Investing in Rentals in Wisconsin for Cash-Flow

24 Replies

Hello. I have been a long-time lurker here on BiggerPockets, and have learned quite a bit by reading forum posts and blog articles. A bit about my background: I am in my late thirties, work as a software engineer for my W2 job, and have taken some small business courses (accounting, law, writing business plans, etc.) and real estate investing courses over the past several years. As of yet, I have not done a single deal since I have chosen to thoroughly educate myself before investing.

I have approximately $480,000 of liquid capital, and approximately $310,000 of equity in my primary residence. My W2 income is quite decent for where I live in the midwest, approximately $110,000 per year.

I would eventually like to replace my W2 income with passive income from rental properties. In the Madison rental property market, it is fairly difficult to make anything cash-flow, as people are currently willing to overpay for investment properties. Milwaukee is supposedly a much better market for cash-flow investing, and one can purchase properties there for far less money than one can in Madison. However, I do not know the Milwaukee neighborhoods very well. Note that I do already have the PDF that Dawn Anastasi has put together regarding Milwaukee neighborhoods, and I certainly know to stay out of certain zip codes.

My question to the BiggerPockets community is this: If you were in my shoes, and you wanted to replace your W2 income with passive income from rental properties, what would you do? Would you do a cash out refinance or HELOC on the primary residence and then leverage yourself into several million dollars worth of multi-family apartments? Pay cash for several SFRs? Do something else entirely? Also, where would you invest?

Kent Wolfhart

First off, never tell someone as a newbie how much you have available. Everyone and their brother will either try to sell your a "program" or a **** deal. As they know he can afford it. I would start looking at multifamily units, maybe a nice 8 unit to get your feet wet, using my 480k for my 20% down and hire a great PM.  Then rinse and repeat.  Keep in mind live where you wanna live and invest where the numbers make sense. If you truly want passive income, location should not matter.  Happy hunting!

I would have to say I would walk before running.  Your profile says you are from Fort Atkinson.  Why not start there?  I would start with one rental or duplex to start because that is where you will learn.  Then do another.  While you may not make a fortune quickly, you will learn the mechanics.  Reading, listening to podcasts, taking classes are all great and you should do all of them but actually doing your first deal will teach you more.  And better to learn in your back yard than an area you are not familiar with.  

My husband and I live in Deerfield.  We invest in Beloit.  The margins are good.  I would invest in Fort Atkinson as well if the opportunity arose.  It is a good area.

Good luck.

@Kent Wolfhart
Welcome to The BP forums!

If I were in your shoes, I would look to network and find out where the potential deals are. A good place to start would be the local BP meetups in Madison and Milwaukee.

I would also look to connect with reputable syndicators with proven track records.

Best of luck!

If I was sitting on some capital, I'd go big.

Agree with @Kathy Mcguigan @Kent Wolfhart . Like you, I’m in IT with desires to replace my W2 with passive income. I didn’t have as much liquid capital as you when I started and I’ve learned some valuable lessons. Being an IT brother with similar goals, happy to help you out. Just hit me up! Leave the real estate investing ID10T errors to me. 

@Kent Wolfhart you have to walk before you run. Having a substantial amount of money in the bank is dangerous, because you will tend to render a bad deal into a good one by throwing money at it to make the numbers work. It is just too easy to do if you can. I have seen several people fail or end up with a s**t deal, which typically results in loosing some of your capital, huge frustration and the end of your real estate career. It's almost better if you have only 30k to work with and you know you have only one shot. It will make you work harder, dig deeper and study more deals, before you take the shot. Success in real estate is in direct proportion to your experience level. The canundrum is you can learn only so much from standing on the sidelines, eventually you have to get in the water if you want to learn how to swim. You have a steep learning curve in front of you, consider the first properties practice. You don't need to make all your money on your first deal, focus on low risk. Ironically most people will look in the bargain cave for low risk deal, because they assume that a cheap price eqauls lower risk. In the investment world lower risk usually comes with a higher price. Buying cheap is pitfall #2, as a cheap deal is not necessarily a good deal. Finally start with your target audience in mind. Which demographic segemnt do you want to serve? Most people start with the property and then find out which tenants it attracts. I suggest to give this some thought up front: you can focus on low income housing and section 8, working class or high end. In terms of rent that could mean $600, $1200 or $2000+ per unit - each comes with different pro's and con's. Most investors do not give this much consideration and their traget audience is a default determined by the property. Once you know where you want to be, you will chose SF or MF (or commercial!). If you want to go MF I would suggest start with a duplex as a training project and then go and scale if you want.

