​Scared and in paralysis by analysis

18 Replies


Ok here is my situation and I was hoping you could help me find my focus. 

I have talked to my bank and I am approved for 200k for an investment property. I have also been approved for a HELOC on my current home for 40k. I live in Orem, Utah (in the valley just south of Salt Lake City) and not sure if I should bother looking around here for properties due to current prices.

What I want from REI is to have a steady passive income of about 5k a month in about 8 years. I don't need any cash from the investments until that point. I have decided that buy and hold would be my best avenue to achieve my goal.

My question I would like help with (and I am also posing the same questions to a realtor friend of mine that I might work with who is also an investor) is where should I start for my first real estate deal? I want to get my feet wet and start small and learn as I grow into bigger properties and deals. I think for this first time I would really like to stay with just using the 40k from the HELOC especially listening to so many podcasts that talk about starting with even less. I can afford the 415 payment a month if things go really bad with the HELOC. With this limitation in mind I have a few options. 1. Find deals that are off of the MLS and look for something that would meet my criteria in HUD, REO, or short sales. 2. Look at areas that are 3 hours or more away from my home. 3. Go out of state (which I am worried about but I have considered places I would be willing to move to after the 8 years could be an added benefit) 4. Wait for a down turn in the market in my local area and position myself to be able to move quick. (I am assuming on the down turn due to the trends and the tendency to drop after houses get so expensive and there are multiple offers for each one due to lack of supply.)

I know this post in just the next step in my paralysis but I really appreciate the people on here and am still just not sure what step I should take next. Really thank you so much for taking the time, any help with these options, or any others that I might not see.

I would probably recommend looking for deals nearby if they can cash flow at all. It's easier to know the areas and much easier to get involved to address an issue if you are nearby. 

Chose a place you’re familiar with and always remember “every property has a number that makes it a home run deal.”

@Joshua Johnson I support what the others have said. Start with areas you are familiar with and where you can drive by and manage it. There are some awesome opportunities where you live. Lehi is growing like mad. I know a few people who have bought new townhouses there to rent out to tech workers that are moving here. You also have two universities. 

Having a property close to you doesn't make a deal a good one...it just means it's close to you.  If the deal is a bad one, as in negative cash flow, then you have the ability to drive by it occasionally and point it out to others saying, "I own that house, and I'm losing money on it".

This also means, that simply knowing the area well (because it's your area), isn't going to make it a good deal.  In fact, if you really know it well, and you listen closely, that voice you hear is that area/property telling you it's a bad deal and you shouldn't be investing here. 

That doesn't mean your area is bad to invest in, it just means that the close location to you has nothing to do with making it a good/bad deal.

Learn to analyze properties based on the market, and not the property, and your market analysis will tell you where to invest, and more importantly, where NOT to invest.

Notice I used 2 different terms describing this event:  Property and Deal. You want to invest in deals, not buy properties.  It's a numbers game, and the numbers that matter have "$$$" in front of them, not street names behind them.  If you are in the right market, the properties you didn't get, will be followed by another one just like it...with a different address.

I went OOS but I invested in the nicest asset class I could... Great schools, low crime, and decent sized property "should" help me attract a quality tenant. Lot think investing OOS is cheap (and it can be) but they look at low class properties that are inexpensive price wise and have "high" returns. What actually happens is they stay flat and are hard to finance. The returns get wiped out by a bad tenant or something breaking.... and if leveraged too high you run into cash flow problems.

5k of income is going to require quite a bit of property if leveraged or some paid off houses. Generally speaking you're looking at about 2-300 door if financed or around 1% rent (150k house, 1500/mo rent). But there are ways to improve this and make it more efficient but there are also limits to (you're probably not going to get a 500k house and rent it for 5k)

I would caution you about your numbers. If you are picking up a property for $40k that's outstanding; if not, your payment is PITI plus escrow slush. Cash flow concerns are not just affording the HELOC, but affording each month it is vacant and the cost to get it rented again.

By your own note, you want to start small, then start small. If you haven't already purchased your own home, then start there. Or consider something that you might also live in and then would you be OK with paying the rent if things go south?

