How does my planned first investment strategy sound?

Question

Hey everyone, I've been in an analysis paralysis for over a year, but I'm finally ready to make my first investment. The first of two questions I have is how does my investment strategy sounds to more experienced investors? Here's the lowdown on my situation:

I've acquired a private loan for 200k cash at 1% interest for 30 years. I don't think I could even qualify for any traditional financing, as I'm 23 years old and got my real estate license about seven months ago, and I've yet to generate a steady income, but on the plus side I do have an immaculate credit score...Anyway, I plan on buying a condo at a judicial sale in Chicago this month. Without going into too much detail, I hope to get at least $20k in instant equity because I won't bid any higher than that margin and assuming minimal rehab costs because I've seen interior photos. The market rent is about $1800, all of this based on my extensive analysis of similar units in the same building in the past year. HOA is around $200/mo and taxes around $3500/yr.

The second question I have is more hypothetical and involves an explanation on leverage. Let's say I saved up this $200k from a job and could qualify for traditional lending. Would my initial strategy still be a good idea to invest all $200k cash in this one condo, or would it be better to allocate the $200k leveraging "other people's money?" I keep seeing scenarios on leveraging money, but they don't always factor in expenses like PITI. Thanks for the advice in advance!

Nikki Kofkin · Answer

Hey everyone! The judicial sale was this morning and I wanted to give a progress update in case anyone is curious. First of all, it was one of the most terrifying and exciting things I've ever done. The room was nearly full and there was a list of about 30 properties up for auction in our time slot. From what I could tell, most people were veterans and bidding on behalf of someone else. I was so nervous, but I put on my best poker face and just observed how others handled themselves when bidding. My property of interest was number five on the list. The starting bid was around $160k. Bids were made in increments of at least $100. I made the first bid, and one other experienced bidder who was bidding on many properties went for it as well. We went back and fourth a few times, and I won the property for $167k. I couldn't believe I actually won. When I walked up to hand in my cashier's check, my legs were shaking! There were so many emotions, but mostly success and excitement. I currently have a certificate of sale, and it could be months until it is motioned in court. Hoping and praying I will get the deed and the property doesn't need much work. Thankfully I got it for around $65-70k under market value based on my analysis, so that gives me a good cushion in case of any issues. I really appreciate all of your support, I couldn't have done it without this community. If anyone would like to hear more details about the experience or how I selected the property, I would be happy to discuss. I'll post an update when I (hopefully) get possession and do a walkthrough!

Melissa Rios · Answer

It would be great to hear more about how this plays out. Please keep us all updated. I've been to the judicial sales a few times. I will PM you about my experiences there.

Greg Scott · Answer

The most important thing is congratulations on starting so young!

Condos can be problematic because you don't control as much of the cost side and there are risks form the HOA getting sued and screwing up any exist strategy. Many condos have "special assessments" to cover bigger rehabs so they can maintain the appearance of lower cost of ownership. I've found that single family homes in the 150K range make the best return. Of course, I'm not investing in expensive areas.

Investing your own money and paying cash is actually a terrible way to invest, even though lots of people push that idea.

Let's do a quick mental model:

• You can buy a house for $100,000 and pay cash
• It rents for $1,000/mo or $12,000 per year
• Taxes, insurance, and everything else is $4,000 per year.
• Your return is 12K-4K or $8K divided by $100K is an 8% return on investment

Now assume someone will lend you $50,000 on any house you buy and charge you 5% interest

• You buy two $100,000 houses with that same amount of cash
• They each cash flow $1,000 per month or $24,000 per year
• Taxes, insurance, and everything else is $8,000 per year
• Your gross is now $24K-8K or $16K, less $5K in interest payments
• You make $11K on a 100K investment or 11% return. Much more than you made before.

It gets even worse if you calculate taxes. With two houses, you get depreciation on both houses to offset your income. In this example, you can depreciate about $3500 with one house or 43% of your income. In the two-house example you shield 63% of your income from taxes.

Want to make it even worse, assume the houses appreciate. You get twice as much for both houses.

Being conservative is great and smart, but paying off a rental property is bad investing.

Nikki Kofkin · Answer

Hey everyone! I wanted to give a final update to @Melissa Rios and anyone else who was interested on my judicial sale property. Here's the breakdown:

Purchased with cash: $167,000

Title closing fees: $2,107

Misc expenses (paint, cleaning, repairs): ~$2,000

Credit to my condo account from association rent: ~$1500 (This was an amazing surprise)

Monthly interest: $166.67 (Nice perk of a family investor!)

18 month lease for $1750

HOA dues are $205 (However this will be debited from the surplus in my account for about seven months!)

