Please, help me with and advice on my first investment property!

12 Replies

Hi, folks!

After tons of hours of reading, watching and listening to everything real estate investment related I decided to finally get my first investment property. However, I still cannot decide what should be my first one, maybe someone has an opinion on it!

Gonna try to put my financial situation as short as possible!

  1. I'm 25 years of age, married and have 3 pets.
  2. Currently renting a really nice single-family house in a very good Chicago suburbs area from my relatives for $675/month + all utilities (basically we don't pay any rent, just taxes, and insurance)
  3. Have a good credit score of 750+, no debts and a good salary that allows me to save ~$2,000/month
  4. Have $3,000 in savings
  5. My mom has ~$45,000 in savings she's willing to put on a table and do a partnership with me

That's where I'm at financially. Now, the options I see so far is:

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Buy a rental single-family with a conventional loan and put 20% down, while I stay in the house I'm currently renting. My limits as of today are around $50,000 which means it's either $250,000 for a good-condition home or $150,000-$200,000 that need some work.

  • Pros: A lot of houses on the market; only 1 tenant (or a family); some cash flow; We can stay in a best possible rent situation in a very good neighborhood;
  • Cons: If vacant - all the mortgage and taxes on me; renting in A and B areas with high rent might bring much more demands for maintenance for every little thing

cash flow if occupied (with savings): $250 from rent - $675 from what I pay + $2000 I save every month = $1575

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Buy a 3.5% FHA-loaned multi-unit. Approximate price is $375,000

  • Pros: a lot of equity gained; if cash flow is positive after I move in - I can live for free and will have even higher cash flow when I move out; if one apartment vacant - it's not that bad
  • Cons: almost no houses on a market; from those that are active right now - either too expensive, in a bad neighborhood or in a very bad condition; almost no 3- or 4-plexes, but a lot of duplexes, but if another apartment is vacant - all payments are just on me; I don't care about myself, but I will need to move my wife from a nice place into a crappy apartment, pardon my French; most of them need work and probably won't pass FHA standards

cash flow if occupied (with savings): $150 from renting + $2000 I save every month = $2150

cash flow if vacant (with savings): -$2500 mortgage and taxes + $2000 I save every month = -$500

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 Buy a 20% down conventional loaned multi-unit. The maximum price is $250,000. Must require no work simply because I will have no money left.

  • Pros: I don't need to move out; some equity might be gained;
  • Cons: Almost impossible to find a cash-flowing duplex for this price. A lot of available are in neighborhoods with 35% vacancy rates, but in good areas - there are none.

cash flow if occupied (with savings): $500 from renting + $2000 I save every month = $2500

cash flow if vacant (with savings): -$1,600 mortgage and taxes + $2000 I save every month = $400

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I don't really want to deal with anything that needs work because I don't have a team yet and most likely it will be a mess if I jump straight into it

Aslo, I don't want to deal with condos or townhomes because of the HOA, association fees and all the rules that my tenant might be breaking and I will be responsible for it

Do you guys have any good suggestions? Will be happy to hear your thoughts on it!

Thank you!

@Ian Dikhtiar Hello!!

IMO i would focus on buying a personal residence first. this will get you a property and teach you the process from market/property selection to property management. With the numbers you mentioned I would focus on units $80K-$100K, with 5%-10% down. 

Also, condos/town-homes are fine. Don't corner yourself or looking for cheaper areas. Money is not free. You have to sacrifice somewhere for gains tomorrow, usually in the form of location or property type. 

Lastly, I would not recommend taking any money from your mother. All investments involve risk and you are risking 14X the amount of money you personal have in reserves. If you can save $2000/month then you should be able to take down a $100K property in 1-2months (with 3.5%-5% down). use that $45K for the 2nd or 3rd deal.


Ibn, thanks for the replying!

You are saying to look at a personal residence in around $80-100k range, but that automatically means it won't be anything near 2-units or more, so it would be a regular mortgage. That means I will be using my money, I could save and use later, for paying off this mortgage. Isn't this a definition of a liability?

>Also, condos/town-homes are fine.

Yeah, I guess you are right here.

>Lastly, I would not recommend taking any money from your mother

It's not necessarily taking it from her. She wants to step in as a partner and she understands the risks, so she could put down-payment money, I would put my time and effort into everything and then we split the profit.

What do you think about BRRRR? Maybe it would make more sense to find a mentor and use that 50 grand and get whatever needed to cover the difference and just BRRRR it? By doing that I won't be risking my own money too much. And also this strategy looks so good so it actually worth spending time on it.

