Just Starting out and would appreciate any feedback from the experienced investors.

[James Park]

Hi moved

Hello everyone, I wanted to get some advice from the professionals here on my investment goals as i consider myself as a beginner.

Question is there to buy or sell:

My long terms goals are to accumulate 5 -7 SFRs via new construction and preforeclosure in the south Orange County, CA area so that i can retire from my portfolio of SFRs. I was inspired by John W. Schaub's real estate book "Building Wealth One Home at a time."

Advice requested for my First Scenario

Currently my primary residence is in the northwest suburbs of Chicago which I bought in 2003. The house was fully paid off and I tried to sell the home early this year with no luck. The appraisal i received on the home was $365,000 back in May 2009 and pulled out a cash out $240,000 5% interest 30 fixed, and invested 20% in gold and 80% in a safe money market. I know my property would rent for $2250 and my carrying costs (mortgage, HOA, Taxes would be around around ($1900 - $1950) I am planning to buy my first Property in Irvine, CA to move into in 2011. Would it be best for me to keep (rent) or sell my chicago property in 2011 when I move my family to our new home in OC. If the home cash flows would it makes sense to keep the property out-of-state? I do like the idea that my mortage rates are fixed for 30 years at 5% if i were to rent out my Chicago property, but feel uneasy becoming a out-of-state land lord for two properties. If i decide to rent.. how long should i hold the property for?

Here is the situation with my rental property where i need some advice..

Advice requested for my Second Scenario

I purchased my first new construction SFR in Duluth, GA in June of 2006. My wife and I were orginally planning on moving there, but our job situation kept us in Chicago. I purchased the home for $550,000 with a $350,000 loan 30 year fixed 6.375. I had made a beginner's mistake by refinancing the home to a 5 year interest only ARM in April of 2008, which will last until April 2013. I was extremely lucky to have a responsible tenant in the house currently who pays me $3000 in rent and where my current mortgage is $1617. I am working directly with my tenant without a PM firm. My total carrying cost is around $2250. My home value has dropped to about $475,000 at this time.

Here are the Questions I want to ask the professionals:

1) Should i try to refinance the home to a 30 year fixed loan as rates are low? Do i have any chance of try to remodify the loan for 10 years? I am leaning towards letting my loan to expire in 2013 and trying to sell the home then. I am hoping that real estate prices will be slowly rising by then.

2) If my tenant decides to later purchase the home, can i make this transaction without using a real estate agent to save on the commissions. I do not have a sales license. How do i go about executing this.

3) Should i try to keep this home as long as can until i can break even from the $550,000 price i paid for in 2006? or try to unload the home immediately? My tenant has just renewed his lease until February 2011.

4) I've read several real estate investing books that discourage owning out-of-state rental properties. For some of you long term investors, would agree that it is much less of a headache, and more profitable to own rental properties in your backyard?

Thank you so much for your time and consideration. If you need more information, please feel free to ask.

[Jon Holdman]

First, you should do some reading in the Rental Property forum. In particular, get a better understanding of your real expenses. You seem to be falling into the "cash flow = rent - PITI" myth. You're better than some, since you do include HOA. But you've left out many expenses. Since you're planning on long term holds, you will have maintenance, and maintence related capital items like ACs, roofs, and sewer lines. CA if a very tenant friendly state, and a six month eviction is entirely possible. Short vacancies between tenants are inevitable. Make ready costs to clean up and paint between tenants are also inevitable. Some of that may be covered by security deposits, some not. Significant tenant damage is always a possibility.

A better formula for cash flow would be:

cash flow = (50% * Rent) - P&I payment

That's the "50% rule". Read more about it in the Rental Property forum. There are several sticky threads on this topic. Realize its just a rule of thumb. You could get lucky and have great tenants for many years and make a ton more money than that forumla. You could get a horrible thread (there's a sticky about one of those, too) and have to spend 10's of thousands of dollars over a short period.

Its very unlikely 5-7 SFRs will generate enough cash for you and your family to live off of anywhere, let alone in SoCal.

Expensive houses make crummy rentals. A key metric is the price to rent ratio. This is almost always better on low end houses. Not run down houses in war zones, where your tenant issues will drive expenses much higher and rents will be lower, but decent houses in working class neighborhoods. In the LA area, you may find better deals in the Inland Empire than in southern Orange county. But I don't know that area well at all, and others can probably provide better input. Whenever I hear prospective landlords talk about "nice houses" I hear the dollars flying out the windows. You should be thinking "profitable properties". The goal here is to make money, not to own properties.

If you paid $550K for a house in 2006, you unfortunately bought right about the top of the market. My personal prediction is that it will be 20 years before we see those price again. That's based on long term trends shown by the Case Shiller data and assumes we end up with a lending environment similar to that before the bubble started (about 2000). But that's based on long term trends and short term factors are likely much more relevant. I can see numerous paths that would make my 20 years optimistic (another major terrorist attack, a major middle east war with Russia or China on the other side, deflationary trends really kicking in) and only a few that would make my scenario pessimistic (inflation being the most likely.) So, while its painful, I think you should acknowledge the tides went against your investment, take your lumps and move on. The fact you can get away without trashing your credit or ending up with big money judgments leaves you far ahead of many people.

If you goal is to acquire a rental portfolio (which won't produce a ton of income unless you have dozens) and live simply, I'd work toward being rid of those expensive houses. $100K houses that rent for $1500 will do a much better job of supporting your goal than $500K houses that rent for $3000. Better still if this is really your goal, move to Dallas or Houston or maybe Georgia or somewhere in the south and buy a bunch of $50K houses that rent for $1000 and you'll really be making progress on your goal. That is entirely possible.

Anyone can sell a house they own to anyone else. No agents or license needed. Write a simple purchase contract (I James sell the houses at 123 Prosperity Ave (legal description blah, blah blah) to Billy Buyer for $400,000) and take it to a title company in the area. Its actually easier than that, but using a title company (or attorney, which may be the case in GA) will ensure all the docs are correct and all the i's are dotted and the t's are crossed.