Discouraged Newbie - is real estate investment possible for me?

Question

Please help! I really need advice from seasoned real estate investors about the type of real estate and investment strategy to pursue: Here's some background info:
- Single mom & full-time caregiver to special needs child.
- Net monthly income: $3350
- Starting capital $150k
- Location: Orange County, CA.
- Desired Goal: purchase multi-unit and live in one unit. Buy & hold.
- Constraints: 1) limited time to go around looking for a good deal (unless online)
2) monthly income is all from child support.
Questions:
- Multi-units in OC are in limited supply and very expensive (upwards of $700k). The 2% rule of thumb doesn’t seem to apply here. Neither does the 50% rule. Should I abandon this idea?
- Re: financing, I assume lenders take into account a (conservative) estimate of the rental income from the other units, is that right? Also, will they accept child support income as the basis for a mortgage loan?
- Any thoughts on out of area multi-unit investments (e.g. Las Vegas)?
- If not a multi-unit, I'm not keen on a SFR. Am I doomed to a condo?

Really hoping for some guidance on what to pursue in my situation (just don't tell me to put $ in the stock market).

Brandon Turner · Answer

Hey Emma S. welcome to BiggerPockets and thanks for posting here. I know the problem you face is a common one, and one that I personally don't have to deal with yet (I live in the sticks!) so I'm not sure how much help I can be. But like Marco Santarelli said, Turnkey might be a decent option if you can't move.

Check out this post - it might help you out:

How to Invest in Real Estate When Everything Is Too Expensive

The biggest thing I'd caution you with Turnkey is that (no offense to Marco at all, I don't know how his business runs!) the cash flow is not always what you think it will be. The returns generally don't account for the vacancies, repairs, legal fees, etc. Don't be afraid of this - just be sure to PLAN for this. This is why I like the 50% rule, even for Turnkey properties.

Hope that helps some!

Emma S. · Answer

Don Konipol Daniel Kowal

Many reasons why I can't and (more importantly) don't want to move. I like Marco Santarelli's advice "Live where you want. Invest where it makes sense!" and plan to research out of area investments.

Thanks.

Marco Santarelli · Answer

Hi Emma S.,

Brandon Turner makes a good point: Not all "turnkey" properties are presented the same. You need to consider what I call the "hard" and "soft" numbers.

The 'hard' numbers are what I consider fixed costs and expenses (property tax, insurance, HOA, property management) and any debt service.

The 'soft' numbers are more subjective and investors debate what these should be. These generally include vacancies and maintenance/repairs.

My preferred (and recommended) method is to leave the equivalent of two or three months' worth of gross rent in a reserve account that you never touch until you need to pay for repairs on your property or turn it over for a new tenants.

Regardless of what method you choose, and to Brandon's point, my website presents the numbers both ways.

Continued success!

Emma S. · Answer

Marco Santarelli thanks for the encouragement and sharing your expertise. I quickly checked out your site & like what you offer. I've bookmarked it to go back and read more.

Also reading the post by @Mike M that Karen referenced was very helpful. His comment "Owning rental property out of one's geographical area is no different than owning stock in a company whose factory you have never visited" does make sense. I'm warming up to the idea but need to read up on it some more...

Thanks!

Marco Santarelli · Answer

Hi Emma S.,

First of all, don't be discouraged. The fact that you're trying to figure this out is half the battle.

Orange County, California is very expensive and in terms of investment property here, the numbers don't make a lot of sense.

I assume you're renting. The monthly income you have coming in probably won't help you get approved for a property in OC, but if your starting capital is earmarked for investment purposes, you do have enough to purchase one to two properties in other markets where it makes a lot more financial sense.

This is not uncommon. Investors from high-priced markets like California, New York and New Jersey (to name a few) call me often looking for better investment options.

In general terms, you could easily purchase two turn key properties (for cash) in solid markets that will produce $400 to $600 per door (depending on the market). That would produce a cash flow between $800 to $1200 per month, equal to a cash-on-cash return in the neighborhood of 10% to 15%.

Let me know if you would like a more detailed breakdown.

Wishing you the best!

Account Closed · Answer

Emma S. I think it's great you are thinking about real estate investing and already have a good chunk of capital. Very good advice so far on investing outside of CA (I am also from there and I know how expensive it is!). There are so many avenues of real estate investing...don't be discouraged! You can learn so much from this site. Good luck to you!

Emma S. · Answer

Thanks all for the words of encouragement & caution too. What an awesome community this is! I truly appreciate your invaluable advice. Hope to post updates & probably questions too as things move along.

Take care!

Joel Owens · Answer

Hi Emma,

The child is number one. My mom was a nanny for a family from the time their child was born until he was about 8 years old and my mom retired. The child was eventually diagnosed with sever autism. We still stay in touch with the family today and are close friends. I like the fact you have 150,000 saved up.

You DO NOT want to be equity rich and liquid cash poor. Do everything slow and carefully.

The people saying buy a rental house out of state and not many things go wrong this is not what I have heard at all. I get calls every week from investors who bought houses out of state. They say property management ripped them off, the tenants were paying but are not now, they can't get anyone on the phone etc.

Make sure if you buy out of state especially with a little house is that a full time property management company is in place. The NUMBER ONE mistake I see is the investor uses an agent that sells most of the time and then cuts them a deal to manage their property. They do not have the experience in many cases to handle issues that come up with tenants or a property. As soon as a regular sale comes the agent does not care about the 60 bucks a month managing they get if they are lucky and do not have to split that fee with their broker and then your property starts going down the toilet.

I hear this over and over again from people I talk too. Now some people do not care about cash flow as much as timing market cycles. So they buy a house for 40,000 cash and it cash flows a little but then that market in 12 to 18 months is super hot and they sell for 60,000 to 65,000 and then go to another market that is cycling. It's all about what you are trying to accomplish with retirement or creating more cash.

I am not downing SFR but I play in the commercial real estate space only. Mainly big apartment buildings 40 units or more and triple net leasing. Some of my buyers are out of state but with a large building management is easier because of economies of scale. If you own 4 houses spread out all over the place you might have to use different management companies and it becomes a logistical nightmare.

If you do go the house route start off small to limit risk. Build a track record of success with the people you are working with and slowly scale up. I do not know that moving into a complex yourself locally with a special needs child is the answer. That might be too much going on to give them a calm environment with tenants etc. You also might not be the type that wants to live next to tenants or a landlord for that matter.

How much time will you have to invest while taking care of your child?? That will be the critical question you need to answer as many investing avenues might be too time intensive for your situation.

All the best.

Dean Letfus · Answer

Emma S. given your life is full with kids and special care and you have done such a great job of getting some savings together why don't you look at a market like Memphis or another higher yield city and create some (passive) cash flow for yourself and rent at home. 150K would get you 2 or 3 good quality homes in Memphis for example with around $2500 a month in income. You could leverage that a little later and increase your income rather than have your capital tied up in a property you are living in.

Ali Boone · Answer

Hey Emma. Don't fret, there are plenty of options out there. I live in Los Angeles and I don't buy anything in CA. My closest properties are in Atlanta and Nicaragua. Can't get much further away than that! I always buy turnkey properties because I don't want the risk or the hassle of doing it any other way.

Feel free to reach out anytime if you want to ask any questions about the turnkey companies or how to do it, what are the risks, etc.

Discouraged Newbie - is real estate investment possible for me?

Discouraged Newbie - is real estate investment possible for me?

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