$20k saved & 810 Credit Score but I live in LA-what would you do?

19 Replies

Hi everyone! I'm brand new to both the site and the concept of Real Estate Investing, so apologies if this is awkward in any way, but I wanted a little starting out advice for my specific situation, and everyone seems really nice and helpful on the forums, so I thought I'd give it a shot!

* My goals: I'd like to generate some supplemental passive income through investing in real estate rentals in cheaper markets, with the end goal being to assist me in saving to buy a home of my own here in Los Angeles (in the $750k range), and maybe eventually replace my current work.

* My job: I currently work from home running my own online fashion brand (it's an LLC). We grossed $275k last year, I kept around $50k -- I'm definitely not rich, but it's pretty chill and I like what I do.

* My living situation: I live in a 3 bedroom home (I rent) in a very trendy neighborhood in Los Angeles. One bedroom is my home office for the fashion brand, the other is mine, and the third I Air BNB, bringing in between $1000-$1500 of extra income per month, which goes straight into a savings account. 

* My budget: I have $10k currently set aside to use towards investing in real estate, and I have another $10k safety net available. I also have an 810 credit score, and my only current debt is around $13k of student loans. I save around $8,800/year from my current income, as well as the roughly $12k per year from my Air BNB room.

* My skills: I am pretty good at online marketing (my company's instagram has around 230,000 followers, my own has 65,000). I'm also pretty skilled at all areas of design (I have my BFA in fashion design, part of the draw of my current home for Air BNB is how it's decorated, and I worked as a graphic designer to pay part of my way through college). I'm also a bit of an overachiever (graduated from high school Valedictorian as a Junior) so I have a go-getter and highly social personality. I'm 2/3 of the way through getting my real estate license just for fun. I am a spreadsheet and math queen (youngest person in my school district to take Calculus in high school). I also grew up pretty poor in a town run by a major gang (shout out Fresno, California), so I have a strong functioning understanding of "rough" sides of town -- I know when a street is run by a gang, or when it's just a bunch of poor but wholesome families trying to get through their day, and how that can change from block to block.

*Here are my starting out questions: 

1) If you have great credit, is it better to finance your first rental purchase or pay with cash? 

2) Is the $10-$20k I currently have saved enough to get me started, or should I be looking to save more money before diving in, to purchase a higher-priced property?

3) Should my first buy be turn-key ready for renters, or should I be looking into fixer-uppers if I have a knack for design?

4) Are there higher maintenance costs associated with buying the midwest or south than, for example, Arizona due to the damage caused by snow and heavy rainfall/storms? 

5) Should I form an LLC just for real estate buys prior to purchasing my first rental?

6) I was originally thinking of purchasing an apartment to rent for my first buy, since I imagine there are lower maintenance fees associated with that than a whole building (even taking into account the HOA fees). Is it better to buy a single apartment, or something like a duplex that is a whole building on its own?

7) Any other advice anyone out there has? I don't know what I don't know at this point. 

@Madeline Hansen congrats on getting started and finding BP.. I will tell you this site has changed my life since I joined almost 3 years ago. If you’re active and provide helpful comments, it’ll open all sorts of opportunities.

Now that aside, my first point of criticism, is I wouldn’t recommend mentioning accomplishments from HS, it’s not really relevant and most people won’t be impressed with that, just my opinion anyways.

I’ll take a crack at your questions:

1. Great credit only matters if you’re financing, so if you have an 800 plus credit score, you should finance. That being said, interest rates don’t change at all after you’re above a 740-760 score I believe (or somewhere in that range)

2. 10-20k is likely enough to get started but to be safe I would recommend saving more. Lots of stuff can and will go wrong. I got hit with a 4K unexpected turnover/rehab about 6 months in. So having reserves is important

3. I started with turnkey, it’s not perfect but it got me started. Having a knack for design is really only useful for flips. With 10-20k the types of rentals you’d be buying, tenants won’t really care much for a super specific interior design. They’ll just want functional and basic.

