My Newbie Investing Strategy - need input/critique

4 Replies

Hello all! Been reading these forums and the rest of the BP site for awhile now and believe I have come up with a strategy for investing in real estate in the very near future. I hope to get a critique of the following plan from as many experienced investors as possible to expose any holes. Please do not hesitate to criticize my newbie plan (but preferably offer a solution if you do). I am here to learn as much as possible before I buy my first property. I'm open to hearing any alternative strategies at any point in this plan.

Quick background: I'm engaged, no kids yet but planning to have several quickly after getting married, no real estate experience, former Airman, full VA entitlement available, live in Phoenix area, currently make $50k/year and raises are very likely over the next few years, no debt, $15k in savings. Fiance has very little desire to share space with tenants, so it looks like we'll be doing SFHs as opposed to multi-families (though I still have hope I can convince her to try it for the first property, but let's assume it's not going to happen).

Tentative Plan:

-Buy a SFH for $150,000-$200,000 in Phoenix area with a VA loan ($0 down), live in it for 2 years while aggressively forcing appreciation as much as possible, have one or more kids

-Buy second SFH for $200,000-$250,000 in Phoenix area (upgrade reason: more space for kids) with another VA loan ($0 down) using remaining entitlement, rent out first SFH, live in this one for 1-2 years while aggressively forcing as much appreciation as possible

-Buy third SFH for $200,000-$250,000 with an FHA loan (3.5-5% down), rent out second SFH, live in this one for 1-2 years, not going to try to force appreciation too much right away but instead will spend more time and money building equity in the first two houses

-Refinance both VA loans into conventional loans once I have 25%+ equity in both, use the "one time restoration of entitlement" to free up all my entitlement again, rent out third SFH, buy permanent primary residence for as much as I can afford at the time (but not more than the VA maximum) with a VA loan ($0 down) for my now large family to live in forever

-Aggressively force appreciation and build equity in third SFH until I can refinance that one into a conventional loan as well to get rid of PMI, then continue on from there

So, my main concern is affording the second SFH without the necessary two years of landlording experience. I've read that it's possible a lender will include the future rental income from the first SFH, as long as you have a signed 12-month lease and a verifiable security deposit in your bank account, but will only include enough to offset the mortgage or 75%. Either way, they won't include the full amount as effective income, which is fine though because I will be able to afford the second one with just the mortgage payment on the first one offset. Am I wrong to assume a lender will do this? This is my biggest concern and why I wanted to do a multi-family for the first one, to get the necessary 2 years of landlording experience in order to include the full rent amount as effective income when applying for the second one. But alas, as of right now this is not in the stars.

Am I missing anything? Any input or advice would be greatly appreciated. Thank you for taking the time to read this lengthy post.

I think this is a good idea to start. Use your competitive advantage which is your VAs loan

@Darrell Knapp

Sounds like a solid plan. Just make sure the numbers add up. Since you'll be putting $0 down, the monthly mortgage would be higher than an investor that put down 20%. Not sure what exact area of Phoenix you are targeting, but the rent more than likely wouldn't hit the 1% rule since most rents in Phoenix on SFR's in that price range usually run $1000-$1700. When accounting for all of the monthly expenses, your cash flow may not be what you want it to be. Just run the numbers correctly before buying a bad deal. Best of luck to you nonetheless!

@Lane Kawaoka thanks for your input! Indeed the VA loan gives me an advantage when starting out. I will try to use it as much as I can.

@Bob Okenwa thanks for chiming in! Yes it will be tough to make the numbers work, especially at the beginning. However I plan on living in these properties for a little while before renting them out so hopefully I can pay down the mortgage a little and build some equity enough that the numbers will look better when it's time to rent them out than if I had rented them out immediately. But it will be difficult. I will indeed run the numbers several times on each property before buying and make sure they will be profitable in the long run. Thanks for the advice!

@Darrell Knapp

Glad to help. It always helps to buy with equity, especially since you're using the VA loan. There are still deals to be had here in Phoenix, but you have to be prepared to move quickly on them.

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