Don't want to overextend/Wise Investment?

Question

So I am new to investing, have done a ton of research, reading, listening, studying, etc. over the past 18 months. My wife and I are supposed to close on our first two investment properties in December (Single family homes, 1 Seller Finance, 1 Rehab on adjacent lots, in Central PA with a buy and hold strategy). Mortgages on both Properties will be roughly $320 a piece, while rental income around $650-$700.

In a recent turn of events, my wife and I are relocating to Central PA from Northern New Jersey where the homes are located. My question is this. We have an opportunity to buy a recently renovated Tudor style home at $160,000 which we would personally live in (House Hack) with one move in ready basement apartment and a 5 car garage with a finished bathroom, which would cost roughly $15,000 to retro fit for a second rental space. Both rentals would yield roughly $500 and $650 respectably. If we purchase the Tudor home the purchase and renovation would leave little excess capital for a period of 6 months (although I do have a potential investor (family member) who could provide a cushion.

The question is this. Am I being over ambitious and over extending myself. Is the Tudor home, house hack a good investment or would those with experience recommend starting small, moving into one of the original properties, and just starting with the single family rental until we get settled?

Steven Loveless · Answer

@Anthony Caiola At the end of the day it all comes down to making projections, and then deciding if the probable upside is worth the possible downside. Those estimates are only as good as your projections though, and that is where everyone is different. I think some of the questions I posed above provide a possible worst case. I like to draw up worst case, best case, and "muted good" (think inflation rate growth, normal expenses, etc.) case scenarios and see what your personal situation looks like in all three.

I don't think you can "manage risk," everything you do has some associated risk and it is what it is - you can't change it. Your job is to make sure that your likely return compensates you appropriately for an acceptable amount of risk, and that is unique to each individual.

It sounds like you have a lot of irons in the fire. Two rentals, learning the process of landlording, a job transition, and re-finishing out a basement and garage of a new home seems like a lot to take on all at once. I cringe when I hear a lot of people talk about "creative financing." You need cash reserves. period. If you use creative financing to goose returns that is one thing. If you do it solely to get in the game, then you are likely taking on what I consider to be some extreme risk. $0.02

Anthony Caiola · Answer

Thank you to you both for your responses. There are a couple of variables in flux at the moment which will help to minimize the risk slightly. The first is whether or not the Salary I receive in Northern New Jersey will be comparable as I am presently seeking to secure a position in central PA before the move. The second is what our home in North Jersey will close at. We have a enough equity built in to provide a down payment on the Tudor home with enough cushion left over to carry the expenses of these properties for up to a year.I'm waiting to see these pieces come together before moving on anything outside of the two properties were already in the process of closing on.I appreciate both of you pressing the issue of risk management. Most of what I've seen and studied focuses on evaluating a potentially good deal as far as cash flow or a strong equity position. It's not as common to find as much on how to manage for risk management.As a new investor trying to balance getting in to real estate with the need for creative financing because of limited funds vs not over extending myself what would be your thoughts? How does an investor know how to manage risk while taking risk. What questions would you recommend asking in order to discern this at this stage?

Peter Tverdov · Answer

This is a post I made a week ago.

https://www.biggerpockets.com/forums/62/topics/361...

Judging by the lack of replies so far, I'd wager a decent amount of people are living in a fairy tale world on here and aren't truly prepared for things to go wrong, just worried about scaling - which is great because I want to scale too, but you need to do risk analysis IMO.

Steven Loveless · Answer

That's a pretty subjective question based on your personal finances and risk tolerance, so I'll just throw out a couple of things to think about:

What would happen if your rental income over the next 2-3 years is 25% lower than you are forecasting?

What would the impact be if you have to evict a tenant (or two?) within the first few months of owning your new properties?

What about if you lose your job?

Do you plan on getting any bank financing for any of these? Your lender will likely require you to have capital requirements, which sounds like you might not make.

If any of these answers make you uncomfortable, think long and hard. Are you sure you are okay using a family member as a capital backstop? How long can that keep you solvent?

I'm new to this whole game - actually closing on my first investment house this afternoon! - but I am very conservative. I have made sure both my wife and I could lose our jobs, the market could crash, and have to pay primary and rental property mortgages with no income for a year. (And that is without taking any tax hits for withdrawing from 401k's/IRAs/etc.)

Just take a look at several scenarios, and then ask - is the return worth it? If it's a once in a lifetime deal, maybe so. If not, just remember you build wealth slowly.