I have just recently started to look into real estate investing and am learning as much as I can. Let me explain the situation I am currently in and hopefully anyone here can help me with any advice they can offer which is greatly appreciated!
**The next 3 paragraphs will explain how I got to where I am today in terms of getting started on real estate investing. If this does not interest you, please feel free to skip the next 3 paragraphs!**
I was fortunate enough to have my father purchase a two bedroom condo in Las Vegas with both our names. I wasn't really hands on with that unit since we had a property manager do the heavy lifting. I just recently was able to sell that property for roughly $200k. I am currently in the contract signing process but I would like to do a 1031 to use this profit to dive into the world of real estate investing. I currently live in LA (Ktown) and have been learning as much as I can through Bigger Pockets and any other resource I can get my hands on.
I would like to start with a buy and hold approach and make some income from renting the units out. I have a full time job currently so I'm not in dire need of income. Through the little information I have learned so far I set my goal as "Earn a steady $2,000 per month of steady income through multi unit properties (duplex, triplex, quadruplex) in LA by June 30th". I know how ridiculous that sounds but I was lacking a lot of researching and learning at that point so that was what got me started.
After some more research I learned that it was extremely difficult to make profits through rent in LA. The more I researched, the more I realized that the 2% or 1% rule cannot work with most of the properties. If anything I was lucky to find a few that would meet the 0.5% rule (if that exists). So now I have expanded my search area to the greater Los Angeles area.
Thank you for taking the time to read this long story. I hope that will answer any questions any of you might have in terms of the history behind where I am currently at.
So bottom line is, I have now amended my goal to "Earn $2,000 per month of profit through multi unit properties (duplex, triplex, quadruplex) in California by June 30th".
First of all, please do let me know if this is a horrible goal to start off with. I am still very green to the real estate world and have yet to fully grasp all of it yet.
Second, I will most likely start with a $200k cash for my previous property I will be selling which I will do a 1031 with to start my real estate venture. So with a loan, I'm leaning towards a spending budget of $500k - $1.2m for a property (or properties).
Well that's about as much information as I can share I think...
So any tips or guidance in terms of the direction I'm going would be greatly appreciated! Please feel free to ask me any questions you may have and I'll respond back as soon as I can.
Thank you again and hope everyone has a great day!
Geoffrey Tan it sounds to me like you have everything figured out! You are on the right track for sure. You just need to make a decision and go with it.
There are so many things to do with the money. We all invest differently, so everyone will have a different answer for you.
As for getting $2k cash flow off your fist purchase/purchases... With 1.2m in the right area you could do that.
Hey @Geo Tan ,
Congrats! Are you looking to live in the property that you purchase, a.k.a, "house hack" or are you simply looking to purchase an income property?
Thanks a lot Eric!
Makes a huge difference hearing that from people on Bigger Pockets.
I'm glad I can finally know my goal is attainable.
I wasn't too sure if I was over-reaching with my first goal.
Appreciate the quick response!
I was originally planning on "house hacking" when my search span was within LA but if it's a better investment choice to buy properties outside of LA (which is what I'm seeing and leaning toward) I'm perfectly content renting for myself in LA. Plus I work in downtown so I love living in LA just for losing the commute time. I'm leaning more towards not living in the unit I purchase as of right now but definitely can go both ways.
The only issue is that my lease is up end of February and going month to month until this gets sorted out is very very expensive! (Current rent is $1400 for 1b1ba and jumps to $2100 for month to month)
I also heard somewhere that if we live in the property we invest in for a certain amount of years that we can get tax deductions for a certain amount? Not sure if this has any truth behind it at all and I'm definitely not at that level in learning yet.
@Geo Tan Understood. We're currently actively looking at house hacking now. So if you want to continue to compare notes as things progress, don't hesitate to reach out! In the meantime, there's a wealth of info on Bigger Pockets on this exact topic, so your time educating yourself here is a great investment!
Welcome to BigggerPockets! Below are some links to get you started. Much success to you!
