Entry Strategy For First Time VA, SFH, BRRRR Investing - Advice?

Question

Hi BiggerPockets community,

My name is Nic LeTexier. I was in the Navy for 6 years and am a native to the greater Seattle area. I currently have a telework job in tech (with a good salary and credit score) and am actively researching real estate investing.

I am new to real estate and have never been a home owner. After reading a number of BiggerPockets blog posts and tearing through the BiggerPockets podcast (seriously great material!!), I’m ready to take the next step in this endeavor and get active in the community!

My Goal:

Financial freedom through cash flow. My freedom number is $8000/month in passive income. Ideally would like to hit this number in 10 years, 2028.

My Strategy:

While working a day job...

Using the BRRRR method for SFH (3 bedroom 2+ baths near elementary/middle schools in a good school district). My market is the greater Seattle, area focusing on the Eastside (Bothell, Redmond, Kirkland, Snohomish). I plan on using a VA loan for my first live-in investment home, staying a year and then getting another SFH to repeat. I also qualify for exemption from the VA funding fees (other strategy options here?). I am not a handyman but can use tools, so I’m looking for an initial property that will only need minor fixes/upgrades for this first crack at home ownership. Hopefully for the follow up homes I'll have a bit ability for the rehab part of BRRRR!

My thoughts are to keep the least amount of houses to hit my freedom number ($8k/month), and avoid the hassles of managing many properties at once. So, I am thinking about using the snowball method to pay off loans. Looking at current SFHs in this region, the going rent is about $2400-$3000/month.

Any thoughts on my strategy? For those in my market, is it feasible? Room for improvement? Other strategies for someone in my position?

Thank you all for your insights and advice!

Nic

Jared Boundy · Answer

@Nic LeTexier, I think you are on the right track.  You're right that the margins can be pretty tight.  I'd suggest looking for value-add opportunities such as a multifamily (duplex or house with duplex zoning), unfinished square footage that can be finished off.  It may mean that you need to bring in some help (but could be done over time), but your margin will be important.  Don't forget to factor in expenses like property management and maintenance.  After calculating everything, you'll want to have a minimum cashflow (not zero or negative).

Account Closed · Answer

Buy Fourplexes and maximize the number of units you can with you’re VA benefits. It will be tough to get to $8k/mo with SFR but with Multics it is totally doable. We just hit that number after 5 years in the multifamily sector. We are trying to get to $20k/mo

Dave Skow · Answer

12/14/2018

Nic – thanks for the post…using theVAeligibility is a great way to get the 1st property as you can go zero down /have noFFand now mortgage insurance ….make sure that you have a full loan pre approval in placefor when you make your first offer ( we can assist with this if you aren’t already pre approved) ……if you plan to buy another property in approx. a year ..a few things to note :1) you won’t be able to use the VA loan again( unlessthe 1st va loan is paid off / refinanced) 2)if you decide to keep the orig VA loan in place , then your options for home #2aeconventionalloan program( 3% down required ) or FHA( 3.5% down required )…both options alsohave monthly mortgage insurance in the picture ….3)so this meansget fundssaved for house # 2down payment needs 4) Seattle / Eastsidepricesare high so if you aren’t alreadyfamiliar withpossibleprices and corresponding loan payments- becomeaware of these figures are the rent you mentionwill likely be hard tomake a decent positive cash flow 5) worth noting- conforming loan limitshave recently risen to $726,525…thanks ..>Dave Skow ..lender…eagle home mortgage seattle

Jaysen Medhurst · Answer

@Nic LeTexier, you want to have: Rent -minus- Expenses - minus- Debt Service = Minimum Cash Flow.

I like deals that pencil out to at least $150/month/unit in cashflow. As an investor you can't forget about appreciation, depreciation, and mortgage pay down, but start with cashflow and figure out what you need to get.

Here's a good Bigger Pockets article to give your more details. I also highly recommend What Every Real Estate Investor Needs to Know About Cashflow by Frank Gallinelli.

Jared Boundy · Answer

I just mentioned duplex as a value-add opportunity.  All the better if you can get more units in one property.  Happy to chat privately if helpful too.  I'd be happy to share how some of my rentals are working out.

