First Rental in a small town to reduce risk. Good or Bad?

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First Rental in a small town to reduce risk. Good or Bad?

Joshua Zajac
Westmont, IL · Member since 2014 · 13 posts · 0 votes

So after a 2 year drought from BP I finally got my act together and really started to get my mind and personal financial affairs in order. I will be debt free at the end of January. I have already 2 months of an emergency fund built but but was looking to build it up to 4 to 6 months. I must have listen to Podcast 200 at least 3 or 4 times and thought it was best. That provide me with such a simple but realistic path on starting out. So I'm ready to start looking at my first investment property. I have used the BP calculators to analyze deals and took Brandon Turners advise of analyzing a deal once a day to gain experience and to be comfortable with it. So my thought moving forward is I was looking to acquire this first property in a small town in Northwestern Illinois that is about an hour and half drive from me (I live in the Western Suburbs of Chicago). My business partner moved out there 2 months ago and I kept asking him information about the area, the good and bad parts, the economy, schools, jobs, rental rates, etc. I plan to fund my first deal using a HELOC (My current house and completely paid off) and am looking for either a SFR or a duplex. I have construction experience and for my first deal would plan to do majority of renovations. The reason why I wanted to start out far away from my current home is due to housing prices are inexpensive (30K - 60K), it feels like it would like less risk (money wise) and from what I gather not as many investors are out in this area. Plus I really want to prove to my self that I can due this and make it work. I did set a goal for myself to purchased my first rental property before the end of 2017. So I guess what I'm asking is, does this seem like a terrible idea to start out? Should I was tweak this in some way? Or should I rethink this plan entirely. I know I'm probably leaving out some key information, sorry for that. Any thoughts are greatly appreciated.

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Meghan McCallum
Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes
9y

I wish people would stop asking why a quality tenant would rent? I wonder why everyone wants to be someone else's employee? Its safe and their are less variables to deal with. You get a regular paycheck...they make a regular payment...its easier.

Not everyone wants to own, in fact, for some people it is a HORRIBLE IDEA! 

Divorces haven't slowed down since the last market swing, it crushes so many people's credit that they have no choice but to rent. In some areas renting is a better investment than buying depending on what market they are in. 

I LOVE and respect my renters, I have high end properties that they just have no idea how to maintain so they pay me to be responsible for their home so they can focus on more important things, their family, their businesses they run, and travel. I have some renters living in million dollar homes of mine that wouldn't be caught dead pushing a mower and they don't feel like worrying about who to hire, writing out checks for work done, buying new appliances, paying taxes. Renting from me is a one stop shop and the changes in tax rates, city zoning laws, and the ability to pick up and move if something changes in their lives is VERY appealing to them. 

Millennial also all first came into the housing market while they watched their parents lose their asses, they make life long renters, also the baby boomers...they are downsizing, want an ease of living and don't want the maintenance...great renters.

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  • Meghan McCallum
    Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes
    9y

    @Joshua Zajac, you are on the right path...maybe. 

    I can't tell you if you are, or if you aren't because I don't know your goals. Start there. Do you want to flip? Pros: Can be quick sexy money Cons: Doesn't build wealth long term, higher risk, you really need to know the market, and you need to throw your time into the renovation rather than the investment.

    Shoot, was that an answer?

    Find what you want to get out of investing? Cash flow? Cash? The education of a first deal? Do you want to manage it? Will you hire that out? As you have taken the time to prepare for your journey your path is different from someone with less means. Your strengths in construction may still be best used not in performing the construction but in being able to accurately determine the cost of a rehab and a solid scope of work. 

    Maybe you combine them and become a very successful BRRRR guy and earn your selves free houses for the next 20 years?

    Last, what is your personal exit strategy?

    Seems a little early to start planning your divesting plan but, working backwards may give you more insight than looking forward.

    Let me know what towns you are looking at. I invest from East Ia, to Chicago and north to Milwaukee. I may know a little bit about where you are looking.

    Good luck and welcome.