I received this info from @Nathan Sharp when I first started.
https://www.biggerpockets.com/renewsblog/2014/03/13/investing-multifamily-ben-leybovich/ (Podcast 061 - How to succeed in multifamily investing)
https://www.biggerpockets.com/renewsblog/2013/04/09/how-to-buy-a-small-multifamily-property/ (How to buy a small multifamily property)
https://www.biggerpockets.com/renewsblog/2015/11/16/how-to-choose-areas-multifamily-deals/ (Choosing multi-family deals)
http://www.biggerpockets.com/renewsblog/2014/07/19/how-to-buy-a-duplex/(guide to buying a duplex)
Now that you have made the move, below are some links that will help with the navigation of the site.
- How to Use @Mentions on BiggerPockets
https://www.biggerpockets.com/real-estate-investing (Ultimate beginner's guide to REI)
Before your 1st purchase, please ensure you visit the below link for some tips.
REI books suggested by BPers
https://www.biggerpockets.com/renewsblog/2015/11/13/7-real-estate-books-beginner-investors/ (7 absolute must read books for beginner REIs)
Simply, expand knowledge in such as, Forums, Marketplace, Learn, Network, Analyze and Resources.
Feast on the BP Podcasts, #askbp Podcasts, BP blogs and BP webinars.
Thanks again RD! Will definitely keep you posted as I find out more on my end as well.
Let me know how things go on your end too!
And yeah Bigger Pockets is definitely one of the best decisions I've made so far.
Thanks for all that great information! You had it all nice and laid out too.
Definitely a big thank you to @Nathan Sharp as well.
I think the majority of the content you provided was exactly what I was looking for.
I've been listening to the podcasts as often as I can while I commute and at home too which is definitely a huge help. I love how they break it down so even someone who just started out like me can stay in the loop. Definitely awesome materials.
Thanks a ton!
@Geo Tan , I would recommend the house hacking route. In my opinion, house hacking a 3- or 4-unit property using FHA 3.5%-down financing is in my opinion the best option for a young person looking to get started investing in real estate. It frees up so much cash to invest elsewhere. It's really a no-brainer if you're throwing away money every month making somebody else rich.
One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 85% (75% in certain states) of the market rents on all the units need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. I put together a spreadsheet here to help potential house hackers quickly analyze whether or not a property qualifies. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like ours.
Good luck and reach out to me with any questions!
your Sir are in a great position! The fact that you are thinking of ways to make that money earn you MORE money before you even receive speaks volumes. To your question, if it was me, I would house hack a multi...for all the reasons already mentioned above and others such as tax breaks.
Hey Geoffrey! Well props to you on your goals and getting started. I love the drive and motivation. And you're right about LA and the numbers....you'll be hard-pressed to find anything here that even hits a positive cash flow number.
Unfortunately, you are going to run into a similar problem pretty much throughout California. A few cities out there may at least give you positive cash flow, but it's not going to be a lot for how much you have to pay for the properties. At least not compared to cities outside of Cali. If you are in it for appreciation potential, then there's some room there to play, but if $2,000 in passive income per month is your goal, you are going to have to buy quite a few properties out here...and they don't come with cheap price tags.
So, just a warning for Cali properties on the numbers! Passive income has always been my goal so I just buy outside of CA instead.
It's always great to hear more information on both sides. In terms of the house hacking route, I really want to emphasize how new I am to this so as I read your response, I could somewhat understand the math and your explanation behind it but I'm still a little lost on your explanation so I hope you don't mind if I pick your brain some more!
From the quick read I did, it sounds to me like FHA loans are just loans more catered for people who might not be able to make the loan payments through mortgage insurance? I should really really study my loan terms and all the vocabulary a little more since anything regarding loans or government regulations, etc, are all very very new to me.
So since I am planning on going through with a 1031 to avoid taxes on my profits from selling my unit in Vegas, if I'm understanding you correctly, you would suggest paying a FHA 3.5% down on properties? Since I have to use the full amount of roughly $200k from my Vegas unit, I'd be able to get quite a few properties if I only have to pay 3.5% as a down payment? I honestly feel like I'm totally misunderstanding your explanation so just wanted you to know that I'm not counter-arguing or anything. I honestly just wasn't able to understand your breakdown as well as I'd like and I did try to do some quick research to better understand your method.
So if I do 3.5% down I feel like I could start off with quite a few properties in my portfolio? But does that mean I'm affording these properties with majority of the payment being loans? That seems extremely risky...
