downpayment and property management questions.

2 Replies

Hello BP community!

I am finally going to make the move to start my journey of getting out of the rat race. I have come up with a plan to start investing in rental properties. My goal is 2 per year for the next 10 years. It won't make me rich but it may allow me to work a little less.

My first question:
Investing in my first property, I was planning on using some savings to put about 25% down on a condo in my area, for 100k. But then a banker today told me to refinance my home and take it out of the equity. I have about 200k equity in my house so taking out 25K is not too much, and my mortgage payments would not go up too much. Anyone see the downside of this vs. just taking the 25k from savings?

Second question:
I'm trying to calculate cash flow from rent, and I'm wondering how hard is it to manage properties to start. I have been calculating it using property managers, using a 10% expense plus first months rent, however, I'm wondering if this is something I can just do myself. Again I'm brand new to this. I figure if I screen my tenants well, it shouldn't be too hard to get rent and I'm looking at properties that are upgraded.


I'm sure you are wondering where this is. I live in Parkland, FL and I'm looking at condos and apartments in Coral Springs, FL.


Thanx in advance!

Great you are diving in.  In MHO, if you aren't earning much in savings, use that.  Essentially your cost of money for the down payment is the after tax cost of debt...your home equity line interest rate after taxes versus the interest you are earning on your savings...I am guessing the cost of the equity line interest is more than what you are earning in the savings account...either way, I also suggest hiring a professional property manager to start with.  

Okay, full transparency...I am biased...As a 30 year broker, licensed General Contractor, owner of a property management firm, and the owner of 16 investment properties, I think self-managing to save property management fees isn't worth the hassle, learning curve cost or the liability and risk. Landlord tenant law and fair housing is enough to get most new investors to think twice...plus unless you have access to PM tools like screening services, MLS and other rental marketing sites, vetted leases, vendors to handle repairs...you should let a professional handle it.

If...after a year or two you have observed what they do, how they do it and can see a benefit to doing the management yourself to save the money...then maybe bring it in.  Management is low margin and full of headaches...maybe not with only one property but even with one...picking the wrong tenant or not knowing how to hire the right repair contractor can cause problems and ultimately vacancy...vacancy kills profit...

My two cents.

Greg

I agree with @Greg Kurzner about managing yourself. It can be done but you need to educate yourself quickly and be prepared to make mistakes. About 80% of my clients managed for themselves until they got tired of spending all their money correcting their mistakes. They pay me a percentage, but they save a much bigger percentage by keeping their rents at market rate, getting tenants that pay and don't trash the units, etc.

If I were in your shoes, I would cash out the equity on the home and use that for investing. I would keep the other cash as a reserve for maintenance, capex, upgrades, etc. Far too many people spend everything they've got on an investment and then get hit with the cost of a new furnace or roof. Hold a reserve to smooth out those bumps.