Nic LeTexier · Answer

@Jaysen Medhurst, you make a lot of sense with the numbers. For rentals is it a good practice (or essentially mandatory) to have a mortgage that is, at a  minimum, equal to rent minus expenses? Ex. rent = $2400/mo, expenses = $1200/mo, therefore mortgage should also equal $1200/mo (or less)?

@Jon Ostojic, I see the problem with the greater Seattle area. Relying on appreciation alone doesn't seem like the best strategy to go for... I'll have to check out the long distance real estate investing book! Time to rethink my strategy for Seattle. With housing costs in the area sky high (and rent almost equal to mortgage), I'm not seeing many areas where a buy and hold strategy could work.

@Jared Boundy, I'll start looking at running the numbers on some of the duplexes in the area. After all, I will need to be living somewhere, so might as well house hack to help the figures align!

Thank you all for the great advice!

Jon Ostojic · Answer

Seattle local here. Nic, there is a lot of money to be made in real estate in Seattle and the surrounding areas. But the numbers don’t pencil out to do it with cash flow. The strategy you’re describing is a good one one, but it only really works in the markets where it’s cheaper (month to month) to own rather than rent. And that just isn’t true in HCOL areas like Seattle.

If you can figure out a way to own a few properties around here and hold them for 15 years or longer, you’d be likely to make a LOT of money, but in appreciation, not cash flow.

Please don’t fool yourself into thinking a mortgage of $200 less than what you could get for rent is positive cash flow. It isn’t. Homes can be expense to own and rent out. Think about the fact that having to float for just 2 weeks—which you will with frequent tenant turnovers—will take All of your leftover cash flow for the year.

Get yourself a copy of David Greene’s book on long distance real estate investing. Chose the market that makes sense for your strategy. Or chose the strategy that makes sense for your market. But make sure your strategy and your market are compatible.

If you want to talk shop and discuss ideas/strategies, feel free to send me a message.

Jaysen Medhurst · Answer

@Nic LeTexier, @ $375k house renting for $2400/ month isn't going to work. Rule of thumb for expenses on a rental is 50% of Gross Scheduled Rent (GSR). That means you should expect $1200 in expenses for a place that rents for $2400, leaving you -$1000/month in the hole.

@Jared Boundy is right about trying to find a value-add opportunity. I'm not a fan of duplexes myself, I find that the numbers rarely work as pure investment properties, because there just aren't enough units to spread the expenses across.

Nic LeTexier · Answer

@Jaysen Medhurst, Thank you for the advice. Your numbers are the exact reason I wasn't looking in Seattle proper, no way to get a return. I was looking in the suburbs and even looking at town homes in the greater Bothell, WA area.

A town house in my region is about $375k for a home with only minor upgrades needed. Using a no money down VA loan the mortgage = ~$2200/mo (including tax and ins). Median rent on similar units $2400. Tight margins but maybe there is a way to get a better deal on other units.

I also really like the idea of getting a multi-family, again using the VA home loan for this. I will have to do more research on best ways to analyze these deals and get with a realtor to help show me the possibilities for these in my market.

For my circumstance, using a VA loan, I will have to live in the house for a year before moving out. Do you have any tips for investing in a high cost market like mine?

Thanks again!

Nic

Jaysen Medhurst · Answer

@Nic LeTexier, I think a better strategy for getting to your goal is multi-family. You're able to realize efficiencies of scale, reduce your risk, and scale faster.

I'm personally not a fan of paying off your properties completely, because your Return on Equity (ROE) is usually pretty bad. There are plenty of varying opinions on this.

Next, Seattle may not be the best market to reach your goals due the very high costs there. The problem is that in expensive markets there is a divergence between home price and rents. Basically, buyers push the price of homes so high that they no longer financial sense as rentals--i.e. renters can afford them.

In Seattle, median SFH price is $699k and median rent is $2600. Even with 20% down, the mortgage on a $700k house is nearly $2900/month. See the problem?

Entry Strategy For First Time VA, SFH, BRRRR Investing - Advice?

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