I am a future investor getting ready

I am a future investor getting ready

Member since 2011 · 11 posts · 1 vote

Hello!

I have come across this site this morning. I am 47 years old, and I will pay off my house in March. Once I no longer have a mortgage in my primary residence, I am thinking investing in real estate could be a good investment for my retirement in 20 years. I would like to own several rental properties in 20 years if possible.

I won't that have much left after I send the last payment to my house in March; however, I will have my current mortgage payment to save each month. I should be able to save at least 20% down payment for a rental property in less than a year.

I tried real estate investing once a few years ago. I failed. It was my fault. Here's what I did:

I didn't have enough down payment. The monthly rent was only enough to cover the mortgage with nothing left to handle repairs, vacancies, etc. I had no savings.

I accepted the first tenant who showed up. Ouch. I didn't check their background, credit, nothing. I didn't even know if the man was employed.

One month, when the rental check didn't come in, I tried to call the tenants. Their phone had been disconnected, so I drove to the house and knocked at the door. No answer, it looked like the house was empty!? So I asked one of their neighbors who told me my tenants had actually picked up their stuff and moved away days earlier.

I had no contract with them. I had no deposit, no last month, nothing. The mortgage was due in just a few days, and I had no money.

That was my only experience with real estate. It was a stupid mistake. I paid 100% of the asking price, and they were asking market value. It was a bad investment in every way.

Today, several years later, and knowing well what mistakes I made, I am willing to reconsider real estate as an investment vehicle. I will try to join some real estate investment club in my area, and I plan on getting a real estate license too.

My first question is this: What kind of POSITIVE CASHFLOW would be acceptable? Is there a rule of thumb? Any advice would be truly appreciated.

Thanks!

CharlieBoy.
:D

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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y

Unfortunately, every time any has provided any significant dataset, the 50% rule has been supported. Lots of people, especially new investors, believe the expenses just can be that bad.

Now, if you do your own property management and maintenance, your actual cash expenses will be lower. You are, in a sense, earning the PM and maintenance cut. Some will argue that's a waste of time, since those aren't exactly highly paid occupations. OTOH, when you consider what you have to pay for those services vs. the time it takes to do that work yourself, it often works out to a pretty nice hourly rate. And, if your goal is to use your rentals as your only source of income, doing these tasks can greatly reduce the number you need.

See this reply in the discussion

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  • FL · Member since 2009 · 2k+ posts · 357 votes
    15y

    Charlie,
    Welcome to the forum.

    I suggest that you spend some time reading here:

    http://www.biggerpockets.com/forums/52-rental-property-questions-landlording-issues

    This link could be helpful concerning rental properties:
    http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

    Raymond

  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Many of your questions will be answered in the links provided above by to answer this specific question . . .
    Many use the 50% rule which assumes that 50% of your gross rental income will go to expenses (operating, vacancy, and capital), the balance 50% left over each month is what you have left for debt service and cash flow.
    The other rule many buy and holders use is the $100 per door or more of monthly cash flow. This is to say that after the 50% rule is used and after your debt service is paid, if you do not have at least $100 a month left over (per door), it is not an investment worth buying.

    Cash Flow = Gross rent - expenses (both actual and projected) - debt service.

  • Real Estate Investor · Hudson, NH · Member since 2011 · 76 posts · 25 votes
    15y

    Hey Charlie,

    Welcome to BP!

    It looks like you are in good shape to jump back in. Since you will own your property outright, have you considered a HELOC instead of saving up your mortgage payment month to month? It might allow you to take down a couple properties to start off with?

    Regarding positive cashflow, Will is right on with his post.

    Best of Luck!

  • Member since 2011 · 11 posts · 1 vote
    15y

    I do not want a HELOC. It is my dream to live mortgage free. I will have a mortgage on an investment property, but not on my family's roof. :) Thanks!

    Charlie.

  • Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes
    15y

    I second the HELOC plan, Or a cash out Refi. Then spread the money out amongst as many cash flow properties as you can. There is a blog post on here somewhere about how having your house paid off actually increases your chance of getting sued.

  • Member since 2011 · 11 posts · 1 vote
    15y

    I would make sure NOT to let the tenants know that their landlord's primary residence carries no mortgage. I'll make him believe that I am 100% leveraged, and that I owe more on my property than it's worth. Maybe he will feel sorry for me and donate something.

  • Member since 2011 · 11 posts · 1 vote
    15y

    Wow, the 50% rule is ruthless. I can tell you that it would require me to give at least 30% down to increase equity and borrow a lot less. Wow!

  • Investor · Portland, OR · Member since 2011 · 132 posts · 41 votes
    15y
    Originally posted by Charlie Boy:
    I would make sure NOT to let the tenants know that their landlord's primary residence carries no mortgage. I'll make him believe that I am 100% leveraged, and that I owe more on my property than it's worth. Maybe he will feel sorry for me and donate something.

    LOL! They can look it up on the tax assessor's site for your area, if they're really nosy. But hopefully you won't be driving up to collect the rent check in a Mercedes.

  • FL · Member since 2009 · 2k+ posts · 357 votes
    15y

    A friend of mine, owns hundreds of rentals.

    Not a single renter knows that he is the owner.

    He is the "handy man."

    He drives a pickup, always dressed as he is ready to fix whatever needs to be fixed.

    Raymond

  • Member since 2011 · 11 posts · 1 vote
    15y

    I like that, the landlord acts like the handy man. I will keep that on mind and work towards that with my property management company when I become a landlord.

  • Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    Unfortunately, every time any has provided any significant dataset, the 50% rule has been supported. Lots of people, especially new investors, believe the expenses just can be that bad.

    Now, if you do your own property management and maintenance, your actual cash expenses will be lower. You are, in a sense, earning the PM and maintenance cut. Some will argue that's a waste of time, since those aren't exactly highly paid occupations. OTOH, when you consider what you have to pay for those services vs. the time it takes to do that work yourself, it often works out to a pretty nice hourly rate. And, if your goal is to use your rentals as your only source of income, doing these tasks can greatly reduce the number you need.

  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by Charlie Boy:
    I do not want a HELOC. It is my dream to live mortgage free. I will have a mortgage on an investment property, but not on my family's roof. :) Thanks!
    Charlie.
    Charlie, I understand your motive here and there is really no right or wrong answer, it is about goals and comfortability of each investor/homeowner.

    That said, let me leave you with these thoughts on what you have stated:
    Owning your personal residence free and clear is in essence storing lots of cash in the walls of yoru house and no different than having say $200,000 buried in the backyard. This cash sitting in the walls earns 0% interest and it does open the doors for sue happy individuals to seek out those with lots of equity, that is 100% true.

    I am of the thinking that taking out a loan on your persoanl residence at say 4% and investing that money in a cash flowing investment returning at least 10% or better gives you a net result of the difference between the 10% and the 4% cost. That is extra money you are earning every month!

  • Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes
    15y

    What is the average rent in your area Charlie & the average price of a 3/2? As far as needing 30% down... is that if you buy off the MLS? because the general opinion is that the best deals are not on the MLS. What if you found a property at a 30% discount?

  • Member since 2011 · 11 posts · 1 vote
    15y

    I was just now looking at the local classified online. With the 50% rule, I was unable to find anything even close to being worth looking at IF I were in the market for a property right now. How will I ever find one that has enough cashflow after I subtract 50% for expenses and service the mortgage is what remains unknown to me.

  • Member since 2011 · 11 posts · 1 vote
    15y

    If the best deals are not in MLS, where are they, FSBO?

  • Realtor · Houston, TX · Member since 2011 · 916 posts · 296 votes
    15y
    Originally posted by Charlie Boy:
    If the best deals are not in MLS, where are they, FSBO?