@Ian Dikhtiar it sounds like you have a lot of options - makes it hard to choose THE BEST one when you don't really know what that is. But, good work in creating options for yourself! And in educating yourself - that is a great first step. As with anything in life, answers will vary and in the end, the only one you should go forward with is the one you really understand and feel comfortable with (follow in Buffett's foot prints on that).

I slightly disagree with Ibn because it sounds like you have an amazing living situation right now. Buying your own residence doesn't really help you out right now if you can afford to live for a fraction of the cost if you are renting from a family member (as long as that is a long-term deal and not going to be terminated any time soon). Whether you live in a duplex you own or rent from a family member, you still have living expenses - the question is, what situation minimizes them? If you could be renting out your half of the duplex for 800 a month, it makes more sense to rent at $675. It seems like you are already thinking about your total income and cashflow, which is a good thing. Maximize income, minimize expenses. I do agree with Ibn that you might want to save for a little while so you have more of your own money in a deal. 

As for partnering with you mom, I'd very honestly answer some hard questions - is she ok with the risks? Do you have an emotionally mature, adult relationship with her that could survive a $45k loss? No matter what, have everything in writing for every possible outcome, good or bad. 

One thing that worries about some of the options you presented above - you seem to be looking at deals assuming that if you have the $50k needed for a 20% down deal, that means you have enough money. Don't forget to include all closing costs, possible holding costs, and any other sale related expenses that you might need to cover BEFORE you can get it rented. Also, it is VERY unwise to jump into a deal with no money in reserves. Somethings just break the first month. Be ready for a new furnace, water leaks and repairs, rats in the crawl space etc on the very first week. It could very likely happen. 

Also, you will want to start connecting with handy-men/ contractors asap who will be able to do repairs even if you don't intend to rehab the property (unless you have a very flexible schedule, know what you are doing, and live in a state where you are actually allowed to do the repairs yourself). Most states don't allow landlords to do plumbing, electrical, HVAC or other such jobs themselves unless they are owner-occupants (and some not even then). 

Personally, I like the idea of staying where  you are at, saving for a year or so, then trying to buy a 3-4 plex as an owner occupant where you can fix up units and increase rents as you have turnover. Good luck!

I have to say FHA multi-unit is the way to go!

Justin,

Thank you for an extended reply!

Yes, definitely it makes sense what you're saying. My mom understands all the risks and she proposed it herself. I just sat down with her today and explained how lease options work and how BRRRR works. In the end of the day, as R. Kiyosaki says - "The biggest risk a person can take is to do nothing". Looks like we are on a same page with her on that.

>Don't forget to include all closing costs, possible holding costs, and any other sale related expenses that you might need to cover BEFORE you can get it rented.

Yes, you are 100% correct on this and it makes the idea of 20% down even less ideal - I would need some money to cover the costs and unexpected expenses, which leads to either more sitting and waiting until I save more money or dropping down the target price even less. And in a current Chicago market - I don't see a lot of even relatively good houses for less than 200k. Everything below 200k are either in the areas won't produce a lot of cash flow or just require a lot of work. 

And that's why I am leaning more and more towards BRRRR it all the way through without putting almost anything down. Because I don't want to wait another year when I fell like I'm already several years late to the game, lol. It might become just the matter of finding a mentor who can help me through my first couple of deals.

How do you feel about BRRRR?

Also, very good point on contractors and handy-men. My hands are growing from the wrong place anyway, so I will absolutely need to find a professionals on this.

Anyway, thank you!

(P.S. How do you tag people in it with "@"? I'm kinda new to the website, couldn't make it work yet)

Benjamin, 

Thanks for replying. Yeah, FHA multi-unit is not the worst idea. It is just hard to find a cash-flowing building in an Chicago area where I don't get shot, raped and then stolen in same time. There are absolutely dangerous areas in this beautiful city. But all other neighborhoods either too far (and I'm working in downtown) or with a really negative cash flow.

Great point Ian- we def don’t want that.

Maybe might want to find a market that is suitable for your budget etc.

@Ian Dikhtiar I really like the BRRR strategy, and am looking for one right now. I know that you really need to have your numbers spot on for After-repair-rents, and also your after-repair-financing costs, which are a little hard to predict as interest rates are rising and it will all hing on your ARV (after-repair-value) which may change a bit depending on how long you hold it.

It sounds like you are in the same boat as most of us who live in nicer areas - the cashflow is simply not there on MOST properties unless it is hidden. In other words, you really have to take and internalize Robert Kiyosaki's advice that investors have to see value that no one else can. In other words, how do you make an asset cashflow in a non-traditional way. Here's what I mean. 

Buy an old house, rehab, rent at market rents - EVERYONE is trying to do this right now.

