23 year old RE investor, questions regarding first purchase

10 Replies

First time posting here.

TLDR: I am a new RE investor and have questions regarding long term wealth generation through RE.

My Background:

I am 23-year-old recent college graduate looking to purchase my first home/investment property in the greater Denver area. I work at a large engineering firm making around $64,000/year; I’ve saved up for a couple of years now and have around 40k in savings. I am single with no debt and am looking for a 4bdrm property at around the 300k price point ($330,000 max). My credit score is around 750, and I got pre-approved for 330K at 4.5% back in May. I can comfortably save 20k a year (with a 4k fun budget), and I plan to invest all of that into RE or the market.

My Plan:

Use a 5% down conventional loan to purchase the property and rent out the other 3 rooms while I live in the 4th. I will live in it for as long as I need to until I can re-qualify for a second mortgage and move into that. Again, renting out the other 3 rooms while converting the first home into a full time rental. My aim is for the other 3 tenants to being paying most of the mortgage down, I do not expect to cash flow, but I’ll hopefully be living close to rent free. I believe I will need to live in the first property for at least a year under the 5% down owner-occupied loan rules, but I am not sure (someone chime in if they know). I will repeat this process until I’ve grown a sizable real estate portfolio (4-5 homes), then I hope to move into investing in larger/higher unit properties.
My questions/concerns: 1. First, being a complete beginner, I’m sure I’m overlooking and missing things, do any of you see any problems or hang-ups with my plan? What would you do differently if you were in my shoes? Constructive, brutally honest criticism encouraged.
2. I’ve been reading a lot about rolling up closing costs, as well as costs of new furniture into my mortgage. What are the pros and cons to this. I will most likely need to completely furnish this house, I expect that to be around 3-4k. Would I still be able to depreciate those items?
3. From reading about the new tax laws, it looks like RE as become less beneficial from a tax itemizing standpoint, at least for beginners like me. Are there any benefits I am overlooking? The only one I see is that I can now depreciate items with a less than 20-year lifespan by 100%. I plan to use this aggressively to purchase new things, but still at my price point its making it much harder to justify itemizing over taking the standard deduction.

Being very generous here are my tax write off #s. I plan to be very aggressive.

($6500 deprecations on ¾ of a 225,000) + ($2200 in property taxes. utilities and repairs) + ($1000 in depreciation of furniture/TV/Appliances) + ($2000 in mortgage interest) ($2500 state and local taxes.) That only equals $14,200, it’s hard to justify taking that over the standard deduction of $12,000 especially because I’ll have to pay back my deprecation eventually (I plan to do 1031 probably, but still ill have to pay it in the future).
4. Any tips for someone in my position? Small hacks that can help my returns?
I am big into budgeting/planning/numbers and am trying to track my expected expenses as accurately as possible I’m at a point in my life where I’m willing and excited to expend the extra energy to maximize my potential for long term wealth. This is the best plan I’ve come up with.
Let me know your thoughts! Thanks!

@Cameron Belknap

For a young guy, you've got a lot of good stuff lined up. If you're buying up in Ft. Collins, reach out to @James Orr and his Nomad investing style. He's has a meetup as well. His Nomad style is exactly what you're describing.

For some clients in Denver, I built a spreadsheet model for buying 4 properties and the impact it has on wealth creation. I'll send it over to you.

You have a very solid plan in buying homes and growing your portfolio that way.

2. Buy furniture from Craiglist and Facebook marketplace. You can get a lot that way for cheap.

3. You're getting a little too stuck in the weeds. Real estate has amazing tax benefits. You're worried about 0.5% of them. Don't. Just stick to your plan and buy property.

4. You're on the right track. Look for houses with basements where you can add a 3rd or 4th bedroom by digging out an egress window (2k-3k) or finish the basement. That can really help with your returns.

@Cameron Belknap It definitely seems like you have a solid plan, and good for you. Definitely not what most 23 year olds are thinking about! I think that if you can save at the rate that you are discussing you may be able to use that and a portion of your equity in your primary residence to purchase another investment property quicker. But otherwise I am impressed. 

Thanks @Chris Lopez and hello (again) @Cameron Belknap .

> First time posting here.

Welcome!

> TLDR: I am a new RE investor and have questions regarding long term wealth generation through RE.

Excellent.

> My Background:

> I am 23-year-old recent college graduate looking to purchase my first home/investment property in the greater Denver area.

That's awesome news.

> I work at a large engineering firm making around $64,000/year; I’ve saved up for a couple of years now and have around 40k in savings.

Excellent. That's great!

> I am single with no debt and am looking for a 4bdrm property at around the 300k price point ($330,000 max).

