San Jose, CA · Member since 2018 · 25 posts · 38 votes
Hi everyone,
This is my first post. I hope I am posting in the right place. I am a newbie to rental property ownership. I am fortunate enough to have a relative give me a substancial lump sum as a gift. She wants her heirs to enjoy their inheritance while she is alive.
I live in San Jose Califoria, and would like to buy a four plex with my recent wind fall. I don't want to buy a rental property here because it's very expensive. Nothing is priced under 1 million in Silicon Valley. I saw a fourplex in Modesto on the MLS that is located about two hours from San Jose. It is priced in the mid 300,000's. I will take my uncle who is a contractor with me, to see if it's worth purchasing.
My question is, Since I have the cash should I just buy it out right or get a loan ? I will still have a nice ammount left for savings even if I pay cash. I have family that lives in that area and would be able to check on the property for me when I'm not available. Thanks for any advice.
@Angela Holmes It all depends. I would personally leverage myself. So I would put 20% down and finance the rest. See if someone handed me a lump some of 100k, I would not go buy one 100k property. I would go buy 4 of them with 20% down. Now you have 400k worth of property.
This only works if the properties are cash flowing. Just my two cents.
@Angela Holmes - welcome to BP. The answer is "it depends." Based on what you wrote, I would do a cash purchase as that would be much more attractive to the seller. You can then refinance out your funds if you'd like to leverage your equity. This gives you the negotiation power/ease of closing with cash at the purchase while providing the flexibility to pull out funds if you feel it's needed.
@Tom Shallcross Thank you for the advice. That is a good idea to refinance later if I absolutely need to. Maybe use it for upgrades or repairs to the property. Thanks again!
@Angela Holmes It all depends. I would personally leverage myself. So I would put 20% down and finance the rest. See if someone handed me a lump some of 100k, I would not go buy one 100k property. I would go buy 4 of them with 20% down. Now you have 400k worth of property.
This only works if the properties are cash flowing. Just my two cents.
@Angela Holmes
Hi Angela,
We are just in the learning process ourselves but I too think you’d be better off leveraging with financing. Start out with one property with 20% down, get a feel for things, then do more!
Also, myself and two others are in San Jose also and meet up Tuesday’s at 7pm to discuss REI. Always welcome others to join.
@Ricky Nigro Hi Ricky, Thanks for the advice. I’d love to come out to a meet up. I’m working a lot right now, but after the holidays I’d love to bounce ideas off of other future income property owners.
@Angela Holmes. Welcome to BP! It’s a good question. I like to make sure my cash is protected. So even when buying cash, I use a strategy of private banking. This allows me to double dip on my assets (cash grows steady and protected & tap into my private bank to make purchases).
I encourage you to look at cash flow and encourage you to have cash reserves.
@Angela Holmes
Welcome Angela! Take some time and look into the BRRRR approach. There is a good starter article on BP that you can look at first. Similar to what some others have said... Buying with cash is a huge advantage, once your rehab is complete, refinance and pull your cash out that you’ve invested. Rinse and repeat from there. Look into “delayed financing” as well for pulling your cash out. That wIll let you pull your cash out a lot sooner than a typical refI. You’ll hear about a “seasoning” period with typical loans where you cannot refinance until 6 or 12 months has passed. There are a couple BP podcasts that cover this as well.
@Angela Holmes Without getting too personal, how much money do you have? I'm assuming it's about $300k, and think that any advice should be weighed against the amount of capital that you have. I think it also depends on how comfortable you are with debt. For example, if you have about $300k and put down 20% on a property, are you comfortable having a note for $240k? A lot of it depends on your personal makeup and what makes the most sense for your situation and money personality. Best of luck.
@Angela Holmes Welcome to BP. You gotta love this site! You already have several great answers to your question. You can now take what seems to fit your comfort level and situation and then repost the a question worded with the method you are learning towards to dig deeper on that specific method to make sure you are heading down the right path.
Also being a newbie and a couple hours away from your potential property I would suggest finding a good property manager. I invest out of state from where I am and having property management has been really good for me. Of course you want to find a good property manager. Listening to the BP podcasts I’ve learned that you should budget for property management even if you choose not to hire 1. You never know if you might need 1 at some point so it’s best to run your #s with that cost in there.
Best of luck!!!
Erik
You're in the right place to search for answers. BP has a fantastic community! You've been given some great advice from some knowledgeable people here... with any advice it's best to "trust but verify" the information you're getting.
One of the great powers of investing in real estate is using leverage so I'll agree 100% with @Tom Shallcross and @David Fawcett . I'll just add that you need to educate yourself. Watching @Brandon Turner webinars is a fantastic way to start. Remember that Brandon says 99% of properties on the MLS aren't good deals, but there's always a purchase price that will make it a home run.
Get really good at analyzing properties... there's no point driving out to view a property until you run the numbers because a 350,000 fourplex can easily lose you money every month and be a poor investment. Some people would drive out there, fall in love with it and make an emotional decision. Real estate investing is all about the numbers, so always analyze first.