We  bought several houses in Milwaukee this summer.   Feel free to reach out if you want to know what our experience was.  spoiler alert- mostly good.  

Hello @Bob E.

Milwaukee ,Wi investing is going well for you? That's awesome, good for you. May I ask, is the price range between the 50K~100K level?

Thank you in advance!  :)

Daniel F. Harb

@Kent Wolfhart Thanks for reaching out to the community. IT professional here as well. 

I think you have taken enough classes and it is time for you to jump. 

With that amount of cash, you could go big. I mean seriously big. Yes, you can start small to get your feet wet a little, but If you have over $ 500k in cash, you can basically play in the $1.5M - $2.00M range (75% LTV). This screams multi- family apartments. I don't know your local market, but you can make some serious dough in some cash-flowing market with this amount of cash. SFRs can be painful, because all your houses will be located in various places.You should put this money to work.

Have you ever done deal analysis? If not, you should get started asap. Do you have a target market in mind? If not, start studying various markets and start assembling a team: Broker, Accountant, PM, Banks ... reach out to banks and get to know bankers ... start seeing the requirements some banks have ... if you wanted to pull the trigger.

At the end of the day, you've got to just pull the trigger. With your capital, you could easily throw down on several SFHs in many markets (paying straight cash if you want to) or put 20% down on a multi family.

A lot of people advise on going straight to multi family if you can. It's about the same level of effort as doing a SFH, sometimes even easier.

At the end of the day, if you just want to get started, you could take $50K or $100K and just do something. Worst case scenario, you make a mediocre decision and still have most of your capital for your next investment. And then at this point, you will have more experience to do an even better job. And if you make a mediocre decision, then at some point you can always offload the property and put that money in something else. Don't take a bad deal for the sake of taking a deal, but you could easily find something worth pulling the trigger on in the next 1-2 months.

Think of it like going to lunch: do you overthink about whether you're going to get Mexican, Thai, a sandwich, Italian? No because lunch is a temporary, low-risk decision. If you pick something and aren't super happy with it, then you'll make a better decision for lunch tomorrow. You don't have to worry about making the most perfect, most well-analyzed decision of where to eat. You put some thought into it, pick a place, and just go for it.

Thank you for the responses everyone!

There comes a point where the answers to our remaining questions are not in books and posts and they lie in taking action and it sounds like you have reached that point.  You have a lot of savings relative most investors but it's not enough money to purchase a commercial property with on-site or tenant handled management (aside from syndications); so, just get started with something and that experience will help answer your questions.

Sorry I don't have a picture yet. I'm in Maryland. I have been investing since 1987. I have been doing SFH flips and rentals. Now moving into Multifamily. Passive Income means rental income. I would actually tell you with your capital you should head to a multifamily that you purchase for at least $1,250,000 or more.

There  are headaches with SF rentals have grown as I have expanded that I didn't think about at first. There are 2 are big ones. Tenant placement costs and loss income when a tenant moves out. In my area it costs a months rent to find a new tenant. And when a tenant moves out it may take 60 days to fix up and then find the next one.

So if rent is $1500 a month and mortgage (piti) of $700 that leaves $800. Your really aren't making $800 a month because you need to set aside a percentage for maintenance, CapEx, and vacancy.

Let's break it down a bit further What's the cost of vacancy? Well some say set aside 5%, some 7%, some 10% ($75, $105, $150) of the gross rent. For this property let's say you are putting aside 10% for vacancy.

