douglas

Investor · Chicago, IL · Member since 2016 · 39 posts · 33 votes

9y

Originally posted by @Anthony Navarro:

But I keep hearing from blogs, friends, and others that it is not time to buy real estate that I should wait because the market is going to drop.

Just want to touch on the concept of timing. Having invested in the stock market for a while, trying to "time" when to make an investment transaction is extremely difficult. I would have made more money if I had just invested earlier as oppose to trying to time the best price. I wish I had a better understanding of this when I was your age. You can't see the future. What if the market doesn't correct for 3-4 years? Will the time spent waiting have paid off? I don't know, but I'm guessing your in this for the long haul. A lot of people down the road agree on one thing, they wish they started sooner.

I know stocks are different than real estate, and I'm not saying the advice you're hearing is wrong, it could very well be right, but in the end it's about finding the right deal at the right price, no matter any stage of the market cycle.

One thing you can "time" right now is borrowing money (mortgage rates) at maybe the cheapest levels you will see in your life. Just food for thought.

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

Great ideas!, the in-law unit idea is definitely something I thought about since I lived in one for the last year. Lol

Just looked up the Freddie Mac 95% LTV MFR great stuff and something that I will look into. Chris do you know if they charge PMI?

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

9y

Originally posted by @Anthony Navarro:

Just looked up the Freddie Mac 95% LTV MFR great stuff and something that I will look into. Chris do you know if they charge PMI?

Anything with greater than 80% LTV will have PMI. Your options are basically...

Pay it monthly until you have 20% equity, which is what most people do.
Pay a big fat premium upfront, basically paying for the insurance policy all at once.
Lender paid PMI with a bumped rate (you see this advertised as "no PMI").

So, yes, you can get a "no PMI" 95% LTV mortgage, but not a no PMI 95% LTV mortgage. Hope that makes sense... visualize me doing air quotes if that is helpful - "no PMI." :)

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Scott Schultz

I have thought of that before. I look at places where the cost of living is so much better then California and get jealous. But I am an independent contractor where I live and built up a pretty consistent and stable client base that affords my the ability to have flexibility in my schedule to Property Manage on the side as well as have time to continually educate myself. My job being my primary seed money it makes me kind of uneasy to leave and potentially lose and not be able to gain the income that I currently have. But believe me it does cross my mind. Thank you Scott!

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

You da man!!! Thank you for all the info it is really appreciated.

Just to continue to pick your brain if you don't mind. Since you are in the East Bay market what would you do if you were in my shoes? I know that is a super broad question but right now I am leaning towards renting locally and investing 1-2 hours away. With the idea being to cash flow enough to cover my rent, I will coin that the "California House Hack." Lol

Thank you Chris!

Scott Schultz

Rental Property Investor · West Bend, WI · Member since 2015 · 931 posts · 598 votes

9y

@Anthony Navarro Good Luck what ever you decide, I get the client base deal, but I can tell you, you can earn a living anyplace if your smart. if I had to go back and do work for others, I could kill it just about anyplace, and im just an idiot, with a tech school diploma.

I have been to your town last year, crazy cost of living, I remember looking at Realtor.com app, and saying how the hell does a retail worker not live in a cardboard box here. my wife is a Pharmacist, and even at double her pay it would be tough to survive out there. Here, you can do pretty good on $50-60K a year, and we do way better, so consider what i suggested, i can get between 2-3% on my rental deals, and can make $20-$50K on a flip, yea our winter is long and cold, but we have little crime, and everyone pretty much knows each other, we have clear water lakes, and vast forests. oh and houses are cheap if you know how to buy them. Good Luck!

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Kim Stofan

Thank you for your kind words and encouragement! I will definitely be networking much more and looking forward to gain more knowledge and contribute any way I can.

OP

Oakland, CA · Member since 2015 · 15 posts · 7 votes

9y

@Malcolm Douglas

Yup we are speaking the same language. Lol I try to tell friends/family that when people try to time the market the majority of people are outperformed by individuals who just do dollar cost averaging. Most people just tell me that REI is different and it's just me being impatient. Thank you for your advice and reassuring I'm not crazy. haha