I'll let Chris comment on that in the Denver area since he knows the prices there much better than I do. If you were looking to buy in Fort Collins, Loveland, Windsor, Greeley... we could do that.

> My credit score is around 750, and I got pre-approved for 330K at 4.5% back in May.

Excellent. Rates can change, so check with your lender to see if that 4.5% is still right. 

> I can comfortably save 20k a year (with a 4k fun budget), and I plan to invest all of that into RE or the market.

That's awesome too.

> My Plan:

> Use a 5% down conventional loan to purchase the property and rent out the other 3 rooms while I live in the 4th.

Yes, I think you've come to the house hacking class where we've discussed this. If you need access to the recording of that class (or the 100+ other ones for that matter), let me know and I'm happy to email it to you.

> I will live in it for as long as I need to until I can re-qualify for a second mortgage and move into that.

Yes. This is classic Nomad. We have an class that is an interview with a young engineer that is doing what you're wanting to do and is a few houses ahead of you on August 8th in Fort Collins if you can make it (or watch the recording... if it records).

> Again, renting out the other 3 rooms while converting the first home into a full time rental.

Yes. Makes perfect sense to me.

> My aim is for the other 3 tenants to being paying most of the mortgage down, I do not expect to cash flow, but I’ll hopefully be living close to rent free.

Yes, if you have not heard the interview with Mary from a month or two ago... she is crushing it getting roommates and doing that very thing. I think she's going on house #4 (5 doors) now doing that model. Basically, her tenants are providing all the down payment she needs for the next property at this point.

> I believe I will need to live in the first property for at least a year under the 5% down owner-occupied loan rules, but I am not sure (someone chime in if they know).

Yes, when you get an owner-occupant loan the lender will require you to sign that you intend to occupy the property for a year.

> I will repeat this process until I’ve grown a sizable real estate portfolio (4-5 homes), then I hope to move into investing in larger/higher unit properties.

Yes, that works. Be sure to study the difference between single family homes, 2-4 units and then larger commercial... they have different pros and cons for each.

> My questions/concerns: 1. First, being a complete beginner, I’m sure I’m overlooking and missing things, do any of you see any problems or hang-ups with my plan?

I have quite a few clients doing it and pretty extensive processes/checklists for doing it.

> What would you do differently if you were in my shoes? Constructive, brutally honest criticism encouraged.

My son just graduated from college in May. I am recommended he do the same thing (except we'll help him a la Legacy Nomad).

> 2. I’ve been reading a lot about rolling up closing costs, as well as costs of new furniture into my mortgage.

If you were my son, I would not encourage you to finance new furniture into a mortgage. If you're trying to minimize your out of pocket then either getting seller concessions to cover closing costs or taking a slightly higher interest rate to get a lender credit to cover some closing costs is OK in my book, but if you have the money to pay those out of pocket you can do that as well.

> What are the pros and cons to this.

Pros of financing closing costs is that you'll have to come up with less money up front. That may allow you to buy your next property sooner, but if you're saving $20K per year, it may not significantly impact you in your specific situation. It will also allow you to keep slightly larger cash reserves (which I believe to be critically important). The downside is your payment will be slightly higher. For every $10,000 more you borrow, your payment will increase by approximately $50 per month (that's really rough math... you can do the actual calculation in Excel based on your interest rate). So, if you're financing an extra $5,000 in closing costs, that's $25 more per month in payment. That will negatively impact your DTI when you go to get your next loan, so discuss that with your lender. I'd consider that to be pretty minor (especially with your income and lack of other debts), but again discuss with someone who knows your finances... I don't know your finances.

> I will most likely need to completely furnish this house, I expect that to be around 3-4k.

Who says? I have clients that are doing this and furnishing it over time. Sure, year 2 will be easier when you have some furniture but it is NOT REQUIRED.

> Would I still be able to depreciate those items?

I am not a tax guy; not sure on that.

> 3. From reading about the new tax laws, it looks like RE as become less beneficial from a tax itemizing standpoint, at least for beginners like me. Are there any benefits I am overlooking?

I am not a tax guy, but I think you'll still be able to depreciate the percentage of the house you're renting with roommates while you're living there. Once you convert it to a rental (when you move into your second Nomad property), the first becomes a full investment and can be depreciated as a fully rented property.

> The only one I see is that I can now depreciate items with a less than 20-year lifespan by 100%. I plan to use this aggressively to purchase new things, but still at my price point its making it much harder to justify itemizing over taking the standard deduction.

Beyond my expertise.

> Being very generous here are my tax write off #s. I plan to be very aggressive.

