First Investment Opportunity - Need Advice

6 Replies

Property Description: SFH in Austin, TX; 3/2, 1200 SF

Background: My father is retiring and moving to the beach. He and I have had conversations about my desire to own rental properties and have discussed me purchasing his current home (the home I grew up in) when he retires and moves near the end of 2017/early 2018. I currently live in Fort Worth, TX, and with the house being in Austin, I obviously have my concerns, hence the reason for this post. SFH properties in the area are currently listed/selling for between $250K and $325K. He plans to list the house for around $200K, but I think he would offer me the property at a discount (TBD). The house would require some cleanup (new fence, new carpet/floors in two bedrooms, minor items). Clearly, more research is needed on my end, but my initial concerns are twofold:

1. What kinds of concerns do you have about investing in out-of-city/out-state properties, especially with it being my first property? 

2. My plan was to purchase my first property in 2018 once I have, what I think are, the appropriate finances in place. While I am financially comfortable living as is, I feel I am not yet financially prepared to take on a property in 2017. However, I almost consider this opportunity too good to pass up if the price is right. Thus, my second question/concern is regarding alternate opportunities for winning this deal? What kinds of financing strategies would you recommend to get this property for little to no money down? 

I plan on analyzing the deal after publishing this post to better understand the opportunity.

Any insight is appreciated! I'm more than happy to share details if wanted. 

Since this is an out of area purchase, you may want to sign a lease where the tenant takes care of yard maintenance.   It is not feasible to drive that far on a regular basis for one house.  I do like the Austin area.

@Hayden Lyon If the purchase is between you and your father, you do not need a real estate agent. That will save him about $12,000. You *do* need a real estate or closing attorney though. Make sure you get a Title Report even tho' it is dear ole' dad. You want to be sure nothing is on title that he didn't know about. Austin is tough to "cash flow" right now, so go onto Rentometer.com and try to figure out what the rent would be. Depending on how you buy the house, using a bank, cash, owner financing, etc you can figure out if it will cash flow for you. Then take dad to the finest restaurant in Austin, because he is giving you a sweet deal.

What is the market rent. You need to be very carful in regards to investigating if this property is a suitable candidate as a rental investment. Most SFHs have low rent to purchase price and higher than average  expenses, resulting in low to no cash flow.

You need to  know your numbers.

They are absolutely right. The challenge that comes with putting long term leverage on a SFH to rent is that you are approaching a retail product with an income property approach. Meaning that if you were looking at a commercial property (retail, office, large multi family) you would value the property based on the income it generates (which is influenced by a lot of factors). But to keep it simple, you would simply take the revenue minus the expenses and it determines the income, and from there you can put a price tag on the property. With a SFH, value is determined not by what you can generate in income, but what are other homes like it selling for on the retail market, typically to owner occupants. So what happens is that while you may be getting a "good value", it may not really be a "good deal" not because of your dad, or the neighborhood, or even the house but simply because you want to rent it out. If the rents are not high enough to support the taxes, loan repayments, expenses (short and long term), property management (which with you not living nearby you need to seriously consider, typically 10% of monthly rent) and other expenses WHILE giving you cash flow, then you need to look at the deal again. Maybe you negotiate a better price, maybe you do seller financing with your dad at 3-4% interest (more than he would get with the bank, and less than you would pay on a loan= win/win), maybe you turn around and do a lease with an option to purchase (not lease option, you would need 2 separate docs for this one, talk to an attorney who has done them before), maybe you turn around and do seller financing at a higher price and higher interest (cash now, plus cash flow without the responsibility of maintaining property), or maybe your dad believes in you enough and wants to help give you a boost in the beginning by allowing you to flip the house and takes the profits from it and get into a better property, or multiple properties. There are many ways to skin the cat, and there a few ways to burn it to a crisp. Avoid the latter. Many here on BP can help if you can provide more accurate numbers such as true ARV, going rent rates for that size house, what repair costs would you need to get it rent ready/resale ready (and starting out, that can be the hardest part to learn if you have no construction background so ask for help on here), and days on market in case you did look at flipping it. All those numbers matter in determine exit strategy, as well as purchase strategy. But it sounds like you will very soon take down your first property. It can be a little unnerving, but its a great decision to begin and no better way to get started than with a little help from family. If you can get those numbers mentioned above, I know I would be willing to help you run them and look at all options to see which ones would be the best choices so that you can then go discuss them with your dad. I'm sure many others on here would be willing to do the same.

@Hayden Lyon

1. If you're getting a good or exclusive deal, which it sounds like you could be, then I wouldn't worry too much about investing in Austin while living in Fort Worth. However, the numbers still need to work. You would also need a property manager. So, be sure to factor that into your numbers.

2. Does your father need the full proceeds of the sale right away (e.g., to purchase his next home)? If not, you could do seller financing at whatever terms you and your father agree upon.