So to find a new tenant it costs $1,500 to find a tenant and it takes 2 months to find a tenant ($1,400 mortgage expense), and $300 to get the place ready (they didn't do too much damage) so total is $3,400. So a tenant needs to stay for 23 months to have saved enough to replace the tenant. But you didn't include your profit in there, so cut your budget by say $300 per month of no tenant.

So am I saying you shouldn't do it? Nope, I am doing it. These are things I didn't really think about when I got started.

So why do I say buy a multifamily that you purchase for at least $1,250,000? Because if you can have a mortgage above $1,000,000 it can be a non-recourse loan (if not a a local bank) which means if they have to foreclose then all they get is the building.

A multifamily of 4 or 5 has less likely that all the tenants will be gone in one month. You may not get the same rental amount, and there are more expenses, and you may make less per unit than a SFH but the re is safety in numbers.

But buying a multifamily is not like buying a single family - you need some help. I suggest Michael Blank or Dave Lindahl.

Two closing notes.

Go get the HELOC so you have money available that you can access.

Find a local investor that has a mulitfamily deal that needs to raise money in a syndicate. Then invest $50,000 or $100,000 and tell them you need to be on the management team. You won't manage the property but you will learn a heck of a lot on how to analyze a deal, structure a deal, work a deal. But don't tell them how much you have, ask them what's their minimum.

Go forth and replace your W-2!

Hey Kent - Great discussion topic, as I am based in Minneapolis and in pretty much the same situation as you. My approach so far has just been to meet as many people as possible, go to as many local meet ups as I can, and continue learning/reading/listening. I really like what @Steve Brown mentioned about finding a local syndicator to invest with and learn from, have been focused on that approach before I take the plunge on my own. Would be great to keep in touch and see how our approaches evolve. 

@Kent Wolfhart There are so many different ways you could go about this, my suggestion is to pick one or 2 strategies and move forward with them.  

There are plenty of strategies: buy single families, buy multi-family/commercial, buy notes, flip houses, become a Hard money lender, invest in syndication's, etc. The most important part is figuring out who you are and what you're looking for. If you want to passively invest and get monthly cash flow, then investing in other peoples deals and possibly turn-key's are great. If you want to take a more active role, then buying rentals on your own is maybe better for you. If you want to be really involved, then go with finding and buying you own rentals or flips.

As for Milwaukee, my experience (I own a dozen units there) is that the properties in good areas don't cash flow much better than Madison would and Madison has much better upside potential. Personally I have invested in 1-4 unit properties and much larger apartment buildings. So far in my experience the larger the purchase the more successful it has been and the more efficient it is to run. I enjoy where I am at, but talking from a point of doing it over again I would go big as quick as possible. By that you can invest in your own commercial or Multi-family deals, invest in a syndication, partner with others or to a mixture. 

Good Luck in whatever you choose

From a personal standpoint, I wouldn't jump into something complicated for your first foray. You have enough liquid capital to get started. Take $250k and buy a $1-$1.5M multi-family in an area you know very well. Hire a management company. Be involved and learn the ins & outs of multi-family while generating a steady passive income and remaining at your W2 job.

In a few years when you have enough equity to justify, either a) sell the multi-family and go bigger/riskier or b) hold the property and use the revenue stream to finance the next purchase.

You're in a good spot it sounds like. The biggest challenge for you will be picking one goal and making the initial plunge.

I would suggest walk before you run and get your hands dirty a bit before moving into bigger things. I started out with renting a SFR, then moved on to duplexes, then 4-plexes. I learned a lot at each step which made me smarter making the next deal. I think it's invaluable manage your own on the first one and really learn how it works. I was a weekend warrior for a long time while keeping my day job, and it was the best training ever. Now I know when I should REALLY call a plumber instead of reacting to a hyper tenant's description! Buy local to start while you're learning in the school of hard knocks. Then you'll be equipped to own something 90 miles away and manage it well. BTW, having a property manager is a big help. But you have to manage them too. And doing it yourself to start teaches you how to evaluate property managers and then manage the one you pick.

Hope this helps.