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  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    9y
    You may be avoiding one risk...higher price means higher per month vacancy cost...with smaller tenant pool so longer vacancy duration so equally high cost. maybe, but depends on the town. An hour plus commute is quite difficult when doing your own renovations. If you have kids it is even harder. Just things to consider. Plus, locally you really know your market. congrats on having a paid off house...it helps alot. have you thought of refinancing with money out of your current home to buy a different home for yourself? and rent out your current house? You have less competition on fannie, freddie, hud homes and can get lower o/o finance terms. Some fixeruppers want cash. just a thought
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  • Joshua Zajac
    OP
    Westmont, IL · Member since 2014 · 13 posts · 0 votes
    9y

    @Meghan McCallum,  See I knew I was leaving out good information.  Its almost 3am and I cant sleep but obviously my brain its at its peak right now.  

    My intention for my first property is to be a rental. Although, I'm not unopposed to selling after reno's are completed. I remember in a podcast someone would completed renovations on a property and market it as both a rental and for sale and would take which ever came first. I though this was a great exit strategy. My goal is to build long term wealth and horizontal income streams. On my first deal I would be happy with either one. I feel like I would need to get first deal done to build my confidence. Ive felt over the past 2 years I've "just talking about investing" and now I need to actually invest. Now don't get me wrong, I don't feel like rushing into a deal for the sake of saying I have one under my belt and have it turn out bad. I'm doing my research and due diligents but I know I want to take action this year, be it 2, 5, 10, whatever, months down the road. So guess then I would be looking for the education of the first deal. I always thought that after my first deal I would go into the BRRRR until I hit my freedom # to transition into REI full time. At that point I would like to 50/50 Flip/Rental and possible vacation rentals.

    I would like to manage my first property to gather the experience, although with an hour and half drive I could see how that can present challenges but I wont let that hold me back.  I hear you on the strengths in construction better spent with cost of rehab and scope of work.  I just feel for the first one I need to do everything (that I know) to get the experience and education.  I certainly don't plan to rehab myself 10 years down the road.

    In all honesty I haven't put a whole lot of thought into personal exit strategy because I'm just focused on trying to get off the ground first.  

    So currently I'm looking into Dixon and Sterling areas to start off.  

    Thanks for your comment.

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  • Joshua Zajac
    OP
    Westmont, IL · Member since 2014 · 13 posts · 0 votes
    9y

    @Marian Smith I just finished renovations on my current house and my wife would like to enjoy the fruits of my labor for a few years before we sell. Plus we really like where we live. That's why the HELOC we thought was the best option and then would refinance after 6 months to pay off the HELOC or roll it into another project.

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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    9y

    Why buy so far from where you live? There are decent deals throughout areas of the western suburbs on properties. You might have to keep your eye on both sfrs and multis to find something where the numbers work. 

    Especially if you are going to self manage, it is nice to be right around the corner for your first one!

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  • Account Closed
    Investor · Kent, OH · Member since 2016 · 6 posts · 0 votes
    9y

    Hi Josh, my current 2 are financed with cash and repairs with HELOC. I'm almost ready to refi and get my cash back out. Re the financing, your ROI is much higher and you r at lower risk if you are properly leveraged. I say properly because we all have a sweet spot where we can cover our monthly expenses and debt out of current income if something should happen. After that using some leverage improves your ROI. People think owing money is more risky but not necessarily true. You have to consider the risk of illiquidity. Real estate is not liquid compared to stocks for example, and if you need the money, better to be in your pocket than sunk in a house that takes months to close. These 2 are in a small college town that has 45% rentals/ 55 owner occupied- 25 mins from my house. I was there every day for the first 4 months - 25 mins seems close but you burn gas and time- keep better records than I did for your biz expenses. I'm backtracking now to prepare for taxes, giant pain. 90 mins is a looong way if you're going every day- that's 3 hours on the road if you go home each day. Choose your investment well - I learned the hard way time is equally important as money. I bought my first from Xome for 29k and with no construction experience I found I bought a house that needed 70k repairs and 7 mos later still not done. I won't be giving a BP interview any time soon :)

    2nd one I bought was bigger, did 4K repairs on the 78k purchase and rented for $1050 a mo, little below market but I got 2 women who have contracts at the Univ for 4 years and plan to stay. Turning tenants is more expensive than newbies realize. Not the sexiest story but it's a solid house and there wasn't much to do. My first phone call after getting it rented was to switch insurance companies and cut that expense in half.