4. I’ve owned in the Midwest and the south. I prefer the south. Biggest reasons are 1. No snow and 2. No basements. Basements and snow cause a lot of issues. Of course where I invest now we have hurricanes, so it all sorts of boils down to preference.

5. There are a billion threads on if you need a LLC or not. You can search those if you want more information, but in my opinion, no you don't need an LLC for a while when starting out.

6. When you say purchase an apartment are you talking about a condo or something like that? I would advise against this as they tend to be harder to finance, harder to sell, first to get hit by a recession, and HOAs are a nightmare to deal with for landlords (or can be). Some have restrictions on having tenants and so forth

7. I read 3-5 books and listened to 200 plus podcasts on BP before I did anything. I recommend a similar level of education.

Tag me if you have any other questions

@Caleb Heimsoth Caleb, thank you so much for all of the info! This is amazing to get me started, and helps point me in the right direction re: financing, funds, and location; I'll definitely search for some LLC threads, too, to see about that.

And lol at the high school stuff. I think sometimes I feel like such a failure in my day-to-day, it's my own little reminder that I'm capable of accomplishing something by someone's standards, but yeah upon reflection definitely more of a "hey buddy" pat on my own back to remind myself maybe I can get SOMETHING going in this real estate world. I appreciate your candor, as well as your feedback and information! Thank you again.

Originally posted by @Madeline Hansen :

@Caleb Heimsoth Caleb, thank you so much for all of the info! This is amazing to get me started, and helps point me in the right direction re: financing, funds, and location; I'll definitely search for some LLC threads, too, to see about that.

And lol at the high school stuff. I think sometimes I feel like such a failure in my day-to-day, it's my own little reminder that I'm capable of accomplishing something by someone's standards, but yeah upon reflection definitely more of a "hey buddy" pat on my own back to remind myself maybe I can get SOMETHING going in this real estate world. I appreciate your candor, as well as your feedback and information! Thank you again.

If you’re a millennial like me and need a pick me up about if you’re “successful” or not just read this: 

 https://www.businessinsider.com/average-american-millennial-net-worth-student-loan-debt-savings-habits-2019-6

From what you posted above I am guessing you’re ahead of the curve (again assuming you’re a millennial). 

@Caleb Heimsoth ha, thank you for the reassurance that I’m at least on an okay path here! I think to be a millennial means to vacillate wildly by the minute between feeling fairly competent and utterly lost. At any rate, I’m excited to deep dive more into the forums as I feel my way around here, and hopefully figure out how to be as informed as possible without going into analysis paralysis.

Hi Madeline

Wow!... I don't usually answer the "where do I start" posts but yours is pretty complete and besides you sound like can do person which I applaud! 

OK, so here I go...

1) If you have great credit, is it better to finance your first rental purchase or pay with cash?

I would say leverage is always good - I prefer the other people's money position, but there are times when cash is king.

Here is an example - I refinanced some of my rentals and along comes a deal for a rental at 66% of the appraised value - my friend who was looking to sell it needed cash and was willing to let it go for $100K but the sale had to be completed in days. So cash is king and we picked it up at the end of last year and now are going to refi it to get our cash back out..

Others may disagree but I still prefer leverage with a fat wallet to back it up... make sense?

2) Is the $10-$20k I currently have saved enough to get me started, or should I be looking to save more money before diving in, to purchase a higher-priced property?

The answer to this is the age old - "If the numbers make sense- what are you waiting for?" I understand the apprehension but for me if the cash is flowing and all the other factors work- then why would you not?

3) Should my first buy be turn-key ready for renters, or should I be looking into fixer-uppers if I have a knack for design?

I personally am not afraid of cosmetic work if the bones of the place are good. Having a knack for design does not replace the work or effort required to gut and rebuild a kitchen. Again, you tell me the numbers and then we can decide which is the best route. - if one exists at all.

4) Are there higher maintenance costs associated with buying the midwest or south than, for example, Arizona due to the damage caused by snow and heavy rainfall/storms?

