Newbie confusion - where do I go from here?

22 Replies

Hello all! I’ve recently joined bigger pockets and have been reading everything I can get my hands on.

I’ve found myself inadvertently in real estate investment. Although I may not have intended to get into it, my husband and I are in love with it.

We bought our first property to rent to my daughter. We bought it for $50k, put $42k into it (which is way more than we would put into it as a normal rental, but we knew it was for my daughter so we put in upgrades we wouldn’t normally do). we rent it to her at the cost of mortgage, insurance, and taxes-zero cash flow. But I figure we are still gaining the appreciation of the house while she pays the house off.

Obviously that one isn’t a true investment property but we did discover that we love buying run down homes and renewing them. My husband is a contractor and does the work and I love creating the vision of the new house and bargain hunting to do it the least expensive way possible.

When we were finishing my daughters house a bank-owned home became available in an auction. Because it was an auction we had to pay cash for it and have rehabbed it with cash. I came across the BRRRR book while rehabbing this house and thought perhaps we had accidentally stumbled into the perfect method of investing in real estate.

Fast forward to now, we are almost done rehabbing second house, about two weeks away, and had a realtor give us a market value because we have two interested parties that would like to purchase the house. The house would sell for approximately $100 k above our purchase price and rehab costs.

Our quandary is do we flip and use that profit to buy more rentals or stick with the brrrr method? If we take the full 75% out of the house I believe the rental market would only bare $150 cash flow above mortgage, taxes, and insurance. I have no idea what to calculate for vacancy expense as we are new to this rental thing and our market, north central Montana, is too small to show up on the online estimators. The problem with flipping would be the capital gains tax. Ultimately we are wanting to create passive income from rentals, just not sure if this place would be better left as a rental or flipped and use the profit to buy more rental property.

Any guidance? Thoughts? Suggestions? Book recommendations? Keep in mind I am new so many of the acronyms are a foreign language to me. Thank you in advance for your help!

Michelle, congrats on officially being a "real estate investor."  And, you answered your own question - which shows that you know what you're doing...$150 in cash flow is known as a "why bother?"  The only reason "to bother" in that case is if it's in a market that is highly appreciating in year-over-year increases or property value.  Often times the best outcome is taking the money and running to the next deal.  Trust your instincts.  You've got this.

And for the acronyms...beware: those who cite, don't always do!

You get to shop and he gets to work construction.  That does sound fun.  Haha, just poking fun at you.

Where does this house fall in the spectrum of inventory in your market? If this is in a "A" neighborhood you would probably be better off selling it and rolling that profit into a low "B" or "C" neighborhood where ROI will be higher. If you are already in a "C" neighborhood then you probably aren't going to do much better in your market. If so and you want to build a portfolio then you shouldn't finance so much out of it, just enough to regain most of your initial investment, to try to get if cash flowing a little better. A few years down the road rent will probably go up and it will cash flow better yet.

@Brant Richardson Haha! I paint too, somehow I got selected to be the painter of all paintable surfaces. Although he has to to the mudding and texturing, so I’m still coming out ahead on that deal. :)

It’s a small town so we don’t have markets but I would say for our town it is now in the B plus to A market of available homes for sale. Is there anywhere I can get info on how to grade a house or area? thanks for your input!

The rating scale is not formal, it would not be on an assessment, it's just based on your feeling when you know an area well.  The guys that work for your husband probably live in the low B, and C areas.  Drug addicts and gangs are in the D's.

$150/mo adds up to $1,800 per year.  Compare that to $100k in a 2.25% savings account which adds up to $2250 per year, plus what ever your purchase price + rehab was in the savings account at 2%.  Of course there are tax write offs and principal pay down with real estate but most likely this one is better to flip, especially if you think there are more opportunities around.

To clarify, with flipping you wouldn’t be paying capital gains tax, would be paying ordinary income tax since this is considered active rather than passive income (assuming that you haven’t held for over a year and can’t demonstrate that you bought with intent to rent).

That being said, with $100k profit yet low rents, this still probably is a better flip than rental, and you may be better off selling it and just choosing your next investment differently, with rental in mind, so that it is a place that is cheap enough and can be quickly rehabbed for rental grade, and keep that one, ?? with BRRR. Choose one that cash flows well enough to make it worth keeping as rental.

You appear to be doing very well at this though, so might want to keep flipping as well (impressive that you already have not one but TWO people who want to buy your current project before even listing it).  

