Biggest Questions on Buying Your First Investment Property?

Question

Looking to buy your first investment property but just can't seem to make the leap?  What's holding you back?  What do you need answers to that will get you off the bench and onto the field?  I was in your position 10 years ago and I now have a portfolio of 127 rentals.  I started with wholesaling, then flips, then onto single family rentals, small multi family rentals, large multi family, office, triple net commercial and currently multi family development and mixed use development projects.  I've experienced a lot and would love to pay it forward by answering the specific questions you have that are holding you back.

Salvatore Lentini · Answer

@Iris McGee - I am not an accountant or lawyer but the whole LLC thing is a matter of personal preference.  I've had accountants and lawyers argue both sides of it.  I know an accountant that buys in his personal name and just takes out a large umbrella insurance policy to protect himself.  I know investors that buy each property in a separate LLC.  That seems excessive to me.  And a bookkeeping and accounting nightmare.  It's fine if your plan is to buy a few properties I guess but if you plan is to have 10 properties or more...do you really want 10 LLCs, 10 separate tax returns for them, 10 bank accounts, 20 or 30 credit cards to keep everything separate (if you got 2 or 3 cards per LLC).  I personally like the method of forming an LLC and putting a handful of properties in each one.  As you buy bigger buildings, banks will prefer that you have a separate LLC for that one asset (ie you buy a large commercial property).  If you finance in an LLC name you are more likely to have to get a commercial loan which may have higher rates and shorter amortization.  Not necessarily but more likely.  I like the idea of buying in an LLC name rather than personally.  It protects you better, legally.

Gregory Cudzilo · Answer

@Salvatore Lentini awesome! This is very help and I appreciate it!

Salvatore Lentini · Answer

Hi @Gregory Cudzilo - I would talk with realtors in the NOVA/DC area to get a feel for which direction areas are trending.  Go to local real estate investment groups in that area.  You can drive around those areas and look for new development going on. Look online at crime maps and school rankings.   Finding upcoming neighborhoods is not easy.  You basically have to predict the future.  Remember though, a common line of thinking for aspiring real estate investors is thinking that they have to find the best property in the best state and in the best town.  Not true.  Just find a solid investment.  Don't search for the homerun.  Because if you're waiting for that you'll likely never get started.  You'll be much better at spotting homerun deals once you have experience.  In the NOVA/DC area, just do process of elimination.  Pick a town or neighborhood where housing prices seem affordable.  See what kind of rents you could get there.  Then see how the school districts are and which direction they are trending.  If you see red flags move onto another town.  The more you analyze the clearer the picture should get for you.  You also need to take into account your ease of getting to the property to oversee it.  Picking a place that's on the way to or from work would be more helpful than a property that is further than your work.  That's just an example of how location could/should impact your decision.

Gregory Cudzilo · Answer

What's slowing me down is identifying an area with a strong market. Living in Northern VA, many SFH's are 500k plus, and I'm looking to get started buying less expensive properties. Therefore, I need to look slightly outside the NOVA/DC area where SFH's are less expensive, but I'm having a hard time finding the best city or town to buy my first place. What is a good way to analyze the housing market in a specific city/town? Once I can identify the area I'd like to start due to a strong market, I'll feel more comfortable looking for a good deal in that area.

Salvatore Lentini · Answer

Jonas - Cash on Cash Return you should include all income and expenses including the mortgage.  You're trying to figure out how much cash you are earning on the cash you're putting in to the deal.  That's not a great comparison to other investments like stocks because it does not take into account appreciation, principal paydown.... and the fact that someone else (tenant) is paying for your mortgage :)

Salvatore Lentini · Answer

@Cece Adderley - There are pros and cons to buying with all cash.  Pros - you can move quicker on opportunities because you don't have to wait for a bank.  Sellers like it when a buyer is not relying on financing because that removes one possible scenario of the loan not going through.  You're also not paying interest on the money.  Cons - Your ability to make money on flips or growing a rental portfolio is limited to how much money you have.  A lot of people have enough to buy a couple investment properties cash but that's about it.  So it all depends on how fast you want to grow and how much risk you're willing to take on.  If you have $100K you can buy 1 house for $100K or 4 houses with a $25K down payment with $75K financed by the bank.  Also, financing a property adds a layer of review to the deal.  If it's not a good deal, the lender will underwrite it and then tell you they can't lend the money.  Or they might say they can only loan 55LTV.  That would let you know it's not a great moneymaker.  Also, it's easy to cashflow on a property bought with your own cash but that's because there is no mortgage payment.  Buying properties cash can make lots of deals look good to a new investor.  You really need to compare what your ROI will be, or your cash on cash return.

As far as finding properties, there is no one method, especially in this environment.  Get on wholesaler lists, get on realtor lists, go to local real estate meetings.  Check out meetings on MeetUp.  After a while you'll see where most of your deals are coming from.

Iris McGee · Answer

I appreciate your willingness to help others! One thing that I am having a hard time with is how to structure my business. I am under contract for my first property, a sfh. After this, I want to acquire more multi family properties. I bought the single family home in an LLC, so I guess I am wondering if I should open a new LLC for each individual subsequent property? I’m also unsure what systems to have in place. Being this new in investing, what is necessary?

Thanks for your help! Iris

Jónas Tryggvi Stefánsson · Answer

Hi. Great thread.

I'm personally stuck in determining whether the investment I have in mind is making sense. I've calculated the CoCROI using the free cash flow (income - expenses, not including mortgage payments) and the total cashflow (income - expenses, including expenses).

Which one is the CoCROI that people are basing their decision on when comparing the returns to other investments, such as the stock market? I feel like both formulas are used as the refereed to CoCROI. I hope I'm referring to the right concepts.

Thank you!

Cece Adderley · Answer

@Salvatore Lentini I have funding. I live in the Atlanta area which is so tight and lots of RE investors every where. I would like to flip in this area and buy SFR in areas like Jackson Ms. I just dont quite know where to start... Should I finace or buy cash? Should i make contact with a wholesaler to get started with a flip? Is getting a realtor the best way to look for SFR in Ms?