Newbie seeking advice on rental property strategy

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Newbie seeking advice on rental property strategy

Mark Y
Member since 2008 · 27 posts · 0 votes

I'm a married 47 year old from Phoenix who is looking to purchase a rental property for a couple of reasons. I'd like to get some tax relief and at the same time do some additional investing for retirement.

My wife and I have no kids and have lived in our current home for the last 12.5 years. We currently owe about 145k on our property that is valued about 450k. I believe we have about 15 years left on our mortgage. Our interest rate is 4.5%. So we have about $300k in "dead equity".

I'm thinking of refinancing our home for $250k, 30 year loan. That would leave me with about 100k. We want to put about 25k into our home for improvements and I would also take 15k and pay off a car.

With the other $60k, we would like to purchase a rental property in the 200k range. I would take out a mortgage for the remaining, which should allow us to have a small cash flow.

We would probably hold on to the rental property for a few years at least.

I am very ignorant at this whole rental property business. I'm looking for advice on whether or not the decision above is sound.

FWIW, I'm a software engineer for a major corporation making in the low 6 figures. I'm not looking to quit my day job, just get some tax breaks and hopefully make some money when we sell the rental.

Thanks for reading my introduction. Any comments and advice sent my way would be greatly appreciated

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  • MATT WARDEN
    Member since 2008 · 141 posts · 0 votes
    19y

    I am also in the custom software development industry (although the consulting side) and am looking to get into rental properties.

    Hopefully others with more experience will chime in, but I would caution you in regard to your timing. While there is always somebody predicting a crash, there are a number of people who have some pretty convincing arguments (based on fundamentals) that real estate will enter a significant decline in the next 1-3 years. In fact, many suggest that the decline has already begun and point to data to back up this suggestion.

    Check out the "is there a real estate bubble" thread elsewhere in these forums.

    I am personally strongly considering waiting 1-2 years to try and catch the market after it has fallen.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    MarkY,

    I would strongly suggest getting educated about rentals BEFORE you buy anything. Read some books and join your local REIA. Make friends with some successful investors and pick their brain.

    The TRUTH about the rental business is that the majority of newbies fail in a short period of time. They fail because the don't understand expenses and cash flow issues and they fail because they don't know how to properly deal with tenants.

    Mwarden,

    It it impossible to time the market with any accuracy. As you said, we are in the beginning stages of a real estate down cycle. However, I certainly wouldn't let that stop you fron starting a rental property business now. Even when the market gets to the bottom, it won't stay there. Therefore, unless you have crystal ball to tell you exactly when you're at the bottom, you won't even know it happened until after the fact. If you're waiting for the perfect time to start your rental business, it will never happen.

    The key with buying rentals is to thoroughly understand the expense/cashflow issues and to buy so that you'll have significant cash flow. In almost every market, that means that you'll be buying at a BIG discount to market. In my market here in Ohio, I must buy at a 30% to 50% discount to retail to obtain acceptable cash flow. That 30% to 50% equity is your insurance that you can sell if needed, even if the market declines.

    Good Luck,

    Mike

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  • Mark Y
    OP
    Member since 2008 · 27 posts · 0 votes
    19y
    Originally posted by "MikeOH":

    MarkY,

    I would strongly suggest getting educated about rentals BEFORE you buy anything. Read some books and join your local REIA. Make friends with some successful investors and pick their brain.

    The TRUTH about the rental business is that the majority of newbies fail in a short period of time. They fail because the don't understand expenses and cash flow issues and they fail because they don't know how to properly deal with tenants.

    Thanks Mike, I'll do what you suggest. Any comments on my strategy above?

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    MarkY,

    I don't like your plan.

    First, by refinancing, you are going to be paying a higher interest rate than 4.5%. If I was going to pull money out, I'd leave that first mortgage in place at 4.5% and either get a HELOC or a second mortgage.

    Second, I would never use a 30 year mortgage to pay for a car. You'll be paying for that car decades after it's in the junk yard! How much will that car cost you with 30 yr financing? UGH!

    Third, you're looking at rentals all wrong, which is why I suggested the education. I do not look for rentals based on a certain target price (like $200,000). I look for rentals based on cash flow per unit and equity.

    Fourth, I would try to put as little down as possible on a rental, certainly not $60,000 on one rental (unless it is a really big property).

    Fifth, I buy all my rentals to keep for a lifetime. I wouldn't sell the goose that lays the golden egg!

    Finally, you have a very low goal - buying a rental for tax breaks and hopefully making some money when you sell. I would suggest buying for cash flow today and picking up equity today. With rentals, you make your money when you BUY!

    Good Luck,

    Mike

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  • Lynn Z
    Member since 2008 · 689 posts · 23 votes
    19y

    You have a great mortgage -- one worth not refinancing I think because you are now at the stage of payoff that you're knocking the principle. Some smart people i know do buy a car with a HELOC and take the interest as a tax deduction.

    I think you can buy rental property and come out even in a bad market if you're careful and figure all of the costs involved and buy "low". Get your financing lined up ahead from a banker so you can negotiate well. Don't pay too much and check this out by taking the transfers from the Sunday paper and riding around in your zip code of interest to see what other people are paying for houses or apartments. Then look for a bargin no matter how long it takes.

    I worked a full time job and one year bought two triplexes that needed fixing. It almost killed me but I lived through it. Good luck and take your time to think the deal through.

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