2015 taxes were $3225

Estimated ARV: $235,000

So I'm all in at about $169,600 with monthly gross operating income of $1750 and annual gross income of $21,000. I might sell it in 18 months when the lease is up and the market is hot in hopes of getting a $65k profit, or I will continue to hold it for the rental income! I'm super happy with the way this went, hopefully it wasn't just beginners luck!

Melissa Rios · Answer

Awesome, Nikki. Looks like a great deal with a great return. 18 month lease a nice surprise as well. Thanks for the update!

Nikki Kofkin · Answer

@Michael Facchini Thanks so much for your advice on an investment strategy. I'm so thankful for everyone's advice and input. You make a really good point about 2-4 units versus SFR and maintenance. I look forward to getting a couple of tax returns so I can diversify my funds!

@michael

@Michael Lucero You're totally right, thanks for your post. That makes me feel better and helps me remember that there isn't one perfect deal and I'm not missing out on it!

Michael Lucero · Answer

The strategy that results in the highest roi will simply depend on the specifics of the deal(s). There may be an instance where you need to pay all cash for a property and get a 25% roi or the best may be to leverage rhat 200k into 1m of purchasing power through debt and purchase multifamily places. There is no one size fits all thing to do. Thats awesome you got the 200k at 1% must be a very nice person.

Typically though, leveraging(getting a losn and buying multiple properties) will be the best roi.

Michael Facchini · Answer

Lots of things to comment on here, but will try to keep it short/sweet. So, judicial sales are most often a difficult beast...it's like finding a needle in a haystack, and yes do not underestimate the work that might need to be done. That said, if you find that gem and have private money ready to go (at 1% no less, which is fantastic), then you could find yourself in a good situation. In general though, I don't recommend judicial sales to my clients for their first purchase. That's not to say though that an agent who has done lots of homework wouldn't want to consider it on the 1st go round. I just wouldn't bank on it being as easy as you might think right now.

To your point, it will be difficult for you to get conventional financing at this time, but once you hit the 2 year employment mark then you can circle back on that and perhaps payoff the private loan with a conventional mortgage. You then free up the $200k and use that for more investments.

In general, it's better to spread the money around if you're able to find more investments with good yields. As long as you can handle juggling multiple properties and buy right, then you're diversifying and leveraging intelligently.

Next, condos vs SFR's vs 3-4units. Each have their pros and cons. Yes, condos come with HOA dues and you have to make sure the HOA is sound/well-run (of course), but they often are low-maintenance and you can find them in desirable areas perhaps with better renters. I own several condo rentals across the country in different markets and they help round out my REO. I'm not really one for SFR's to be honest, mostly because I invest in bigger cities. I rather focus on 2-4 units. One foundation, one roof, but multiple rentals. That said, there are less 2-4's available and they can be more expensive. So, condos are an easy first investment, SFR's are good too, but I'd rather buy one multi-unit rather than 2 SFR's. Better NOI and often less risk from a maintenance perspective.

Nikki Kofkin · Answer

@Greg Scott, thank you that is definitely not something I thought about. I'll make sure to do more research on the reserves and HOA tomorrow. I was more worried about buying SFH because I didn't want to deal with maintenance costs myself, but you've made such a valid counterargument. I wanted a smaller/more manageable first investment so that's why I've been more interested in the condo route...

BIG THANK YOU for the hypothetical explanation on leverage, you made that so simple. I've read many articles about it but was left with questions, it makes so much more sense now. In my real world scenario, I am using a loan and no money down, however it's still a cash deal. I wish I could get financing, but for now I can't imagine any lender working with me without a steady income. I'm keeping your leveraging model in my investment goals once I can get approved!

Nikki Kofkin · Answer

@Chris LumLee I appreciate your advice, and you're definitely right. I will research what other expenses I might take on as well. For my hypothetical, I meant if the $200k was mine and I could distribute that into multiple properties with 10-20% down, would that be a better ROI? In my mind, the gross ROI would be less (due to PITI primarily) and the cash on cash ROI would be greater...but I don't have a very good understanding of leverage.

@John Weidner, as far as the MLS goes, I comb the MLS daily and I have to respectfully disagree since those properties are generally at or around market value and I want to buy under market value. FSBO isn't a bad idea though, I haven't really looked into that. Generally when I run comps of FSBO's they seem to be overpriced, but maybe I just don't find the good FSBO's quick enough. I've stayed away from hard money lenders because of high interest rates, but maybe that's something I will consider. Thank you for your input!

How does my planned first investment strategy sound?

How does my planned first investment strategy sound?

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