Congratulations on your new capital! Put that money to work for yourself and good luck!
My suggestion would be to purchase your 4 plex, learn how to manage it and give yourself a year or so to decide what you want to do.
There is no rush. You can always do a cash out refi, but honestly, i would wait and learn as much as you can so that you never put this gift at risk and also waiting will allow you to save some of your cash flow or enjoy it for a bit
I went thru similar several years back so feel free to pM me if you like.
@Angela Holmes very great you are looking ! I would look at landlord tenant rules , and taxes. Ca is very tax heaven. Honestly, if I had the money I would buy all cash and let the house become a seasoned investment. I’ve hear that can be 1 year and a day or two tax returns. After that time passes I would do a 1031 tax deferral and double the investment. Say you buy a property that’s worth 300 k, and own it out right, then about two years later sell it and buy 600k worth of Realeste. Also I’d in this case I’d create an llc to protect your personal assets and have good insurance plan too. Cool thing about realestate and 1031 tax exchange is that you can do them any where in the USA ! With a 1031 exchange you would avoid capital gains, and roll you net worth into the next investment.
We are just in the learning process ourselves but I too think you’d be better off leveraging with financing. Start out with one property with 20% down, get a feel for things, then do more!
Also, myself and two others are in San Jose also and meet up Tuesday's at 7pm to discuss REI. Always welcome others to join.
I agree with Ricky! leverage is good....highly leveraging is not good. What's the difference? depends who you ask. So dont ask a dry cleaner how to fix a ipad....go direct to the source. Here you are. You will find a wealth of information on BP. So you are doing the right thing. I would not HURRY anything. If you dont feel confident at this time, dont buy. You have time to learn and grow and truly find out what you really want. Are you looking for cashflow, appreciation, are you only going to be able to commit a few hours because you are busy at work, or are you flexible at work and can take all the time you can.
I would buy a few doors with 20-25% down and follow the BRRRR strategy. Depending on how much time you have or what your connections are, maybe you can buy some really ugly fixers and fix them to keep them instead of flipping them as many investors are doing. For example, if you and I were competing on the ugly fixer upper and I wanted to flip it, I would probably buy it for 50-60% of the ARV (after repair value) in order to repair it and make a profit on the resale. You on the other hand could buy it for up to 65% and put some money in to it, then rent it out, wait 6 months and refinance to get some to all of your money back. Then move on to the next one. I did this 4-5 years ago in the Bakersfield area with small chump change and today I have an immense portfolio using the BRRRR strategy...only I didnt know back then it was a strategy because I didnt know about BP at that time. Today even as a seasoned investor/realtor I follow BP, listen to podcast daily and connect with others nationally all the time! Love this place. I'm not going to wish you luck because its not luck that's going to get you where you are headed. The fact that you are on this forum clearly demonstrates that you are already on track...so Godspeed ;-)
I like the area you are from. It is among the best real estate in the country. I wouldn't invest out of State. Modesto seems close enough, plus the working class of the Bay Area increasingly lives in communities like this. Strong demand for apartments.
@David Barnett Thanks for the questions. They're making me think. Not to divulge too much info about my funds, but 300,000 is not going to hurt me even if I pay cash for a property. I'd still have quite enough left over. I am still working full time,but hoping to be able to live off of cash flow from income properties and finally enjoy my life. I was a caregiver to a parent with Alzheimer's the last ten years while working as well. I would like to finally be able to enjoy my life now that that person has passed away. My goal is not to not to have a mortgage.
@Joseph Lopez Thanks yes, I feel I am on the right track by learning all I can here on BP. I don't want to rush into anything. I forgot to mention when I was in elementary school and high school my grandparents owned a duplex. They bought it with the funds from a sale of a boarding house they ran during the war way before I was born.There were no computers in those days and they taught me how to enter the rents into their ledger and take out money for repairs. I learned to paint with my grandpa and do minor repairs.I remember I wanted that property so bad when I graduated from high school in the 80's, but they sold it to a neighbor because the last tenant they had evicted, totally trashed the place and my grandmother didn't want to deal with the hassle of repairing it. So I have a little bit of experience in property management from hanging out with my grandparents in San Jose. I think the property bug is in my DNA. Knowing which ones to buy or run away from is where I hope BP will help me as I attend more webinars and use the calculators.
@Brian Ploszay Thank you for your opinion. I live in San Jose and yes, so many of my friends with young families have moved to Modesto, Tracy, and Mountain House California.Their commute is two hours going to work in San Jose and two hours getting home. The rent is lower so people are sacrificing so they can have a roof over their head. You're right the demand is really high for apartments.
@Mary M. Thank you for the advice. I do only want one property at first to test the waters. Vallejo is a area I hadn't thought of, but there are some bad areas there too but I guess that's true of any city.