Simply put -yes. I own in AZ and Vegas as well as a some Midwest homes. I have lost a home to a tornado and had a roof torn off due to Katrina, FYI, the insurance for the NV homes is a third of the Gulf homes. I prefer the sunshine states but again, if the numbers are right, I will buy where it makes me the cash$$$.

5) Should I form an LLC just for real estate buys prior to purchasing my first rental?

I say no but there again you might consider speaking with an attorney considering you have another business to protect. An LLC in California costs you $800 every year, even if you do not make any money so I am not in favor of it personally. Further, California does not care if the LLC is out of state, the fact that you live here and are benefiting from it is enough for them to tax you the $800 out of the gate.

6) I was originally thinking of purchasing an apartment to rent for my first buy, since I imagine there are lower maintenance fees associated with that than a whole building (even taking into account the HOA fees). Is it better to buy a single apartment, or something like a duplex that is a whole building on its own?

Personally I like straight SFRs or the whole apartment building. I am not sure where in LA you are but if you ever go to the valley there are a bunch of duplex set ups, usually a home with an added legal unit.  That would be a great start up for someone to get their feet wet. 

7) Any other advice anyone out there has? I don't know what I don't know at this point.

I would suggest that you look to attend meetings, read this board as well as others and just keep learning. I have been doing this a while and I still learn stuff from others all the time.

Good luck to you.. Steve

@Madeline Hansen

1) I think in your case it might be better to finance, as you can leverage your gain.  This is to say that if you earn 5% of the total property value annually in equity through appreciation and amortization, the leverage would increase your return to 25% on a 20% down payment. For example, $100k property bought with $20 down is worth 103K in a year, and the mortgage balance is down from the initial 80K borrowed to 78K. Now you have $25k equity and have increased your holding by 5k on a 20k investment for a 25% rate of return.  The caveat being that it's much more complicated than that with real world numbers and scenarios

2) I would save more or consider a partner. Not necessarily for a higher priced property, but you'll need some cash for reserves and for the things you can't see coming. 

3) It depends upon your personal situation, how much free time and experience you have and the value of your time away from work. There are many threads here on turn key vs BRRR.

4) This is really state and property specific. Taxes, maintenance and reserves will vary by location and age of property.  In general, however I would say that property age and condition may be a bigger factor. Just do your math carefully and with a pessimistic approach.

5) See above.  There are many threads about this on here.

6) I prefer single or multi family buildings, rather than an individual condo or apartment. SFH and multi family hold their value much better when things go badly. Condos are less marketable in most cases. They are the first to loose value and the last to recover during a slowdown. Also, I would rather spend money on an amortizing mortgage than an HOA. I believe that it's not that hard to make money in real estate during good times, but another recession is undoubtedly coming during my investment horizon. It's those who survive and thrive during the hard times who seem to become truly wealthy. I wish I had a nickel for every investor who lost it all in 2008. My primary objective with any investment is not to loose my shirt when hard times re visit. Condos are not for me.

7) Read/Listen to everything that you can.  Try to remember that some of it is gold, and some of it is garbage and develop the skill of critiquing the information you consume.  Find someone with some experience who's willing to share what they know with you.  Stick with it. 

@Steven Warner Thank you so much for all of the information! The info about the locations and resulting weather-related damages and insurance prices is so beyond helpful (as is your input about everything else). I so appreciate you taking the time to respond!

@Darren Mesibov Thank you so much for the input! The financing vs cash information is great to keep in mind, as is the recommendation to save up some cash reserves and plan to be recession-resistant with the types of properties I go for. I've also noticed a few people mentioning BRRR and heard it mentioned on a few of the podcasts -- I'll have to do a deep dive on the forums tonight to amp up my understanding of that. Honestly, this forum is such a gift; I am so appreciative for everyone's time and knowledge.