You indicate that your long term goal is to build a buy and hold portfolio.  With your combined skills, one very good way to grow your portfolio can be simplified as buy 2, sell one, rinse and repeat.  In the current scenario, you would sell the current project, use the $100 k profit to buy/rehab a house that makes sense as a rental (maybe one similar to the one you got for your daughter?) and rent it out.  You can take a mortgage on this if you want, but one small enough so you still have a healthy cash flow. If you can , may be better to just leave it unleveraged and just save the cash flow to add to your war chest as you buy more properties.

You then buy and rehab a second house that makes sense as a flip with the cash that you have left over from your first flip (as well as any money you may have pulled out of the new rental via BRRR, minus what you've set aside for taxes on the first flip). This time you choose a house that makes sense as a flip, and finish it as a flip (upgraded finishes, etc). Sell the flip, invest the profit, pay taxes etc. Depending on how long it takes you to complete these cycles, you will be able to finance your fully paid or lightly leveraged rental portfolio to the tune of 1-2 houses per year.

As stated above, houses in nice B/C neighborhoods make good rentals, lots of blue collar workers who are lifelong renters, and houses in low A/or high B neighborhoods make good flips.  You can buy or sell anywhere, but just keep the end goal in mind as you are choosing what and where you buy...

((If you really want to scale you buy the two houses at once with the proceeds from each flip, keep one, sell one, but this likely doesn’t fit well with your scenario of doing the work yourselves.))

hope I was clear and this makes sense...

@Sebby Gabre Madhin Thank you so much for your advise. My gut was leaning in that direction, creating a combo of flips and rentals, but I haven’t read anything yet that suggests this as a strategy. I’m typically too analytical in hopes of reducing my risk so I tend to stick to only doing what the experts or books suggest. I’m really glad you posted because it’s good to know that it’s a viable strategy to do both. 

@Sebby Gabre Madhin Also, one advantage to small towns is that very little advertising is needed, word of mouth moves quickly in a small town :)

Good to know about the capital gains, I thought I had read that it was capital gains when you sell a flip and inventory when you buy a flip, but I probably misunderstood. I listen to my real estate books while I’m doing all that painting ;)

Wow you are rockin!  congrats on your new passion...

I used to play music up in Conrad and Shelby and Havre about 35 years ago (!), and love that area and especially the people!

My question is how Conrad is doing these days?  I have no idea, but  is it growing and does it have a good long term prognosis?  That would be a good thing to figure in... because if it's declining, and if the young folks are moveing to bigger towns cities, etc, sometimes it can be a gamble in the long term hold idea.  A lot of American small towns are dwindling...

 Whereas, if you've got buyers for the flips, you may want to cash in on that, and potentially look at other places that do have good long term economies and are attracting millenials or short term rental people for the buy and hold...

Also, there seem to be some very good advantages to being a 'real estate professional' I think it's called:  you have to work 750 hours per year on your real estate business (which you probably do, working on the houses--physically, and if you're managing them, marketing, leasing etc), and check with your accountant, but I think you get some pretty good tax advantages...

DEFINITELY go to the meet up in Havre...  you can learn so much, and it's much easier and faster to convey information verbally instead of typing!!  And listen to EVERY BP podcast!!  I"m not kidding, they cover everything at one point or another.  Ive been doing this a long time, and learn something new pretty much every podcast sometimes earthshattering stuff!... So while you're making those long montana drives, 0R PAINTING! listen to as much as you can

When you're figuring your cash flow, BE RUTHLESS!  I"m too optimistic, so my wife holds my feet to fire... Figure 10% of gross income for repairs and maintenance, and create that reserve account for that.  Talk to folks at meetups, other landlords in Conrad, shelby, and Havre and find out how long they're going between renters... and how much you spend in between renters on 'make ready'-- cleaning, painting, etc... That should be additional reserve;  I think I figurre 10% vacancy, that includes lease up fees, and 'make ready' costs...

I"ll bet one good thing about Conrad is tenants probably stay long in a nice place!!  that's good as Gold!

If there are any decent property managers there, Bug them for information, and find out how much they charge to manage properties (should be between 7% and 10%) and how much a lease up fee is... Figure this into your numbers, and if you manage it yourself, pay that to yourself, and THEN figure cashflow... because someday you may decide you don't want to manage them anymore, especially if they're not in your town.

