I have $100k. How should I start?

Question

I am a new member here. I've saved around $100k and am evaluating investment options.  I initially considered adding to mutual funds, but I want to diversify, and my wife and I have really enjoyed house-hunting, painting, and fixing up the homes we've had in the past. Also, I am an attorney and my wife works in marketing and social media, so there are several ways we could reduce expenses by doing some legal and advertising work ourselves.

Hypothetically, if I wanted to invest up to $100k in rental property, what are my best options?  Is there a formula to determine the sweet spot(s) on the continuum between using all $100k on one property or using as little as possible to buy multiple properties?

Any other introductory advice is welcome.  Thanks in advance.

Abdul Azeez · Answer

2% rule is not realistic in many places. 1% has a better chance.

Brad Ter Beek · Answer

Multiple properties would definitely be the wiser use of that money.  Before you put 5 offers in though, think about the ways that a rental property produces income.  With one property purchase for $100k, sure you'll have all 4 of those mechanisms working for you: 1 cash flow, 1 mortgage being amortized, 1 property appreciating and tax benefits from 1 property.  Now if you have say 5 properties each with 20% down (just using as close to round numbers as I can), there's your $100k.  But now you have 5 cash flows, 5 mortgages being amortized, 5 properties appreciating and tax benefits from 5 properties.  The beauty in it though is that you may be tempted to think that well the cash flow will be 1/5 of what it'd be if you only had 1 unit or that the mortgage payment would only be 1/5 the size.  Not true!

Let's use the 2% rule that says that your rent price should be roughly 2% of what you paid for the house (note: this is not a hard and fast rule and doesn't work everywhere).  Now if you bought 1 house for $100k you'd  be receiving $2k/mo in rent.  If you bought 5 homes w/ 20% down for $100k, you'd be receiving $10k/mo in rent.  If each home cash flows $200/mo, you're keeping either $200/mo with 1 home or $1000/mo with 5 homes.  For a more thorough and detailed explanation I would definitely check out Brandon Turner's The Book on Real Estate Investing.  It's an easy read, and a great introduction to real estate.  It's also guaranteed to answer your questions (especially Chapter 3: 4 Sample Plans).