    Motivated sellers (one's that really need to sell). I haven't found any yet.

  • Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes
    15y

    Direct marketing to owners, whole sales, short sales & foreclosures, auctions... There is a epic amount of information on this site. But some areas (southern california) do not lend themselves well to buy & hold investing. If you would let us know were your located you would get a better opinion. Maybe even some people in your area.

  • Real Estate Investor · Birmingham, AL · Member since 2011 · 8 posts · 0 votes
    15y

    Trying to make the 50% rule work if you're buying at retail prices will limit your chances of finding a deal that works. Read up here on the BP forums about short sales, wholesalers, and foreclosures. Like Rusty said above me - the sheer amount of information available on this site is staggering.

  • Member since 2011 · 11 posts · 1 vote
    15y

    I am located in Utah Valley. The local newspaper with a free and large classified is at www.ksl.com. The zip codes here are 84663, etc. I realize that paying retail is mistake #1 which I will not make.
    A realtor told me yesterday that the 50% rule is unrealistic. She said that a 40/60 rule is more realistic. It works this way according to here: Save 40% to cover expenses and vacancies, and the other 60% will be sent entirely to the mortgage company. You keep 0%.

    What?

  • Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes
    15y

    Most Realtors are completely ignorant to the realities of Real Estate investing. Next time you talk the her, ask her how many properties she owns. I've talked to several that have given me (and many others) some of the worse advice I have ever heard... I know my realtor knows nothing about real estate, she is just someone who can let me into the house.

    That aside I don't think you will have a problem. I looked at the Provo Craigslist for "for rent" & then looked up houses under 100,000. I found 10 that would be good prospects for myself. All you would have to do it negotiate them down to a good price point for you. That is just stuff off the local MLS. You may be able to do much better with direct mail, and out of area owners. It is possible. Just read here and learn, then go out into the world with that knowledge as you sword and shield.

  • Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes
    15y

    Just remember... never trust someone to find you a good deal, when their pay check depends on you spending the most money possible...

  • Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    There are LOTS of places where it makes no sense to own rental property for the cash flow. Do keep in mind there may be other strategies that involve rental property. Specifically, speculation, where you're hoping for big appreciation so you can sell for a nice profit. Or, just being break even while you pay the house off so you can have income later.

    But if you're looking for immediate cash flow, there are plenty of locations where it just does not work. You either have to work really hard to find a good deal, or you have to look further afield.

    The 50% rule assumes you're hiring everything out. If you're doing the PM and some maintenance yourself, you can earn back a nice chunk of that 50%.

    Rusty is on the right track, IMHO. Look at rents around your area. Craigslist and rentometer are good tools, though rentometer tends to be high. If its like here, rents don't really vary all that much from area to area. Then look at prices. Just looking on the MLS will give you an idea of the prices in various area. You may find they're out of whack everywhere. Or, you may find some areas where the prices and rent do work for owning rentals. Dig deeper into those areas.

  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Then you should run far away from this agent as she does not have a clue. First off, if your mortgage was ever 60% of the gross rents, you either have a way too high interest rate or you way overpaid for the property. Also note that placing more money down may increase your cash flow, but you have to account for that money placed down too (opportunity cost) and you can easily compare apples to apples by using a cash on cash return to see if the down payment provides you a good enough return.

    If you pay retail for a property, I can almost guarantee you that you will not cash flow anywhere in the US.

  • Member since 2011 · 11 posts · 1 vote
    15y

    Noted. I will run from any agent who tells me the 50% rule is wrong. And retail price = bad news.

  • Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y
    Originally posted by Charlie Boy:
    Noted. I will run from any agent who tells me the 50% rule is wrong. And retail price = bad news.

    Good luck with that. Most agents will insist expenses aren't that high. As long as you don't rely on them for your financial projections, and they don't get frustrated with you for passing over all the "deals" they offer, you can still work with them.

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