 Do you pay any of the utilities?  You have to be crazy analytical on that stuff... I find that I pretty much spend 45% of my gross income on all the expenses, BEFORE mortgage payments... 

That $150 may go away quickly, when you figure all that in, but If the market is appreciating really well, like better than 5%- 8%, losing a little monthly is worth it in the long run, if your regular income can easily cover it.

Good luck!

Hi @Alan Brown ! I'm surprised that I've already come across two people familiar with this area, normally nobody has ever heard of Conrad, let alone been here.

Conrad is definitely dwindling, which was one of my concerns with rentals. Right now the rental market is strong, homes in the C market are renting at prices that are easy to cash flow, even with all of the extra costs that you mentioned figured in. My brother and I bought my parents' business from them several years ago and I handle the financial/business side, he is more into sales. So I, like your wife, pencil everything out. I've found that being detailed, ruthless, on the financial side of the business makes the difference between making enough money to stay in business and  creating a lucrative business. My brother is like you, he sees the rosy side of everything. I, on the other hand, work in numbers. However, I will say the details (expenses) in real estate investment are much different than a normal business so I GREATLY appreciate you listing each expense to consider because it is hard to pencil something out when you don't know it is part of what needs to be figured!

I will set up an appointment with my accountant, he is really good at finding all the best strategies for reducing taxes. I will mention setting up as a real estate professional and see what he knows. Great tip!

So, perhaps with the town dwindling and the potential for the market diving 10 to 15 years down the road we would be better off flipping houses in Conrad? Ultimately we want to build up rental properties but this may not be the best market for that. 

There are no property managers, at least that I am aware of, in Conrad. Which is unfortunate, because that is the part of renting that I really don't want to deal with. You know, the more I type the more I'm certain flipping in Conrad is the way to go for now. Maybe what I should be doing is flip houses here, try to partner up with someone in this community that has been doing rentals - profitably for a number of years (that is the analytical side of me) - and provide the financing for a share in the rental. Is that a thing or did I just make up something that can't exist? 

Thank you so much for taking the time to respond so thoroughly. I appreciate all the advice I can get!

@Michelle VanDyken check out the book “Best Ever Apartment Syndication Book” and daily YouTube show Best Ever Real Estate Investing Advice Ever for more insights and information about your future investments.

City-data.com has a good summary of statistics for most cities and towns. And I also read Sperling's for a good summary. A 1 minute overview tells me that 20% of Conrad lives below the poverty line and that unemployment is higher than the state average, with a -2.5% job growth (probably correlating to the decrease in population). Housing units are on the decrease, while the population has not exceeded its maximum population since the 1980's.

I'm very familiar with Conrad, but I wouldn't invest there. The American farmer is dying right now for obvious reasons. While many jobs seem to be in the educational sector, I know that the surrounding areas are all agriculture.

It may be a beautiful place to live, but, speaking as an investor, I wouldn't do anything but trailer park, or an old folk's home when it comes to residential. One of those options requires way more cap expense than another... 

Besides residential investments, I would look into land purchases for agriculture. Land leases are easy to write up, and usually last 1 year, with decent return on cheap, fertile land. Our country's economy is transforming, and Montana has had legal hemp before Trump's executive order. The climate is ideal for the plant, and land will be at a premium once hemp production is industrialized. Otherwise you can grow 3 crops of winter wheat. 

Sorry if home flipping isn't in my list of suggestions, but facts and figures should be your guide, not the advice of investors who are unfamiliar with our state.

Account Closed

Thanks for the info. It’s good to know I can useful info even about Conrad. 

My long term plan isn’t to continue to invest in Conrad. I’m getting my toes wet while I’m still here. My youngest daughter graduates in three years so I won’t be as bound to this specific region. In the meantime we will try the few houses that are worth flipping. Our first flip was put on the market Tuesday, it’s been shown a few times and there has been favorable response. I realize none of that means anything until there is an actual sale but it’s all looking promising for now. 

I’m very familiar with the hemp market. My “real” business is in the ag sector. I work directly with one of the first hemp growers, back when they could only have 50 acres per year. I’ve seen a lot of fads come and go in the ag market, I’m not certain that hemp is any different. 

Regardless, purchasing farmland and leasing with the long term in mind is actually a very good idea. It has also been my experience that most farm land gets sold before anyone in the area even knows it is for sale. Also, most farms in this area are several thousand acres, so we are talking millions instead of hundreds of thousands of dollars. Not that it isn’t doable, just that I personally would need to work up to that point. 