Buy an old duplex, rehab, rent at market rents - EVERYONE is trying to do this right now. 

Buy an old 3,4,5,6,7,8,9,.... unit, rehab, rent at market rents - EVERYONE is trying to do this right now.

Buy a trashed, BIG single family home on the edge of commercial that is zoned multi-family and turn it into a duplex or triplex - Not many folks are doing this. For good reason, it's usually hard, but that might make it worth it. This will have less competition from normal home owners and flippers because it just won't command top dollar if it's next to an apartment complex already.

Buy a single family home with an ADU (accessory dwelling unit) and rent it out for short-term rentals on AirBnB (or similar). See @Ben Leybovich 's posts on his Luxury House Hack. 

@Ian Dikhtiar Best option for you is to 'house hack'. Buy a SFH with 3+ bedrooms using a conventional loan with 5% down. 15yr mortgage. Live in the house and rent the other rooms. Do this for 3 years. In 3 years buy a house for yourself (15yr, 5% down) and rent/sell the original.

A mortgage is the best loan you can get so don't put down 20%, just put down the minimum and get a reasonably priced home ($150k-$250k).

Forgot to say, GOOD LUCK! Sounds like you're on the right track!

@Ian Dikhtiar type the “@“ symbol and the he first letter of the person’s name. If they are in the thread they should appear. Click on the name and you have it.

Good job on studying up on real estate investing and wanting to invest at such a young age. It seems like you have a very good living situation at the moment. You may want to let that situation ride for a bit and save up that $2K per month for some more time for reserves and renovations on your first investment. Keep your eyes open and see if you can possibly find a 2 or 3 unit property in the next 12 months or that you can do a little upgrading to Ao that you can raise rents and live in one of the units. Maybe your mom can partner with you and help out with the owner occupied down payment portion part. You can have your saved up funds for your renovations/upgrades and unforeseen costs that you will most likely run into.

Find yourself a good realtor and. Good mortgage broker that can give you good advice and guide you through your first purchase.

Good luck and let us know what you do.

@Justin Koehn Thank you so much, you are making a very good point here! I was thinking about some creative stuff and possibly will do just that. By the way, great tip about ADU, I came across a couple of buildings with it, now will look closely for it.

@Ali Hashemi I wouldn't be able to do that, I'm married and we have 3 pets. It's easy when you are single and you don't really care, tho and I think I would have done just that. Thank you, anyway! Also, why would I pick a 5% conventional if I can put 3.5% FHA? Is there any benefit for 5% one? And why would I pick 15yr mortgage instead of 30yrs? It's not very easy to have a 96.5% mortgage with mortgage insurance and still have it cash-flowing with 30 years, 15 years most likely will be highly negative cash-flowing, which is a big no-no based on what I learned so far.

@Charlie Price yeah, I have it working. For some reason, it was a browser issue and names never highlighted in a first place)

I actually decided to start with it. Found a very nice area (that I overlooked earlier, mistaking it for a bad neighborhood) with very affordable triplexes all over the place and already scheduled some showings this Saturday. I think it is actually the easiest way to start. The key is to have (or to force) at least 20K of equity in it that I can leverage later the same (or next) year because my main goal is not the first property, but the second one.

Thank you so much!

Originally posted by @Ian Dikhtiar :

@Ali Hashemi I wouldn't be able to do that, I'm married and we have 3 pets. It's easy when you are single and you don't really care, tho and I think I would have done just that. Thank you, anyway! Also, why would I pick a 5% conventional if I can put 3.5% FHA? Is there any benefit for 5% one? And why would I pick 15yr mortgage instead of 30yrs? It's not very easy to have a 96.5% mortgage with mortgage insurance and still have it cash-flowing with 30 years, 15 years most likely will be highly negative cash-flowing, which is a big no-no based on what I learned so far.

Thank you so much!

Here are my thoughts...

At 5% 15 yr you don't have to have PMI

Also, if you do a 3.5% FHA 30 yr each payment many years will be almost entirely interest. At the end of the day you have to remember why you're investing....to build equity (which is another way of saying...make money). If your plan is to buy & hold for 3-7 years then sell and upgrade, you want to have equity.

You can negotiate a better rate at 5% down and 15 yr than you can at 3.5% and 30yr.

Lastly, 5% 15yr typically results in a mortgage that can be covered by a tenant's rent.

To me, the benefit of going to 5% down and shorter loan term outweighs the 1.5% difference in mortgage rate.

It comes down to what you're comfortable with, but cash flow isn't the only way to make money. You definitely want positive cash flow but you absolutely want equity as well. And equity (in my opinion) is much better because you can refi out, you can borrow against, you can sell and cash out....etc.

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