Real Estate Investor · Winter Springs, FL · Member since 2014 · 7 posts · 1 vote
I'm 33 years old in Orlando, Florida area. We are currently three weeks away from closing on a new house that we are building. We got underwater on our current home by buying at the wrong time, but we did refinance a couple of years ago to take advantage of low rates.
My current plan is to hold on to our current home and turn it into a rental property. It will probably be a money losing venture for a few years with rental rates not yet up to our mortgage. But I'm hoping to turn that potential loss into cash flow as prices continue to rebound and rental rates will increase in Orlando.
So that is rental property #1.
Beyond that I've got a good nest egg already built up in stocks. After recently selling my business, I have quite a bit of money on the sidelines right now that I need to put somewhere. Stocks don't seem very attractive to me right now at the current valuations. I am thinking about putting it into real estate instead and start building rental properties.
Would it be foolish to buy these rental properties cash? I'm kind of debt averse, especially since I will already have two mortgages.
I am planning to go with a rental management company so I don't have to deal with the hassle of managing it since I am a full-time software engineer. Good idea?
St. Louis, MO · Member since 2014 · 2 posts · 2 votes
11y
This will be my first post on here... I am going to try and speak to your posted title.
New Landlord... Buy Property in Cash?
Absolutley! If you can, yes, do it!
Cash or owner financed, would be best if possible. Not all markets fit this model as it can be hard to reach and hard to get started depending on the price-point of inventory available. It is worth it if you can do it. Miss the lenders if you can... It has been my personal experience that the whole "leverage your money" concept can be overated and it's dangerous for many people just getting into this business. This is my experience, there are others that have done well with it. I also know many trainwreck stories that lost everything to the banks and are all out of the game. Yes the ratios and arguments in favor of leverage can be attractive on paper, (the whole 100-200K can control a million dollars in real estate idea) but having walked in both pairs of shoes I can assure you my lenders never cared to hear about vacancy rates, trashed properties that I had to deal with and many other "chance cards" rental life can deal out. (not complaining, RE has been very good to me) So if you are rich already, experienced in RE, can throw money at problems like lightening to keep the boat on plane at all times, you can make a VERY good argument for getting on the leverage fast-track to hit warp speed and blow past everyone in the game. That I will totally agree with. However, if you are like most people, big ideas on being a first time landlord, or moderatly on your way, I would exercise caution. Like you as a landlord will be wanting the rent, lendors want their payments, plain and simple. My mortgage free properties have always been more understanding to my sympothetic needs and rough patches than my lenders have ever been. My mortagage free properties also like to reward me and pay me lots of money when times are good with low vacancy. They love me in all markets.
I started all cash 15 years ago, touched lending for only a short period of time, got the T-shirt, and quickly went back to cash. I have stayed cash ever since. Leverage wasn't for me. A little word called amortization is an awesome power to understand. I hear new investors comment that "interest is tax deductable" as if that makes everything perfect. I encourage running the numbers again and really understanding the whole big picture of your deductions combined with what you actually pay using amortization, and who gets paid first, the lendor or the balance due. You will also hear how leverage is not a big deal because the world is perfect and the tenants will pay your notes for you and line your pockets with the excess pooring over from the difference between rent and mortgage note. This is just not reality, there are maintenance costs, bills that come in, municipalities trying to cut your grass for you when over 7" at $125 hour. I am here to say the rental life is not perfect and it you could have a situation come up where your 95% occupancy for a small family landlord can turn to a 60% occupancy or worse overnight (okay in a matter of months) due to an alignment of murphys law and things that may be out of your control. These things can and do happen from time to time. If you don't have cash reserves to fight back to the top, your mortgages can get missed and soon you can become a statistic. House of cards can fall. Amortization is an awesome power and if I ever find myself playing with it again, it will be from the other side of the desk lending to others.