Having said all that, I still think you are on to something. Buying land and leasing to farmers. I like it!

Thanks for your tips!

Account Closed, fantastic!! Thanks for bringing up hemp!  I have been learning about the myriad uses of this plant, and it’s ridiculous political kneecapping Since the dreaded reefer madness era, for 20 years!  I’ve been thinking a lot about it lately and hoping that now is it’s time... and I’d like to be part of that investment... where can I learn more about it? 

 At the tail end of some radio broadcast, I recently thought I heard that it can produce $150k per acre?  For the oil maybe?  Did I dream that??

@Michelle VanDyken , what do you know about it?

Thanks in advance

@Alan Brown

It's in the early early stages of becoming industrialized. These are the big hurdles that need to be overcome:

1. There are no current markets, at least locally- as in the entire state of Montana, that take in large amounts of seed for oil. There are smaller operations that will contract a few acres but that would not fall into the industrialization of hemp. So why aren't there markets for large scale production? That leads us to #2

2. Because we were not allowed to grow it on large acreage amounts, very little/no research has been put into growing it large scale. Canada, just a few miles north of us has more experienced large scale growers by a few years but you would be surprised at how little information is shared across the border. So currently our industrial growers are being taught by smaller scale green-house growers of an extremely similar plant :) the cross-over does not translate as easily as you might expect because...

3. Hemp is grown completely different from other small grain or oil crops.  There Are many human mechanics that do not translate into machinery, or even hiring legal migrant workers. The amount of workers needed and the time to complete the tasks would not be possible. 

This is all just oil production, which is where the money currently is. Now, personally, I think the fiber market could be developed into an industry that would be easy to grow and harvest on large scale. Probably won't have the high $ return as oil. 

So to sum it up, the farmers here are trying to create an industrialized hemp oil market but it's probably more likely that it will remain a smaller scale production. Personally, if I could grow a crop and make that sort of money on just a few acres, I would do it in western Montana. Our location is more ideal for growing hemp because of our hours of daylight, temp, and rainfall; but you've been here, where would you rather have a small scale production? Western Montana is such a beautiful place to live. There are and will be more small scale operations in eastern Montana but it's people who already live here, currently own land, and are trying something new. On the other hand, who knows, maybe hemp is going to be the economic boost that eastern Montana needs...

Just one ladies opinion that knows far more about farming hemp than she ever expected to have to learn. Forced education. My perspective is limited to my area, but I'm sure other areas are running into similar issues. 

Originally posted by @Michelle VanDyken :

Hello all! I’ve recently joined bigger pockets and have been reading everything I can get my hands on.

I’ve found myself inadvertently in real estate investment. Although I may not have intended to get into it, my husband and I are in love with it.

We bought our first property to rent to my daughter. We bought it for $50k, put $42k into it (which is way more than we would put into it as a normal rental, but we knew it was for my daughter so we put in upgrades we wouldn’t normally do). we rent it to her at the cost of mortgage, insurance, and taxes-zero cash flow. But I figure we are still gaining the appreciation of the house while she pays the house off.

Obviously that one isn’t a true investment property but we did discover that we love buying run down homes and renewing them. My husband is a contractor and does the work and I love creating the vision of the new house and bargain hunting to do it the least expensive way possible.

When we were finishing my daughters house a bank-owned home became available in an auction. Because it was an auction we had to pay cash for it and have rehabbed it with cash. I came across the BRRRR book while rehabbing this house and thought perhaps we had accidentally stumbled into the perfect method of investing in real estate.

Fast forward to now, we are almost done rehabbing second house, about two weeks away, and had a realtor give us a market value because we have two interested parties that would like to purchase the house. The house would sell for approximately $100 k above our purchase price and rehab costs.

Our quandary is do we flip and use that profit to buy more rentals or stick with the brrrr method? If we take the full 75% out of the house I believe the rental market would only bare $150 cash flow above mortgage, taxes, and insurance. I have no idea what to calculate for vacancy expense as we are new to this rental thing and our market, north central Montana, is too small to show up on the online estimators. The problem with flipping would be the capital gains tax. Ultimately we are wanting to create passive income from rentals, just not sure if this place would be better left as a rental or flipped and use the profit to buy more rental property.

Any guidance? Thoughts? Suggestions? Book recommendations? Keep in mind I am new so many of the acronyms are a foreign language to me. Thank you in advance for your help!

 Welcome to the site Michelle.