I'll just stop right here since I really think I'm not understanding the explanation properly and I feel like I'm making a complete fool out of myself hahaha.
Thank you so much for your explanation Logan and I'll definitely do some more homework regarding the FHA loans. I'll also definitely be checking out the spreadsheet to better analyse self sufficiency! Thanks again!
Thanks for the motivation, I could use all the pats on the back I can take.
I was definitely leaning much more on house-hacking in the beginning exactly for those reasons you mentioned: paying myself rather than paying someone else money for rent, and the tax break reasons.
But now I'm currently leaning more towards out of LA for investments purely just because the numbers I'm crunching aren't really adding up as a profit in LA. I definitely should look more into the tax breaks though since I only heard that from an associate of mine but never really had the chance to look into how much of a benefit that would give me.
I'll keep you posted on as I find out more and thanks again for the motivation!
Thank you for the compliments! It's always great hearing motivational comments from veteran real estate professionals.
I'm totally bummed to hear about all of California being on the same boat as LA in terms of hard to turn a profit. I still have a ton of research to do on other cities outside of LA but I do have to agree with you that most of what I'm finding is exactly as you mentioned in terms of making a positive cash flow. I still do think it's still a tiny bit better than LA so I still have my fingers crossed.
My long term goal is to definitely invest outside of California. I feel like there's a gold mine waiting to be tapped. But since this is my first investment, I would love to be more hands-on and be involved to better learn the process. That's pretty much the only reason why I am hoping to keep my first few properties in a few hour driving distance. Even if the cash flow is much more limited here.
To be honest I am not even remotely considering appreciation profits in my research for now. I know I should be but I'm already overwhelmed with learning all about basic buy and holds with rent as a main source of cash flow. I also am completely lost as to where to start out in terms of researching past and current housing market values and such. I feel like that's a whole other monster to tackle and I am trying my best not to overwhelm myself and get discouraged.
Definitely let me know if that is a completely wrong way of thinking or if you have any other suggestions on getting started or which direction I should be going!
I'm glad you think there is still a possibility of making my goal happen. I'm sure I will get more specific with my goal as I learn more but one common suggestion from everywhere seems to be setting a goal. It's definitely helpful and motivation just to have a goal though.
Thanks again for your response and I'll definitely keep you posted as I find out more on my end!
@Geo Tan , if you're in your 20s and currently renting, house hacking is a no-brainer. If you do nothing else in real estate, you will have succeeded by getting into a Los Angeles fourplex as a young man with only 3.5% down. Assuming the rents cover your expenses, in 30 years when you're in your early 50s and the mortgage is paid off, you will be sitting on a multi-million-dollar asset that cash flows thousands of dollars per month at the cost of a measly $20k or so out-of-pocket when you were 23. I can't think of any better way for young people with limited resources to prepare for their future so early on in life with so little cash out-of-pocket. Run the numbers and see for yourself.
Also, remember this: you're young. Your priority at this point in life should be setting yourself up to build your balance sheet, not necessarily your current profit and loss statement via cash flow. It'd be a different tune if you were in your mid-40s with a family.
PM me, and let's talk. I'd love to get on the phone with you and convince you why you should make house hacking your first investment and then think about duplexes in Indy or Cleveland later down the line if you're so inclined.
@Geo Tan ? Also, unless you buy a multi family to house hack you can't do a 1031 into a primary residence for yourself without some very careful analysis on valuation allocation. The 1031 exchange is for investment to investment property only.
Hope that helps you a little.
@Geo Tan Welcome to BP! I am not sure where you heard " all of California being on the same boat as LA in terms of hard to turn a profit." The REI climates in California run in every possible direction. Very few are like LA. But if we are talking total profits the top three in Cali since 2000 are LA, SF and SD. Those are also the top 3 for the nation.
Good luck with your search!
How about 5+ units in the valley, or anywhere you can drive to within 1 hour?
Great to see you are making the jump into real estate investing! The cash flow sounds great and many investors than use that cash flow to reinvest in purchasing more real estate, if they don't need the income; Freeddie Mac just increased their limit to 6 properties, allowing you to purchase up to 6 properties, with the below LTV's.