It has been touched on already, although in a different way. I suggest that you essentially forget about the price tag, aside from considering value. 

Take your goals, figure out the numbers, and then go find properties that will work within that model. If you find that there are no properties to be had, maybe your goals are unrealistic? And then keep adapting. Regarding repairs/fixers, observe what other investors buy in your market. Just by watching the market closely you will spot homes that are turning to an investor quickly; then watch what they do. Do they fix everything? If not, where could you save as well? Also, at what point would you cut the bait and run? What is your exit strategy?

i.e. I work with 2 types of investors: 1) Those that want a "good deal", whom also rarely pull the trigger. And if they have in the past, they got stung because someone else told them a property was a "good deal." And 2) those that take their model then apply it to the market, then adapt that model if needed, re-applying it, and adapting some more. It is a process of rinse and repeat.

The "deals" are found when you purchase, not when you sell. Key to remember is that their really is no such thing as EASY MONEY; it should be labeled EASIER MONEY. Remember that this definition is also based on each person's/investor's perspective.To me this is vs. my past W-2 jobs. 

If I bought a first property and didn't need the cash flow, I would reinvest that money into paying down that mortgage (or into another above-performing asset) until I had enough to purchase another major investment for more future cash flow.

Originally posted by @Matt K. :

I went OOS but I invested in the nicest asset class I could... Great schools, low crime, and decent sized property "should" help me attract a quality tenant. Lot think investing OOS is cheap (and it can be) but they look at low class properties that are inexpensive price wise and have "high" returns. What actually happens is they stay flat and are hard to finance. The returns get wiped out by a bad tenant or something breaking.... and if leveraged too high you run into cash flow problems.

5k of income is going to require quite a bit of property if leveraged or some paid off houses. Generally speaking you're looking at about 2-300 door if financed or around 1% rent (150k house, 1500/mo rent). But there are ways to improve this and make it more efficient but there are also limits to (you're probably not going to get a 500k house and rent it for 5k)

 Actually, it shouldn't take too long to get that $5k/month...and depending on the market you go with, it could take a lot less cash than you might think.  The keys are to never spend the money...just use it an unlimited number of times, and to get the initial cash investment back to you ASAP...within a few months is ideal..

Originally posted by @Steve Milford :

If I bought a first property and didn't need the cash flow, I would reinvest that money into paying down that mortgage.

Why? Paying down your mortgage is not an investment, it is the opposite of an investment. An investment is something that will generate income or appreciate. Paying down your principal does neither.

Originally posted by @Dillon Leider :
Originally posted by @Steve Milford:

If I bought a first property and didn't need the cash flow, I would reinvest that money into paying down that mortgage.

Why? Paying down your mortgage is not an investment, it is the opposite of an investment. An investment is something that will generate income or appreciate. Paying down your principal does neither.

 Right.  Paying off your mortgage, and buying your property, is the job of the tenant.

Originally posted by @Joe Villeneuve :
Originally posted by @Matt K.:

I went OOS but I invested in the nicest asset class I could... Great schools, low crime, and decent sized property "should" help me attract a quality tenant. Lot think investing OOS is cheap (and it can be) but they look at low class properties that are inexpensive price wise and have "high" returns. What actually happens is they stay flat and are hard to finance. The returns get wiped out by a bad tenant or something breaking.... and if leveraged too high you run into cash flow problems.

5k of income is going to require quite a bit of property if leveraged or some paid off houses. Generally speaking you're looking at about 2-300 door if financed or around 1% rent (150k house, 1500/mo rent). But there are ways to improve this and make it more efficient but there are also limits to (you're probably not going to get a 500k house and rent it for 5k)

 Actually, it shouldn't take too long to get that $5k/month...and depending on the market you go with, it could take a lot less cash than you might think.  The keys are to never spend the money...just use it an unlimited number of times, and to get the initial cash investment back to you ASAP...within a few months is ideal..