@Kent Wolfhart I invest in Milwaukee and here's my 2 cents.  The most important thing is to get started.  Many new investors are so desperate to get a deal that they overpay or does not do the analysis correctly.  I am an accountant by trade so I only like to take calculated risks.  I would recommend testing out the Milwaukee market (buy a single family home around 80K in a B area) taking out a loan since you have a strong W-2.  Keep that as a rental and find a good property management company since you do not live in the area.  This will be a good learning experience for you, moreover, it will help you get comfortable with the numbers and move forward.  After I bought my first deal, the next deals came naturally.  I would suggest reading David Lindahl's Multi-Family Millions if you haven't already. That could be your next step after you are comfortable your first deal.  I see this as a win-win situation as you get to have your first deal without sinking too much capital in (and doesn't take away the majority of your capital for the next deal) which will help you move forward with building passive income.  Milwaukee is a small city compared to some others, get referrals from people you talk to and get referrals from them too.  You will find Milwaukee agents/brokers/lenders very easy to talk to and easy to work with.  If you are very risk-averse, find someone with experience who can share their knowledge with you and partner up with them (take on a more passive investor role).  The prices are going up quite a bit for the last 2 years so I would recommend buying sooner than later.  I am doing some rehabs in Wauwatosa/West Allis area this winter.  You can reach out to me if you want to learn a little more about possibly working together and sharing experience on flipping in the nicer areas of Milwaukee.  If you would like to limit your risks then we can discuss passive investor opportunities on the rehab. I work with an experienced local team specializing in Milwaukee and Wauwatosa/West Allis.  I also have some lender contacts if you need that for your next deal. 

Great responses everyone. One thought: what about investing in syndications? Is that a good idea for someone like me? Or is it for more sophisticated investors? What would @Jay Hinrichs suggest?

My recommendation - use leverage to purchase multi family or commercial properties in Madison. Leverage because money is still cheap and lenders are looking to make deals. Madison because the market is robust with a solid job market. Plus even with 70-75% LTV, you can get into properties that many other investers cannot. You chances of landing a solid deal are good.

@Kent Wolfhart

The answer ultimately lies on you.  No one (including Jay) can answer this question for you.  It's a matter of what type of investing makes you the most comfortable based on your personal preference.  As you can tell, you are going to get a wide spread of advice and at the end of the day taking general advice for various people can only benefit you so much.  The truth is no one here knows you very well (I'm assuming) and to ask a pretty specific question is a recipe for a plethora of different answers.  

My advice is attend various real estate meetings, network, and decide what type of investing works best for what you are looking for.  Then connect with those who have succeeded in the type of investing you are looking to do.  

I went this route on my own personal real estate journey and think it worked pretty well for me.  It's about having the right people around you so that your financial decisions are good ones.  Your network is your net-worth.  

@Kent Wolfhart

Hi Kent

If you are trying to generate passive income to replace W2, I would focus on multifamily. I think you would get there a lot quicker with having to do less deals.  You have enough capital to purchase a sizable asset, and if you partner with someone, your purchasing power would be much bigger. There are a lot of Mid West cities that cash flow, but have little appreciation.

Wait for the HELOC, use the liquid capital first, possibly retirement funds next and then the HELOC

Gino

Leverage is risk. You’re risking your nest egg and family home at a real estate peak. How much debt can you carry comfortably?

Personally, I’m a buy and hold guy. I would buy 5x 80k units in full, in an area of the country that can generate 5k a month in rent. That’s 60k a year/ 170k with your w2 income. That’s more or less risk free income. Or as I like to do, divide 60k/2040 and you get the hourly equivalent for a full time job, in this case $30 an hour.

170k a year gets you one new property per year. 10 properties in your portfolio equals 120k per year. You’re 5 years away from making 240k/year risk free.

More properties/ more headaches, but in balance not as much as a 40 hour a week gig.

The best part is, in this scenario you have 240k in annual income and 800k in equity to leverage when the market tanks again. That’s when you bet big, from a position of low risk with good cash flow, unencumbered by a bunch of leveraged mortgages on upside down properties.

@Kent Wolfhart I’m in and out of Sheboygan, seems there are decent rentals there that would cash flow... unemployment rate under 4% and wages rising...

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here