    My first rental was a vacation home I've since sold. After kids it was hard to get there so I rented it annually to a local- best decision I ever made was a single mom with an ill child who needed to be close to her family. Rented $150 below market and she stayed 5 years with only a few calls over the years for things that genuinely needed attention. Great experience and taught me to treat the right people right. Also taught me that I like collecting the income but I do not want to be bothered with day to day, thus I love a good property manager and I'm willing to pay so I can get on with my family and day job. Iv been chastised  politely by BP fellow purists but I have no desire or time. I view rental income as a high return preferred bond with better tax characteristics and hopefully purchased at deep discount to NAV- net asset value. I can go in the stock market and buy a relatively liquid junk preferred portfolio paying 5-10% so I want more than that in rental to compensate me for the lower liquidity. Those calculations go in beginning when choosing the RE. Not perfected yet but Im getting better at it. 

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  • John White
    Flipper/Rehabber · Sterling, IL · Member since 2016 · 4 posts · 0 votes
    9y

    Hi Josh, I have set the same goal for myself - to buy at least my first rental in 2017. I live in Sterling and have done two very successful flips (I also do 100% of the rehabbing myself). I am currently living in a house that I am rehabbing and then plan on using a HELOC to start BRRRing. I am also a licensed Illinois home inspector and most of my inspections are in the Sterling/Rock Falls area - so I have some insight. If you plan on investing in Sterling - be careful! Yes there are tons of houses here under 50k, problem is 99% of them aren't worth investing in (at least in my opinion). It can also be tricky to find comps - they are all over the board, and there doesn't seem to be much rhyme or reason to what sells and what sits on the market. I'm definitely not trying to discourage you from the area, I'm investing here, and it is an inexpensive market with potential and there is a high demand for quality rentals - just proceed with caution. If you have any questions about the area or a specific property feel free to message me.

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  • Joshua Zajac
    OP
    Westmont, IL · Member since 2014 · 13 posts · 0 votes
    9y

    @John Warren Dont get me wrong I am will to purchased near me.  I know being the first time that would be ideal.  However I do have a friend who lives in the area where I want to invest and he is willing to keep an eye on the place day to day. 

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  • Devin Deswert
    Investor · Salt Lake City, UT · Member since 2016 · 78 posts · 38 votes
    9y
    My concern at that price point is why would anyone rent? What's the current standard on credit for fha? 630, 650? I'm not sure but it's pretty low, and down payment on 60k is t much to save for. So if they are sub 700 beacon and can't save 2100 for a down what kinda tenet's will you end up with? That's why I don't bother outside of major area's. In the major area's you always have people moving in and out or go from renting to owning. But there a applicant might have a 840 score but they can't save up 60k for a downpayment or not ready to put roots down yet and needs to stay mobile.
    0Reply
  • Meghan McCallum
    Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes
    9y

    I wish people would stop asking why a quality tenant would rent? I wonder why everyone wants to be someone else's employee? Its safe and their are less variables to deal with. You get a regular paycheck...they make a regular payment...its easier.

    Not everyone wants to own, in fact, for some people it is a HORRIBLE IDEA! 

    Divorces haven't slowed down since the last market swing, it crushes so many people's credit that they have no choice but to rent. In some areas renting is a better investment than buying depending on what market they are in. 

    I LOVE and respect my renters, I have high end properties that they just have no idea how to maintain so they pay me to be responsible for their home so they can focus on more important things, their family, their businesses they run, and travel. I have some renters living in million dollar homes of mine that wouldn't be caught dead pushing a mower and they don't feel like worrying about who to hire, writing out checks for work done, buying new appliances, paying taxes. Renting from me is a one stop shop and the changes in tax rates, city zoning laws, and the ability to pick up and move if something changes in their lives is VERY appealing to them. 