 What is too long though? I'm assuming the 5k is profit and not total rents (ie 5 100k house at 1100/mo to cover PM). Quick math puts that probably tad over 3k mo (500k, 200k down, 4.85 @ 15yr, 6k taxes, 4k insurance). Then you'd still have to account for reserves and lease renewals... probably get you close to that 200/ door or 1k mo. Let's make it simple and say you rolled that 1k ea mo back into the loan you'd get done w/ a 15yr around just over 9 years. I left taxes out for simplification and this is kind of a better case scenario. If you dropped the 1k to 800 its' now 10 yrs, 600 takes you to 11 yrs.... 

Originally posted by @Matt K. :
Originally posted by @Joe Villeneuve:
Originally posted by @Matt K.:

I went OOS but I invested in the nicest asset class I could... Great schools, low crime, and decent sized property "should" help me attract a quality tenant. Lot think investing OOS is cheap (and it can be) but they look at low class properties that are inexpensive price wise and have "high" returns. What actually happens is they stay flat and are hard to finance. The returns get wiped out by a bad tenant or something breaking.... and if leveraged too high you run into cash flow problems.

5k of income is going to require quite a bit of property if leveraged or some paid off houses. Generally speaking you're looking at about 2-300 door if financed or around 1% rent (150k house, 1500/mo rent). But there are ways to improve this and make it more efficient but there are also limits to (you're probably not going to get a 500k house and rent it for 5k)

 Actually, it shouldn't take too long to get that $5k/month...and depending on the market you go with, it could take a lot less cash than you might think.  The keys are to never spend the money...just use it an unlimited number of times, and to get the initial cash investment back to you ASAP...within a few months is ideal..

 What is too long though? I'm assuming the 5k is profit and not total rents (ie 5 100k house at 1100/mo to cover PM). Quick math puts that probably tad over 3k mo (500k, 200k down, 4.85 @ 15yr, 6k taxes, 4k insurance). Then you'd still have to account for reserves and lease renewals... probably get you close to that 200/ door or 1k mo. Let's make it simple and say you rolled that 1k ea mo back into the loan you'd get done w/ a 15yr around just over 9 years. I left taxes out for simplification and this is kind of a better case scenario. If you dropped the 1k to 800 its' now 10 yrs, 600 takes you to 11 yrs.... 

 "Too long" is based on each starting point (funding and knowledge...not in that order), and the market you have found that works with the strategies your are able to work with...again based on funding and knowledge.

This is all really wonderful advice. Thank you. 

I have looked at a couple townhouses that would cash flow only 50-100.00 a month over a 1100.00 payment for mortgage, insurance, taxes, and management. That is a far cry from the 50% rule. Would it be a good start for someone just wanting to get going? Should I hold out till I can find something that is closer to the 50%? 

In my area I am getting mixed signals from the market. On one hand I see most SFH going for more than they are asking on the MLS, few shortsales and foreclosures, and the inventory is low right now. From what I can see it has the look of being at the top of the market. On the other hand there are a lot of things happening here with bigger companies moving to the area and the population is growing which would mean it is a good time to catch the wave.

Also I don't see the 5k in 8 years being too big of a hurtle. My plan is to keep all the money invested within my portfolio to buy more properties and to pay down mortgages while also investing more of my current income. I am estimating (rough numbers so I can get a better understanding and goal) about 1200.00 a month for rent on each property with the 50% going back in for management and other expenses. If I plan on having everything paid off by the deadline it would only take 8-9 houses. Round up to 10 houses to be on the safer side and the math would be just fine. Granted the timeline for the pay offs are an assumption but finding the balance between number of houses and average returns on each house is part of my plan. Currently I don't plan on stopping at 10 but would plan on selling over the 10 to help pay off the mortgages to find that balance at end of the 8 years. 

The more I have looked around the 40k seems unreasonable right now and in the area that I know. Looking back it was probably more hopeful than practical. I will look at the 200k price range to give myself more options. 


Again thank you for talking with me and giving me advice. 

Originally posted by @Joshua Johnson :

This is all really wonderful advice. Thank you. 