@Madeline Hansen Hi Madeline, I think you're in a great position. If I were starting over again and in your current position. I would try to save a little bit more and go purchase a 4 plex utilizing an FHA loan. Live in one of the units and rent the other 3. This should cover your mortgage and all other home expenses. I'd live in the unit until I've saved enough money to buy another one. Now you're in another 2-4 plex and collecting cash flow from your last unit thats now a rental. Rinse and repeat and before you know it you're a millionaire. Becoming wealthy Is slow and boring. If a deal sounds too good to be true out there its because it is. Theres a reason why no one has purchased it already as most good deals happen off market. You've got a great start with your own online business so with that you're on your way to greatness. Best of luck! Junior

@Madeline Hansen

Welcome to BP!

It is a great place to start and a great place to learn.  I am pretty new to BP myself (less than a year) but have learned ALOT!   (and still have a lot to learn!)

I don't have answers for all of your questions (at least nothing much more than others have already stated)
But I would suggest a few things.  First off, pay off your student loan ASAP!  Like today if you can.  Seriously, you will feel so much better to be debt free of that burden and you will be able to save even more if you take what you were putting towards that and continue to save while you are continueing to gain more RE eduacation.

And yes, as others have said, read more books (BP has a lot of great ones) and listen to podcasts here.  and read the forums, and maybe best of all, build relationships by attending some local BP events/meet ups.  Depending where you are in LA, there are a number of them.  I often attend the South LA one.  Great friendly group there.

Good luck! 

@Madeline Hansen Hi There. I will keep it short and simple and give you the advice I would give my own family member if they lived in LA in your position. Buy a duplex using 3.5% down fha. Live in one unit and rent the other. Don’t bother looking for 3-4 units. In your area it more than likely won’t work for fha as there is self sustainability test that it won’t pass.

Best of luck!!!

@Madeline Hansen I wouldn't bother investing in real estate. Reinvest in your business. You have the good fortune of being self employed, and if your business model is viable and capable of scaling that 10k reinvesting in marketing, sales, or other growth initiatives will yield you way more than it would investing in RE, unless you start a real estate investing business of some sorts with it.

If you're hell bent on investing in RE, I would say don't do it until you've got more cash. 20k puts 20% down on a cheap duplex out of state. Nice, but still not my preferred route as a business owner. 

When my business was really small (it's still small), 10k invested in intelligent targeted marketing made me almost 500k in less than 6 months. 

Originally posted by @Elliott Elkhoury :

@Madeline Hansen I wouldn't bother investing in real estate. Reinvest in your business. You have the good fortune of being self employed, and if your business model is viable and capable of scaling that 10k reinvesting in marketing, sales, or other growth initiatives will yield you way more than it would investing in RE, unless you start a real estate investing business of some sorts with it.

If you're hell bent on investing in RE, I would say don't do it until you've got more cash. 20k puts 20% down on a cheap duplex out of state. Nice, but still not my preferred route as a business owner. 

When my business was really small (it's still small), 10k invested in intelligent targeted marketing made me almost 500k in less than 6 months. 

These perspectives are interesting. About the return with a business vs real estate investing. I remember on the BP podcast with Noah Kagan, he had similar views. Mentioned that he could yield way more by reinvesting in his businesses over real estate investing, so he couldn't justify focusing his time with RE.

@Mark B. it's a simple truth. I just so happen to own a real estate business, that sells high cash flow rental properties. Some customers ask me this silly question:

"If your properties really can make me a 25% return, why wouldn't you keep all of them?"

My answer is simple:

"Because I happen to have a sales business. And my marketing dollar reinvested nets me a 1000% return."

This doesn't mean everyone should forego investing and start a business lol. High yield rental properties are awesome. It just means that if you want to, and have the ability to invest money into a business that can absorb those funds and produce a high yield on them- then you're often better off doing so.

@Madeline Hansen

Sounds like we started out in a similar place in life. Also sunds like I also might own rentals in this hip neighborhood you mentioned! 

1)  Finance or Cash? There is a time, place, and circumstance for using cash. Right now, competition is weakening, so it's not always necessary to use cash to score. See my thoughts on using debt, Here. Being self employed makes traditional financing a little tougher, we can talk about that if you like. 