    Millennial also all first came into the housing market while they watched their parents lose their asses, they make life long renters, also the baby boomers...they are downsizing, want an ease of living and don't want the maintenance...great renters.

    1Reply
  • Meghan McCallum
    Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes
    9y

    I wish people would stop asking why a quality tenant would rent? I wonder why everyone wants to be someone else's employee? Its safe and their are less variables to deal with. You get a regular paycheck...they make a regular payment...its easier.

    Not everyone wants to own, in fact, for some people it is a HORRIBLE IDEA! 

    Divorces haven't slowed down since the last market swing, it crushes so many people's credit that they have no choice but to rent. In some areas renting is a better investment than buying depending on what market they are in. 

    I LOVE and respect my renters, I have high end properties that they just have no idea how to maintain so they pay me to be responsible for their home so they can focus on more important things, their family, their businesses they run, and travel. I have some renters living in million dollar homes of mine that wouldn't be caught dead pushing a mower and they don't feel like worrying about who to hire, writing out checks for work done, buying new appliances, paying taxes. Renting from me is a one stop shop and the changes in tax rates, city zoning laws, and the ability to pick up and move if something changes in their lives is VERY appealing to them. 

    Millennial also all first came into the housing market while they watched their parents lose their asses, they make life long renters, also the baby boomers...they are downsizing, want an ease of living and don't want the maintenance...great renters.

    1Reply
  • Joshua Zajac
    OP
    Westmont, IL · Member since 2014 · 13 posts · 0 votes
    9y

    @Devin Deswert,  I hear your and agree with some of your points.  I would argue that some people are not in the position to purchase home that would not qualify for a conventional mortgage or are unwilling to put in the sweet equity to make it nice.  Hence is where I would come in.  I know you run the risk of challenging tenants but believe you can mitigated this with proper training and a solid lease agreement.  Also, I might view this market not as long term but as a low risk way to enter into investing and getting that education of the first deal made.  

    0Reply
  • Joshua Zajac
    OP
    Westmont, IL · Member since 2014 · 13 posts · 0 votes
    9y

    @John White I had the same problem trying to find comps in Dixon. I don't have access to the MLS just use the information from zillow, trulia, and the Lee County site. I found it was challenging getting a good idea what duplex's comp out at in Dixon but will keep doing my research. I plan on going out to Dixon next month maybe we could get together and have a beer (or coffee if that's your thing).

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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Joshua Zajac Just food for thought but if you're going to do the majority of renovations yourself and it's a 3 hour round trip, how will that impact your ability to get renovations done in a timely manner?  Assuming it's unoccupied during that period there's definitely a cost associated with that.  Not to mention if you're not in the area, want to manage the property yourself, and your tenant has a garbage disposal that breaks...it's a heck of a round trip.  Maybe the business partner can do some of this but is that something he/she is up for?  

    Overall, I'd try to remain a little more objective and do a deal if the deal makes sense.  You don't want to get emotional about proving anything to yourself about doing this.  Talking yourself into the wrong deal just to prove you can do it is likely recipe for disaster.  If you haven't started inquiring about properties and running pro-formas yourself, I'd start doing that.  If nothing else you'll start to get to know the area, learn what $30K vs. $60K gets you, and noting can replace getting to know a local (small) market on a street-by-street level.

    1Reply
  • Joshua Zajac
    OP
    Westmont, IL · Member since 2014 · 13 posts · 0 votes
    9y

    @Andrew Johnson Good advise and point taken. The amount of renovations will have to be taken into consideration. I know driving 3 hours round trip is not ideal and I am ruling out some portions of this depending on the time-frame. Also, when I run my numbers I always including about 8% for PM. I figured if I am driving 3 hours round trip and putting in work I should pay myself. I think my thought process for wanting to manage in the beginning is simply to gain the experience. My plan was to always hire a PM after 1 year, be it my business partner or a local company (with proper vetting of course). Your right about getting too emotional about the first deal and having it turn out bad. I'm gratefully for BP here to get some unbiased opinions. I have been running the numbers off of some properties that I've found off of the MLS to gain a level of comfort. I have a few more minor debts to take care of by the end of the month and after that will be in a position to move forward into investing.