Owner finance is a great way to go as a middle ground. You will have to do your homework learning how to approach it. You might be surpised how many people will lend you 90-100% of the money to buy their house and won't even charge interest if you know how to ask. It's amazing how nice 100% equity owners can be to people that are honest and can back up their credibility. My cash investor friends like myself are all in the game still, many of our highly leveraged friends are simply out of the game and don't appear to be coming back any time soon. If you can go cash, do it!
Find a rental you can get your initial purchase + rehab costs paid back to you in less than 4-5 years by way of rent. That or better would be a good easy to understand goal to shoot for. Keep it simple. Those deals are in many markets today, but not all. Cash is not the fast vehicle in RE, but it is realible, predicable, understandable. I could have bought my garage full of red sports cars a long time ago, but I drive an old toyota because it get's me where I'm going every time, it's a depreciating item, taxes are low, and I'm in no hurry. I like that. You want to do cash? Do cash, it works. Good luck to you!
Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes
11y
I really like the all cash deal and have done it on a couple places. There is always the knowledge that you can't be forclosed on because you have a few months of vacancy in a bad market (as long as you pay your taxes...)
Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes
11y
Most of the BP audience is very leverage endorsing, but there are a few contrarians. Listen to Podcast 53 by Jason Hull http://www.biggerpockets.com/show53 for someone doing it without loans.
Baton Rouge, LA · Member since 2012 · 61 posts · 10 votes
11y
Welcome on board Jason. You have a lot of options. I would become knowledgeable with all of the different ways to invest in real estate. Everything you need to know can be found right here on this site. Personally, I would leverage my money as much as possible but I would not put it all in real estate investing. Find a niche and go from there. Good Luck!!
I'm 33 years old in Orlando, Florida area. We are currently three weeks away from closing on a new house that we are building. We got underwater on our current home by buying at the wrong time, but we did refinance a couple of years ago to take advantage of low rates.
Would it be foolish to buy these rental properties cash?
Yes! If you are a baby steps guy maybe just go 50% LTV. But it will cost you profit.
Residential Real Estate Agent · Longwood, FL · Member since 2013 · 30 posts · 3 votes
11y
Using leverage is really a personal preference. Most of our investors own their rental properties all cash. When submitting offers on REO's (and really any property), seller's tend to prefer cash to offers with financing contingencies.
If you need any help assessing rent rates or market value of a property, feel free to reach out to me.
Real Estate Investor · Fort Pierce, FL · Member since 2014 · 132 posts · 57 votes
11y
I love all cash, I own all my properties all cash no mortgage. It is a really great feeling. It also gives you the ability to be more picky when choosing a tenant, as you are not in a rush because of debt payments. Aso you will sleep better at night.
Using leverage is really a personal preference. Most of our investors own their rental properties all cash. When submitting offers on REO's (and really any property), seller's tend to prefer cash to offers with financing contingencies.
If you need any help assessing rent rates or market value of a property, feel free to reach out to me.
You can make an offer with no financing contingency and still utilize the power of leverage.
Investor · Cypress, TX · Member since 2014 · 496 posts · 205 votes
11y
@Jason Byrne there are effective ways to do buy and hold rental investing and not so effective ways that can cost you or make your returns minimal. First rule from my mentor is "Don't lose money". Second one is "Don't buy anything that doesn't cash flow". Get some education on the most effective approaches before you lose your nest egg or tie it up for little return. If your current home will lose money as rental, why not just keep living there? You might also look at selling it to a buyer who has good income and some up front cash but poor credit using owner financing (some variation of a wrap around mortgage).
With a little education on best practices, it is easy to manage a few properties on your own while working your regular job. I manage 6 houses myself and it is not a problem with my corporate job, commute, plus personal and family activities. I have a property mgmt company for a 7th house because it is over an hour away on the other side of town.