2)$10K-20K isn't much in LA as far as buying property, and it's a good idea to leave some money in the bank. But, there are things you can do RE related or even not related with that cash to get started! Lots of ways to get in with what $ you have 

3) Turnkey or Fixer? Depends on your ability. Learn everything you can, and if you have the figurative balls - and someone who has done it to lean on, get a fixer. Especially with your design skills. Fixer properties are going quick and there's a lot of competition for those right now. Timing is everything. 

4) I own out of state also. When you buy OOS, just know the terrain and take the right precautions and understand the renting cycles. Age of buildings, weather, current maintenance, think of it with a holistic overview. 

5) LLC? Some say yes right off, some say just adequately insure until you have a growing portfolio. Just know that an LLC makes everything more expensive. There's the cost of filing properly, the minimum $800 year state tax, and when a business (LLC) owns property, you will pay higher interest and insurance costs. I tend to recommend insuring properly and using common sense around the property to avoid issues.

6) Condo's are certainly more affordable to get into and depending on the area, can be really attractive. There are some caveats but I think you could make it work. In my experience, the maintenance expenses in my rentals here are much lower per year than the average monthly HOA - at least in the central LA area. Especially when you think of it on a per unit basis. I've got my own thoughts about condos, timing, and due diligence on a condo rental (make sure HOA allows you to rent out, or Airbnb). For the most part, under most circumstances, I prefer duplex over condo.

7) Learn all you can. You have a business, while a typically hard industry, you have infinite income potential. You also have Airbnb design skills - LA passed something limiting STR but I think with your marketing skills, you could have another stream of income. And finally, marketing... another income stream. I'd be interested in talking with you about that, maybe become your first client! I'm a broker in LA and am happy to coach you along as needed. Good work on the credit score and being awesome

-EC 

@Madeline Hansen I only found BP a few weeks ago and I can honestly say I have learned a lot since. If you are ready to pursue REI passively or even actively, consider using house hacking to start. You are already doing it so just continue doing so in you own property. Get something with multiple rooms you can rent out through Airbnd or for rent and have that cover most if not all of your monthly bill.

In addition, if you use BRRR strategy you can get back you initial capital when you go re-finance and apply your initial down payment towards your business if you need to.

I wouldn't worry about student loans unless you just have a very high interest rate, keep making you monthly minimum payments plus some extra towards principal to keep your score where it is or higher and pay it down.  You can do much more with the cash you have.

Also if you haven't already, start listening to the BP podcast.  you'll learn a lot for these guys, I know I have!

https://www.biggerpockets.com/podcast

Good luck 

@Madeline Hansen

1 and 2 - since you have $20k max, you probably have to look at financing. Also, I would recommend saving up more than $20k. While that can get you a downpayment, you need cash reserves.

3. I think in your situation, turn-key makes the most sense. You have a business you're running and seems like you are very good at it. I think your time is better spent improving/expanding the business than trying to learn and successfully run another business that involves fixing up and renting properties. That btw is very risky to pull off remotely. 

4. This is very location specific. AZ might have less damage from snow/rain, but have higher prices than midwest.

5. I have always been told and believe that if you don't have a ton of assets, no LLC. But verify everything with your cpa

6. With 10-20k, investing apartments are out of question unless you invest in syndications or some other crowdfunding deal. I prefer single-families due to exit strategy. Easier to sell SF vs MF. But this answer depends on your goals and preference.

7. Set investment goals. It's easy to get shiny object syndrome and also analysis paralysis.

Originally posted by @Madeline Hansen :

Hi everyone! I'm brand new to both the site and the concept of Real Estate Investing, so apologies if this is awkward in any way, but I wanted a little starting out advice for my specific situation, and everyone seems really nice and helpful on the forums, so I thought I'd give it a shot!

* My goals: I'd like to generate some supplemental passive income through investing in real estate rentals in cheaper markets, with the end goal being to assist me in saving to buy a home of my own here in Los Angeles (in the $750k range), and maybe eventually replace my current work.