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  • Wayne Marshall
    Levittown, PA · Member since 2017 · 3 posts · 0 votes
    9y
    I'm new to the investment world as well I will be closing my first deal in by the end of the month I was also temped to buy far away due to a cheaper price range but I came to realize how important and valuable my time was and factored that into the cost of the project and decided to wait until something came up closer to me , I too have spent a year or two talking about investing and getting excited about it but never pulled the trigger , don't be afraid to wait and network with everyone you can in your local area , I made friends with just about everyone I could so I could get the most information even though I feel my network is small It has been a powerful tool for me
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  • John White
    Flipper/Rehabber · Sterling, IL · Member since 2016 · 4 posts · 0 votes
    9y

    @Joshua Zajac I'm always interested in meeting people with similar goals in the area - and beer and coffee are both my thing, all depends on the time of day, haha. And if you serious about the area I'm sure you can find a good realtor that would pull comps for you off of MLS. Do not rely on Zillow, Trulia, etc..

    @Meghan McCallum +1 on the quality tenants.  I have several responsible, successful friends who rent (for varying reasons) that would be approved to buy in a heartbeat.  

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  • Jonna WeberPro Member
    Moderator
    Investor · Boise, ID · Member since 2011 · 1k+ posts · 736 votes
    9y

    @Joshua Zajac - As you can see from the varied answers, there is no magic way to start or place to start. There will be pros and cons not matter which area you start in.   Good job on jumping in a taking action!  I personally would stick closer to home if at all possible - our rentals are within 20 minutes of where we live, and we like the comfort of knowing our vendors, our schools,  and our rental market in general.  It is difficult to justify all the drive time for one small rental if you are self managing.   Have a fantastic 2017!

    208-608-4884Podcast Guest on Show #80
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  • Zachary Wood
    Professional · Saint Louis, MO · Member since 2016 · 7 posts · 0 votes
    9y
    Originally posted by @Meghan McCallum:

    Not everyone wants to own, in fact, for some people it is a HORRIBLE IDEA! 

    Divorces haven't slowed down since the last market swing, it crushes so many people's credit that they have no choice but to rent. In some areas renting is a better investment than buying depending on what market they are in.

     I totally agree with Meghan.  Although I have owned several rental properties at once, when I first got divorced until recently, I have only looked at renting.  I didn't know where I wanted to live, or if I'd change jobs for the fun of it.  Sometimes renting just works for people, even if they have investment experience and a high income. I hope I rent to people like me in the future.

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  • Joshua Zajac
    OP
    Westmont, IL · Member since 2014 · 13 posts · 0 votes
    9y

    So I've given some deep thought and after speaking with family and friends and others on BP.  I've decided that for my investment property I'm going to set a driving limit of 1 hour from my home to my first property.  With that criteria set now that would put me just a little west of DeKalb.  Although some of the prices out in Dixon and Sterling looked enticing, I wrote out what it would cost in fuel and travel time to those areas and determined I could take those savings and spend a bit more on a property that is a 45 minutes closer.  Additionally, I've was out driving for dollars today in Dekalb/Sycamore and timed my drive from Peace Rd/I88 to my exit at Maple/I355 and took 30 minutes.  I feel a bit more confident now knowing that the drive would not be unrealistic should I have to make multiple trips per week.

    Thank you all for your comments,  they really did help and I'm very appreciative

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  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    @Joshua Zajac you have to start somewhere.....However be sure to look at the market,neighborhood,rents in that particular neighborhood, home values etc. closely.  Just because a deal is inexpensive doesn't mean it's a good deal.  Deals come in different sizes and shapes so JUMP, but mitigate your risk.  You may want to consider partnering on your first deal with someone who has a bit more experience and or expertise in the market you choose.  Best of luck to you my friend!

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