Is it reckless to invest in my situation?

Question

Hi guys, I'm absolutely as green as can be on the real estate world in general and property investing specifically. I was just spending my Sunday doing a little tinkering with my savings plans and thinking about my situation and stumbled upon this site.

Here's my situation.

I'm 25 years old, and have worked for the same company since graduating college. Thanks to a ton of hard work and great opportunities, I now make $120,000/year. Despite that, I'm savings-conscious and am living in a $950/month rental (very cheap for the upscale area of my city I live and work in), maxing out my 401(k), etc. My credit is roughly 789.

I have a small investment account that I'm building at $1,500/month. I'm considering taking most of it and tossing it toward a down payment on a 1 or 2 bedroom condo/apartment in my area.

I'd like to just put 10% down on something under $150k that's basically market-ready. Units in that range in my city typically rent for $1,500-$2,000/month. The mortgage payment, taxes, insurance, etc. would probably run me about $1,100-$1,250.

Given my personal budget allows for $1,500/month in savings, anyway (plus a discretionary allowance I could tap into if needed), I feel like I could handle vacant months without feeling the squeeze.

I would definitely use a property management service — the combination of my inexperience and my long work hours (often 70-90/week) means I am simply not the best candidate to manage property on a daily basis.

I'm not looking for supplemental income out of this. I want to use other people's money to make my savings potential grow faster. Potentially I could rent this place for 5 years or so and simply move in (advantages of being young and single ...). Or, if I have to take a new job at less salary, a pay cut at my current gig, or encounter other financial shortfalls, I could get out of my current rental and move into the unit I own.

How risky does my situation sound? And what advice would you offer?

Thanks in advance for your help!

Account Closed · Answer

Since your currently renting, why not look into buying a 4 unit with FHA financing (low down) or conventional financing if you have a good chunk already saved. Then live in one unit and rent out the other 3. You could still use a property management service and not tell the other tenants your the owner so they don't bother you with every little problem. Then your rents would pay your mortgage and you'd be living rent free. This is only one of many options, but I think a good one for your situation.

Bryce Y. · Answer

While this is a great strategy on paper, there are some not-so-obvious drawbacks that I have come to realize.

The biggest drawback to me is that at least here in Dallas, 4-plexes that make sense from a cash flow point of view are not in the most desirable areas. $950 gets you a pretty nice apartment in a great area, probably close to lots of bars, restaurants, grocery stores, etc. Most 4-plexes will not give you this.

Basically what I'm saying is you must sacrifice lifestyle for money. That is a personal decision and one that will be different for everyone. Now if FHA is the only way you can go to get started investing, then this doesn't necessarily apply, but sounds like the OP is not in this situation.

I am of the opinion that home ownership is vastly overrated, especially when you are young and single.

I would recommend the OP spend 6 months on this site reading and learning, then re-evaluate after. After that time, you will have a much better idea of where you want to go as well as a good chunk of cash to make that happen.

Stephanie Dupuis · Answer

You're starting out. It's great you're thinking about this stuff. You're also working long days - I feel for you, been there.

1. Start with basics - I'd start with a rental. If it were me in you're situation, I'd look at either buying a duplex (live in one side so you're paying down your own mortgage) and rent out the other. Or purchase a SFR rental.

2. Pay a PM company to manage. This frees you up. Hire a solid PM company. Some companies stink. You still need to manage the PM company. But, not all PM companies are created equal.

3. Buy a cash flow positive rental. First save the CF (cash flow) to create your reserves for repairs, etc. (or set this amount aside at the beginning from your own savings), then take income from the property and pay down the mortgage until paid off.

4. You can purchase additional properties while you're paying off the first one (I like to focus on the property with the lowest amount due - that's me). Plan is, focus on one property at a time. This is similar to dividend reinvestment.

5. Stay away from fancy stuff. My opinion is that fancy ends up biting people in the pants eventually. Learn your basics. Stick with fundamentals.

Rentals are pretty basic and a great introduction to RE investing. Plus, you get great returns when executed correctly that last for as long as you own the property. Many other investments have a "death date" - an expiration date. I don't call those investments. Meaning, once you get into a particular investment (wholesale, flip, etc.) you get your cash for a period of time and then the cash stops. With rentals, it keeps coming in. Over and over and....

Steven J. · Answer

I do like Joel Owens mention of tax liens. It might take some time to learn what those are and what it will take for those but from what I understand they are relatively stable investments providing up to 14% returns. The key is to educate and show yourself what works. Once you have acquired the liens they are more hands off than other investments. The only problem is the time you are already working - you'll have to balance the time of educating yourself, seeking deals, closing deals, dealing with the investments, etc. with your long work hours.

Suzie B. · Answer

If you bought a duplex, why not go ahead and move into one side and rent the other? Let your tenant pay the bills while you stack away cash while you are young and willing to work those kinds of hours.

It would allow you to save the $950 a month you are paying in rent every month, plus, allow you to continue to save as you already are... making your bank account grow faster so you can buy another sooner if you so choose to. (After you have plenty saved up for possible repairs and vacancy, of course).

Joel Owens · Answer

You say 120,000 a year.

Is that salary?? Salary plus bonus?? Straight hours??

What I am getting at is with salary you can count on that 120,000 you are just working long hours. Of course the company could cease or the position at anytime so there is risk there.

With the other 2 choices the income isn't a given because extra hours could go away or the bonus system could change with both altering what you make in a substantial way.

As you find other things in life that you enjoy (hobbies, significant other, family, etc.) you will want to scale down the number of hours to achieve a balance. I owned a business in my 20's and worked those crazy hours but now at 38 I simply do not want to "work my life away".

I do not want my gravestone to say when I eventually pass "Here lies a man who was a workaholic and then he died". I would rather it say "I lived a full life of adventure living to the fullest and trying to impact everyone I met in a positive way while helping my loved ones achieve their dreams."

Being that you work a lot the last thing you want is to have to be a landlord dealing with a tenants life issues.

If you do not have much saved up you might look into tax liens or note investing etc. to see if you can accelerate your capital growth.

Is it reckless to invest in my situation?

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