* My job: I currently work from home running my own online fashion brand (it's an LLC). We grossed $275k last year, I kept around $50k -- I'm definitely not rich, but it's pretty chill and I like what I do.

* My living situation: I live in a 3 bedroom home (I rent) in a very trendy neighborhood in Los Angeles. One bedroom is my home office for the fashion brand, the other is mine, and the third I Air BNB, bringing in between $1000-$1500 of extra income per month, which goes straight into a savings account. 

* My budget: I have $10k currently set aside to use towards investing in real estate, and I have another $10k safety net available. I also have an 810 credit score, and my only current debt is around $13k of student loans. I save around $8,800/year from my current income, as well as the roughly $12k per year from my Air BNB room.

* My skills: I am pretty good at online marketing (my company's instagram has around 230,000 followers, my own has 65,000). I'm also pretty skilled at all areas of design (I have my BFA in fashion design, part of the draw of my current home for Air BNB is how it's decorated, and I worked as a graphic designer to pay part of my way through college). I'm also a bit of an overachiever (graduated from high school Valedictorian as a Junior) so I have a go-getter and highly social personality. I'm 2/3 of the way through getting my real estate license just for fun. I am a spreadsheet and math queen (youngest person in my school district to take Calculus in high school). I also grew up pretty poor in a town run by a major gang (shout out Fresno, California), so I have a strong functioning understanding of "rough" sides of town -- I know when a street is run by a gang, or when it's just a bunch of poor but wholesome families trying to get through their day, and how that can change from block to block.

*Here are my starting out questions: 

1) If you have great credit, is it better to finance your first rental purchase or pay with cash? 

2) Is the $10-$20k I currently have saved enough to get me started, or should I be looking to save more money before diving in, to purchase a higher-priced property?

3) Should my first buy be turn-key ready for renters, or should I be looking into fixer-uppers if I have a knack for design?

4) Are there higher maintenance costs associated with buying the midwest or south than, for example, Arizona due to the damage caused by snow and heavy rainfall/storms? 

5) Should I form an LLC just for real estate buys prior to purchasing my first rental?

6) I was originally thinking of purchasing an apartment to rent for my first buy, since I imagine there are lower maintenance fees associated with that than a whole building (even taking into account the HOA fees). Is it better to buy a single apartment, or something like a duplex that is a whole building on its own?

7) Any other advice anyone out there has? I don't know what I don't know at this point. 

 Buy and hold Turnkeys in the Midwest. They are around $95k and can rent well above $1,000 in the suburbs of the major cities. At least, that's what I am seeing. 

@Madeline Hansen Hello, I sent you a PM! Since we have a gorgeous Turnkey property we are either going to be exiting or renting out up near Cal Arts. (5 bedroom 4 bath with a main level 2nd master full bath or home office) in a gated community with a pool. Anyway, I wanted to touch on your question:

3) Should my first buy be turn-key ready for renters, or should I be looking into fixer-uppers if I have a knack for design?

I think in your case it's much better to get something turn-key because a knack for design doesn't translate to "fixer-upper". I was a licensed RE Agent for my family's new home business - we built custom homes. Our home in California is a newly built townhome (but it's large, almost 2600 square feet). The skillset for fixer-upper is construction manager skillset, rehabbing, knowing what needs to be fixed, scoping and estimating costs -- the cute "design" part of arranging pillows that draw the eye -- comes at the VERY VERY END and doesn't translate to your bottom line. Fixer-Upper means knowing what work *must* be done (to pass code, safety issues etc,) knowing *how* to get it done and estimating costs -- scope of work. That is learnable but it's a very serious learning curve.

Turnkey or close to it (paint touch up) seems to be much better for your situation. Plus, running your own business you probably wouldn't have the time to put into managing a fixer upper. It just doesn't seem to fit in with your lifestyle and goals. Think about what you want - you want to keep cash flowing and grow your income, living in something that is a bit bigger and you're able to rent it out right away seems to be ideal.