Landlord Newbie Looking To Invest A Windfall...

2 Replies

Landlord Background: I own one rental and it has gone well over the last 2 years. I was planning to start investing more since then, but life got in the way. My current rental is mortgaged. It is worth about $30,000 and I owe about $17,000 on it. It is currently rented for $550/mo. so my cashflow is about $300/month. Since I don't need that money right now, I am keeping it in the account we have set up just for the rental.

Current Debt Situation: I have one residence out of town worth $400,000 that I owe about $320,000 on. I also own a commercial property free and clear that my wife runs a bakery from. It is worth about $75,000.

Area: I live in a town that is depressed and used to be a manufacturing powerhouse. This means there are a lot of potential renters and a lot of property that can be had cheap. If I had the time and money, I think I could buy 50 nice houses for under $50k in the next year. That is how cheap and plentiful real estate is here.

Recent Developments: I work for a company that is about to be sold and I am expecting a windfall from the sale. I will have about $500,000 that I can use to invest and I think I have a great start to get my PM company up and running. I will also be working here for the next 2 years at my current salary of ~$200k. This will let me get things going while still bringing in a paycheck.

Question: I am in the infancy of developing a plan, but the big question I have is, "Do I go all cash, or do finance these properties?". The safe bet would be to pay cash, but if I finance them, I can buy 3-4 times as many houses. I will have to service all the debt, but the cashflow would be tremendous. I would also be worried about owing all that money.

What do you all think?

@Matt T. Congrats on the upcoming windfall. Here are a couple thoughts:

-Many folks believe we are closer to the top of the market than the bottom, because of this I am more cautious and not overextending on credit. With  your $500k, using that as 25% down you could essentially buy $2M in property or at 20% down $2.5M. But this would max you out and not leave reserves. I would maybe look at using $400k to pickup $1.2m in real estate and keeping $100k cash on hand for reserves. This doesn't over leverage you, and leaves healthly reserves for repairs and maintenance in addition to having some cash to buy a really killer deal.

-Consider the health of the economy in your small town? You mentioned it used to be a power house. Do you think it is wise to invest all in your small town? What is keeping the town alive? Is there negative population growth? Or are there people moving in because there are lots of jobs? What happens if another big employer leaves, would it completely decimate the town? Could you put $200k into financing and buy $700-$800k of properties in your town, then invest $200k elsewhere, sort of diversify across different MSA? 

-Picking up a couple dozen new properties would be awesome, but at the same time, are you ready for that work? It would take a lot of time and energy finding, vetting and closing on the properties. Then once you are closed, you need to fix them up, then rent them. This is all very doable, but do you have systems and process in place to handle this while still working your very lucrative $200k a year job. You would want to think thru this process.

All in all, this is a very exciting opportunity for you. Be sure to let us know if you have other questions. And once you decide on a place, be sure to update everyone in the real estate success forums as it would be a good story to read.

Andrew,

These are good points. I may not invest all in this town. There are a few towns close that would be good (not as good) for investing in rental properties. This town is currently barely shrinking, but the business friendly environment has recently brought in new jobs and I foresee more businesses moving in. We are logistically a very good place to be.

I think I am ready for a lot of work. I am a relatively young, handy, business savvy guy. I think after 2-3 years, I could see this being my full-time gig. I couldn't do all this while still working a full-time job though. Honestly, I don't have any systems in place to help manage these properties. I am working on putting these things together now.

I am sure I will have a lot more questions. I sort-of dipped my toe in with the first rental, and I enjoyed the experience. It wasn't at all the nightmare that my friends and relatives said it would be. I have been lucky with my first tenant, but I also come from a household where we rented houses to people and I think I am ready.

About the financing, that makes sense. I could see holding 100k back for reserves.

Thanks,

Matt

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