First investment property: Help deciding on a property

8 Replies

Hi everyone, I am a new would-be investor in Kansas City, MO and looking to purchase my first deal. Currently, I own a family home that is a nice, newer 3/3 in a fantastic neighborhood and school district. However, it is a financial drain. This major expense is part of the reason I wanted to begin this journey in REI. Anyway, I’m ready to make a pretty drastic move and sell the house in order to start what I plan to become an eventual career in RE and the path to financial freedom. Also, to mention: I have two kids, 12 and 8 and am divorced so one income and one source of labor and time for rehab/reno(my Dad is a contractor and will be super helpful, though). By day, I’m a teacher so have steady income and excellent credit. I am approved for financing on all of the prospective deals so that isn’t an issue. I would do an FHA loan and occupy the place for one year. Then, move on to the next one. Do this 4-5 times before settling down into something. Okay, so I’ve looked at probably 30 places in the last month or so. A couple ‘off market’ deals(as in word of mouth through friends/associates), but mostly those I’ve found on CL, Zillow, or the MLS. As of today, the best two options would be: >>A duplex in Independence—owned by long time local investor who has been very helpful to me so far. 3/1.5 that rents for 900 each side. Asking 175k but would take 165k, maybe 160k. PITI below based on 165k. Gross rents: 1800 PITI: 1120 Maintenance: 270 (15%) He said w my Dad doing most work, I won’t have much in expenses here. I agree, but trying be conservative. Capex: 270 (15%) He also thinks this is on the high side, but trying to be conservative. Vacancy: 150 (per current owner of 15 years, has had 98% occupancy). Cash flow= -10.00. Seemingly, this is a bad deal. However, living in one side for 1-2 years would allow me to save upward of 18,000 per year. That would be tremendously valuable to me and allow me to buy other properties and have a nest egg for repairs and maintenance (though I plan to save 15k out of my primary residence for this purpose as well). I wouldn’t go into this without a reserve of cash for repairs. Other cons on this one: Location not ideal. Independence not the best area of town and 20 min from my current neighborhood. Not awful in terms of managing it, though. Easy drive and again, not a war zone, just not where I’d want to live. I’d call it a C+ working class neighborhood. >>SFR 4/2 in my school district (Park Hill) Asking 129k but could probably get for 120k. Needs about 10k in work but has brand new roof and HVAC and has had plumbing updated, too. And we’d do the work to be done ourselves. So, basically all in at 130k. Gross rents: 1400 PITI: 800 (paying out of pocket for repairs) Maintenance: 210 Capex: 210 Vacancy: 100 Cash flow: 80 This one is in a highly desirable location walking distance to three excellent schools. Very close to where I already live, too. I realize neither are great deals. At all. But, I have to start somewhere. And part of my motivation is to save aggressively through cutting (or nearly eliminating) my personal mortgage expense. Any recommendations or insight welcome:)). Thanks in advance!! Amanda

Well it really sounds like you want to stay in your school district! Since your Dad is a contractor are there any fixer uppers you could buy within that school district? You might be able to sell your home, buy a fixer, then refi the fixer, free up a chunk of capital and then go buy some value-add MF rentals. Fix those up, refi them, repeat, repeat, repeat! 

@Amanda Olvera

I think you're on the right track by trying to cut your living expenses down, in order to save more capital. 

I would however caution going into any deal where cash flow is negative, especially when the market is crazy hot right now and rents are at a high. These rent trends could last another 5 years or last 1 year, nobody knows. When the correction occurs, rents will drop. Especially with all of the new apartments being built north of the river right now, near Liberty and the NKCSD area specifically, this creates more options for would be renters. Supply and demand on a macro level is easy to forget when we get into the thick of a deal. 

In my opinion I would keep saving money where you can now. Maybe even offer some tutoring for students on the side to get extra income. Then when you have more of a cushion, or find a killer deal, you'll be ready to leap.

Once you create your ideal criteria, stick to it. It's better to go a year or two without a deal than it is to get into something that ends up taking you for a ride. 

Another thought: I really don't like the FHA loan due to the lifetime PMI attached (without doing a refi), you can  however do a lump sum payment of the PMI on the front end of the loan, which will allow you to get in around 16% (these numbers are from a previous deal I analyzed) down. Just something I've heard others have done successfully and may be worth looking into. 

Value adds, are going to be your best bang for your buck. Especially because of your dad and his expertise that he can bring to the table.

@ Lee Ripma
Yes, staying in the school district is ideal.
Thanks for the insight—and that’s exactly what I want to do. Just wish there were some better deals to rehab right now.

Ahhh. I had this original post in paragraphs!
Don’t know what happened, but what a mess now!
Type A English teacher nightmare!!! 😳

Ah-you've hit problem number 1, no deals! Killer deals are not usually sitting out on the MLS as is. So you might need to get creative to find a value-add project. 1) you could find something in your school district that you could add sf to or reconfigure to increase the value. 2) you could do one of the many suggested things for finding deals, direct mail, driving for dollars, wholesalers, etc.

Also, checkout the direct lender loan depot. They have a bunch of low down loans without PMI. A loan broker might be able to get you one of those as well. I am not a fan of FHA. But full disclosure I use commercial loans and don't have any of these but I have looked at the loan depot loans a lot and like them!

Amanda, considering the ages of your kiddos, I'd say, stay in the school district and be patient.  It's hard to find deals but they're out there.  Drive around the neighborhood and look up those distressed properties with equity.  Ask those owners if they're looking to sell in the future and maybe you'll get lucky and snag one.  It's great that you're driven and you seem to have a game plan.  Keep up with your hard work.  It's out there!

@Amanda Olvera - agree with all above. With any multi schools are critical. I know your house is killing you but don't rush into a bad deal. Have you considered simply moving into a much cheaper SFH that needs work? Renovating it and then moving in two years? I understand that doesn't eliminate your mortgage but a good way to build equity and a rental portfolio.

What part of KCMO or KCK are you looking in?

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