For A Fixed Rate Purchase, Investment properties, Mortgages 1-4;
- A SFR requires a LTV of 85%
- A MFR requires a LTV of 75%
1 unit - $417,000
2 unit - $533,850
3 unit - $645,300
4 unit - $801,950
There is a Maximum 2% sellers concessions is allowed.
Not sure if you have retirement funds for cash reserves; but these are required on each inVestment property as well;
If the borrower has 1-4 mortgages, an additional two (2) months for every other SFR investment property and second home is required and additional six (6) months for every other 2-4 unit investment property and second home.
If you already sold the property do you have the cash in a seperately account? We looked into a 1031 exchange at one point, but decided not to do it. I don't think you can ever have access to the money and you need a middle man to hold the money, in which you have fee's to pay for that as well. I don't know much about this though. Once I found out we couldn't have access to the money and had to pay the fee's I decided not to. Maybe it is different now.
I get your logic but I feel like that would be even harder of a task to do for obvious reasons. Lower down means higher mortgage payments which in majority of CA would be quite hard to get a property that has higher rent than the expenses no? I'm sure there's ways to get around that and find right properties but that overall sounds like high risk high reward? I personally feel like I don't know enough yet to do something that risky. But that's just me.
Another issue is from what I understand with a 1031, there are certain regulations I need to follow if I want to house hack with a 1031? Not too sure if that holds any truth to it or not but that's what I always thought. I'll definitely message you to talk more about this. I honestly did not think I'd get this much good feedback with my post and since I'm working full time and my job is picking up it's hard to keep up with these awesome responses!
Thanks as always!
That's what I'm starting to find out on my end as well! Glad to be on the same page. Someone suggested that I go that route so I did some research and I have to agree, I don't think it's possible to do fha financing with a 1031. That wasn't my current plan though but I'm glad I got the chance to learn about fha financing in general. Currently from everything I've learned (which is the tip of the iceberg), I'm leaning towards sit and hold on a multi unit(s) that's in a 3 hour radius from LA. It just seems extremely hard finding a spot in LA that gives a positive cash flow but at the same time, since it is my first hands on investment I want to be able to drive to the property if needed be. Thank you so much for the heads up though! I'm glad to know I wasn't misunderstanding what I was learning.
I hope @Mark Creason, @upenpatel, and @Steven Gesis do get a chance to read into my situation! Everyone's been such a great help on here and I'd love more feedback from anyone here I can get in touch with!
Thanks Dave, it definitely did help a ton!
Thank you for the warm welcome! I'm glad I took the dive into the Bigger Pockets community. Best investment of time spent by far.
I totally agree with you that there are cities outside LA that are much better for cash flow. I think it definitely is more of a challenge than some other states in the US though.
A quick question I had was the top three cities that provide profit being LA, SF, and SD.
Is that in terms of property value or with cash flow from rent or both? I'd think those 3 cities may be best in terms of property value profits but I feel like it would be quite hard to make it highest profit for cash flow from rent? I definitely don't know enough to make a solid statement on that but that's how I feel it would be. Definitely let me know if that is totally incorrect though!
Thank you for wishing me luck and hope to keep in touch!
@Geo Tan , The real issue with house hacking and 1031 is that it is mixing uses of properties. It can be done but you've got to be careful. A 1031 is only for investment to investment. You may not use 1031 proceeds to purchase your primary residence.
If you were buying a duplex and wanted to use a 1031 exchange for one half and live in the other half you could as long as the amount you purchase for the 1031 portion meets the valuation requirements. One of the rules is that you must purchase at least as much as you sell (net sale before mortgage payoff). So if you sold your investment property for 200K you must purchase another investment property for at least 200K in order to fully defer all tax. If you can buy the duplex for 400K then the half you will be using for investment could be worth 200K and that would be fine. You could live in the other half and still keep the 1031 intact.
When you house hack the allocations are not nearly as clear. It becomes less like two structures and more like a bed n breakfast etc. So you'll need to work with your accountant to establish exactly what % your are treating as investment and what part constitutes your residence. Then apply those valuations to the 1031 scenario to determine if there is the danger of any taxable amount in the sale.
Of course you'll need to report all business activity from the hack appropriately.