Congrats on the nest egg. Real Estate can give you much better actual returns (cash flow in your pocket as well as appreciation. Regarding debt, you can manage risk and use leverage effectively. There are ways to buy with cash to take advantage of REOs and other deals that require it and then immediately do a cash out refi to apply leverage after purchase. Your returns will be 3-5x higher using leverage (15-25% vs. 5%). Buying right and keeping your LTV below 80% (most of mine are at 65-75% of market) will minimize your risk of getting in a bad spot.
Real Estate Investor · Winter Springs, FL · Member since 2014 · 7 posts · 1 vote
11y
@Doug McLeod We moved into this home early on in our marriage. It was just before the bubble burst. Everyone told us that real estate was high and might not keep going up, but real estate doesn't go down it just plateaus. HAH! Were they wrong!
So eight or so years later, I'm a lot wiser and a lot more money in the bank. But this was a starter home and we never even meant to be here this long. We need more space, shorter commute, and to be happier in life in general. So thus building our new dream home.
To sell this house and walk away, I'd be probably 40K out of pocket to pay off the loan. So the thought is if I can get close to covering the mortgage now and make it up in the long term, then that is more attracitve than paying the bank 40K and handing over the house.
Maybe that's a wrong strategy, but that's the thought.
Real Estate Consultant · Chicago, IL · Member since 2014 · 720 posts · 439 votes
11y
@Jason Byrne, how much will the negative cash flow be?
For example, if it's $200/month, you are looking at $2400 negative cash flow a year, so it will take 16.5 years to loose $40,000, while you will be paying a lot of principal down and you'll get some appreciation. Depending on your income you can also take those loses on your income-tax.
Real Estate Investor · Winter Springs, FL · Member since 2014 · 7 posts · 1 vote
11y
Thanks everyone. I love how awesome and responsive everyone here has been. I can already tell that BP is a great community!
We truly got into an awful situation with our current home. Literally bought at the peak. In the crash we saw a rash of foreclosures (like everywhere), especially it seems in our neighborhood. We lost 60% of the value. That's tough to dig out of.
In the Orlando Metro area what county you're in makes a big difference. We are just across the line in Orange County (soon moving to much nicer suburb Seminole County) where the city of Orlando itself is located (we are in Apopka). Orange County home prices were hit much harder than Seminole and have recovered more slowly.
Luckily, it's climbed back around $40K since the bottom (according to Zillow) and probably $20K of that in the past year and a half. So the hope is to minimize the bleeding for as long as possible with hopes that either prices recover and we can sell it. Or rental rates increase enough to cover our nut. Either way... it's just making the best of a very bad first home buying experience!!!
I am hoping for much better things in looking forward to my first truly investment property. But a lot of research to do first before jumping into that. And gotta move into our dream home first!
Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
11y
@Jason Byrne I say as long as its cash flow and leverage makes sense, I don't see why it would be an issue. Just be careful and it's nice to have multiple exit strategies. I understand being conservative. I'm financing as much as I can but am going in thinking I'm never going to sell. If it happens, great. If not, I'm in it to win in and it's locked in for the long haul.
Historically, these are the lowest rates in over 100 years confirmed by Bruce Norris and Sean O'Toole being nerds and looking up interest rates back into the mid 1850s at the Library of Congress. Seriously, that happened. #nerdalert
What's the condition of your current home? If it's a little older, have you considered renovations? Doing renovations could translate into 40k or more in forced appreciation which would allow you to sell without a loss. Depending on your area, with the renovations, if you decided to keep it you could command a slightly higher rent for updated accommodations.
Real Estate Investor · Winter Springs, FL · Member since 2014 · 7 posts · 1 vote
11y
Good thought, I'd love to see that as a way out. But I don't think we could really command the premium. It's a 1998 home. Pretty good shape (needs a roof patching.. hopefully not a new roof!!). We could potentially make over the kitchen and bathrooms with granite, stainless, etc. I'm not sure we'd see that return though? But I'm really a n00b so I don't know for sure. I don't see any houses in our neighborhood going for 40K premium at this point. Not a bad area, but not a wealthy one either.