OK.

> ($6500 deprecations on ¾ of a 225,000) + ($2200 in property taxes. utilities and repairs) + ($1000 in depreciation of furniture/TV/Appliances) + ($2000 in mortgage interest) ($2500 state and local taxes.) That only equals $14,200, it’s hard to justify taking that over the standard deduction of $12,000 especially because I’ll have to pay back my deprecation eventually (I plan to do 1031 probably, but still ill have to pay it in the future).

Check with your CPA, but for depreciating the house: even if you don't take it, it is assumed you did and you still have depreciation recapture when you sell. If you do a 1031, that just defers the recapture until later.

> 4. Any tips for someone in my position? Small hacks that can help my returns?

See the classes we've done on improving cash flow which goes over all the ways to minimize expenses and then all the ways to maximize income.

> I am big into budgeting/planning/numbers and am trying to track my expected expenses as accurately as possible I’m at a point in my life where I’m willing and excited to expend the extra energy to maximize my potential for long term wealth. This is the best plan I’ve come up with.

We did a whole 2 hour class on the bookkeeping and accounting for real estate investors too and provide you with a spreadsheet for that. Check that out too.

> Let me know your thoughts! Thanks!

Hope that helps. I've had quite a few clients go before you and we've got really good processes for this already documented in the classes and checklists.

I love it... now go do it!

@Chris Lopez just saw your event you will be hosting next week, unfortunately I won't be able to make that one. Do you hold events each month, or quarter? 

Also I would love to see what your spreadsheet model looks like that you have provided to your clients. I am looking to close on my first deal with in the next 6 months, and hopefully a 2 more in the next 3 years. Right now looking out of the Denver market because I think its pretty hard here to get good price to rent ratio unless you are getting off market deals. Are you doing buy and hold investments here? Do you feel like the market is going to correct a little?

Hey Cameron, great job on having a solid plan. Based on your salary and yearly 20k cushion you're in a great position for a BRRR strategy. I agree with James that you're probably better off avoiding wrapping the cost of your furniture into the loan.

@Tristan Colborg

The Investor Advantage Lunch & Learn is a monthly event. In addition to that event, we have various classes throughout the week (no set schedule.) I'll send you a link to our calendar of events. I'll also send over the spreadsheets.

I'm currently figuring out financing to pull cash out of a property to buy one or two properties in Denver. I've learned from my attempt at stock trading, that I can't time the market. My basic strategy is to buy properties in a good market, when I have cash and very healthy reserves. 

I don't have a crystal ball nor do I pretend to predict the market. Based on all the data that I've seen, I don't think the market is going to correct. It's basic supply and demand. There are more people looking to buy than inventory and sellers. Prices have risen because people are moving here and lack of inventory, not because of junk loans.

These two graphs below are worth a thousand words!

@Cameron Belknap I too studied engineering and bought my first rental at 23. I have similar credit and my only debt is mortgage debt (which my tenants have so far paid around 2k for me in the last year, how nice of them lol)

I think your strategy is good and you’re probably starting with more money then I did. I started out of state and continue to do that. Just figured I’d throw that out there since like you I lived in an expensive market (dfw) when I started. Now I live in another expensive market (Raleigh).

Originally posted by @Chris Lopez :

@Cameron Belknap

For a young guy, you've got a lot of good stuff lined up. If you're buying up in Ft. Collins, reach out to @James Orr and his Nomad investing style. He's has a meetup as well. His Nomad style is exactly what you're describing.

For some clients in Denver, I built a spreadsheet model for buying 4 properties and the impact it has on wealth creation. I'll send it over to you.

You have a very solid plan in buying homes and growing your portfolio that way.

2. Buy furniture from Craiglist and Facebook marketplace. You can get a lot that way for cheap.

3. You're getting a little too stuck in the weeds. Real estate has amazing tax benefits. You're worried about 0.5% of them. Don't. Just stick to your plan and buy property.

4. You're on the right track. Look for houses with basements where you can add a 3rd or 4th bedroom by digging out an egress window (2k-3k) or finish the basement. That can really help with your returns.

I actually went to Northern Colorado Real Estate Investor Group for a while back when I was studying at CSU!  James and Brian really helped me out there, and I learned a lot from them. The Nomad style of RE investing is what I am interested in, do you know of any similar groups you'd recommend in the Southern Denver area?

@Chris Lopez

I'd love to get a link to that Calendar as well and that spreadsheet.

Still getting my schedule sorted out, (I just started my job 4 weeks ago), but I plan on becoming a regular at a few RE meetup/groups in the Denver Area. Hopefully I see you there.

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