I have looked at a couple townhouses that would cash flow only 50-100.00 a month over a 1100.00 payment for mortgage, insurance, taxes, and management. That is a far cry from the 50% rule. Would it be a good start for someone just wanting to get going? Should I hold out till I can find something that is closer to the 50%? 

In my area I am getting mixed signals from the market. On one hand I see most SFH going for more than they are asking on the MLS, few shortsales and foreclosures, and the inventory is low right now. From what I can see it has the look of being at the top of the market. On the other hand there are a lot of things happening here with bigger companies moving to the area and the population is growing which would mean it is a good time to catch the wave.

Also I don't see the 5k in 8 years being too big of a hurtle. My plan is to keep all the money invested within my portfolio to buy more properties and to pay down mortgages while also investing more of my current income. I am estimating (rough numbers so I can get a better understanding and goal) about 1200.00 a month for rent on each property with the 50% going back in for management and other expenses. If I plan on having everything paid off by the deadline it would only take 8-9 houses. Round up to 10 houses to be on the safer side and the math would be just fine. Granted the timeline for the pay offs are an assumption but finding the balance between number of houses and average returns on each house is part of my plan. Currently I don't plan on stopping at 10 but would plan on selling over the 10 to help pay off the mortgages to find that balance at end of the 8 years. 

The more I have looked around the 40k seems unreasonable right now and in the area that I know. Looking back it was probably more hopeful than practical. I will look at the 200k price range to give myself more options. 


Again thank you for talking with me and giving me advice. 

 First, go to that room that has all the porcelain furniture, and flush the 50% rule...and focus on what you.

Second, focus on what your financial needs dictate in a property profile, then...

Third, go find a market (micro market actually) that has/will supply properties with that profile.

You can go out of state but it’s definitely not for the faint of heart. If you set up systems you can buy properties long distance without much issue.

Also a low purchase price doesn’t necessarily mean it’s a war zone, and it doesn’t necessarily mean it’s a great deal either. Look at the area it’s in, and what it rents for. Even if the house cost 30k but rents for 900, it’s probably not a war zone (unless it’s section 8). A good way to find out for sure is to take local property managers what they think.

My PM often collects rent in person so if they won’t do it in a certain area it’s probably a bad area. I’ll ask anyone about an area from my inspector to insurance agent. If they all say the same thing it’s probably okay area.

@Joe Villeneuve so you say the 50% rule is not viable any more? Do you think there is a better rule to follow? Do you figure just to find the operating costs and emergency fund and just make sure it it cash flows? On your post you ended your first point "and focus on what you." Did you mean just to focus on my goal?

@Caleb Heimsoth do you think it is a bad idea to invest out of state for a first timer? I know having the systems set up from the beginning is mandatory for me right from the get go if I want to stay as hands off as I can.
I like the advice about talking to the local property managers. I might start to focus on that in the areas I am interested in. Same with the others you mentioned as well. 

@Joshua Johnson I invested out of state for my first time (went with turnkey) and my second was also out of state in a different r state (Memphis and then Cleveland).  I visited both markets before buying.  If you read through my old posts I talk a fair amount about this topic.

The main pros are this:  build systems to make it totally passive and allow for scale down the road.  My dollar goes further than in my local market.  And this last one for me at least, I have been moving a lot (3 different states this year alone, so what’s “local” to me now may not be in a couple years). By simply starting out long distance I can live anywhere in the country 

Cons:  can’t see the property that often.  I have inspections done probably twice a year so this isn’t a big deal for me.  Costs are higher since you’re paying someone to do it all for you.  Etc.  

@Joshua Johnson dude just buy a property. My first few properties were palm to forehead projects.

If you want to chat on the phone let me know. That’s how I got started. I talked to a few investors on the phone and got a lot of confidence to move forward.

Q:  so you say the 50% rule is not viable any more? 

A:  It never was

Q:  Do you think there is a better rule to follow? 

A:  The rules of math and analysis

Q:  Do you figure just to find the operating costs and emergency fund and just make sure it it cash flows? 

A:  yes

Q:  On your post you ended your first point "and focus on what you." Did you mean just to focus on my goal?

A:  Yes

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