Real Estate Investor · Winter Springs, FL · Member since 2014 · 7 posts · 1 vote
11y
I've had the suggestion a couple of times to maybe structure a lease to own if we get a good renter. I think I have our renter in place already who is an aquaintence who I think will take really good care of it.
St. Louis, MO · Member since 2014 · 2 posts · 2 votes
11y
This will be my first post on here... I am going to try and speak to your posted title.
New Landlord... Buy Property in Cash?
Absolutley! If you can, yes, do it!
Cash or owner financed, would be best if possible. Not all markets fit this model as it can be hard to reach and hard to get started depending on the price-point of inventory available. It is worth it if you can do it. Miss the lenders if you can... It has been my personal experience that the whole "leverage your money" concept can be overated and it's dangerous for many people just getting into this business. This is my experience, there are others that have done well with it. I also know many trainwreck stories that lost everything to the banks and are all out of the game. Yes the ratios and arguments in favor of leverage can be attractive on paper, (the whole 100-200K can control a million dollars in real estate idea) but having walked in both pairs of shoes I can assure you my lenders never cared to hear about vacancy rates, trashed properties that I had to deal with and many other "chance cards" rental life can deal out. (not complaining, RE has been very good to me) So if you are rich already, experienced in RE, can throw money at problems like lightening to keep the boat on plane at all times, you can make a VERY good argument for getting on the leverage fast-track to hit warp speed and blow past everyone in the game. That I will totally agree with. However, if you are like most people, big ideas on being a first time landlord, or moderatly on your way, I would exercise caution. Like you as a landlord will be wanting the rent, lendors want their payments, plain and simple. My mortgage free properties have always been more understanding to my sympothetic needs and rough patches than my lenders have ever been. My mortagage free properties also like to reward me and pay me lots of money when times are good with low vacancy. They love me in all markets.
I started all cash 15 years ago, touched lending for only a short period of time, got the T-shirt, and quickly went back to cash. I have stayed cash ever since. Leverage wasn't for me. A little word called amortization is an awesome power to understand. I hear new investors comment that "interest is tax deductable" as if that makes everything perfect. I encourage running the numbers again and really understanding the whole big picture of your deductions combined with what you actually pay using amortization, and who gets paid first, the lendor or the balance due. You will also hear how leverage is not a big deal because the world is perfect and the tenants will pay your notes for you and line your pockets with the excess pooring over from the difference between rent and mortgage note. This is just not reality, there are maintenance costs, bills that come in, municipalities trying to cut your grass for you when over 7" at $125 hour. I am here to say the rental life is not perfect and it you could have a situation come up where your 95% occupancy for a small family landlord can turn to a 60% occupancy or worse overnight (okay in a matter of months) due to an alignment of murphys law and things that may be out of your control. These things can and do happen from time to time. If you don't have cash reserves to fight back to the top, your mortgages can get missed and soon you can become a statistic. House of cards can fall. Amortization is an awesome power and if I ever find myself playing with it again, it will be from the other side of the desk lending to others.
Owner finance is a great way to go as a middle ground. You will have to do your homework learning how to approach it. You might be surpised how many people will lend you 90-100% of the money to buy their house and won't even charge interest if you know how to ask. It's amazing how nice 100% equity owners can be to people that are honest and can back up their credibility. My cash investor friends like myself are all in the game still, many of our highly leveraged friends are simply out of the game and don't appear to be coming back any time soon. If you can go cash, do it!
Find a rental you can get your initial purchase + rehab costs paid back to you in less than 4-5 years by way of rent. That or better would be a good easy to understand goal to shoot for. Keep it simple. Those deals are in many markets today, but not all. Cash is not the fast vehicle in RE, but it is realible, predicable, understandable. I could have bought my garage full of red sports cars a long time ago, but I drive an old toyota because it get's me where I'm going every time, it's a depreciating item, taxes are low, and I'm in no hurry. I like that. You want to do cash? Do cash, it works. Good luck to you!