Newbie with funds but no rental experience.

General Landlording & Rental Properties
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Newbie with funds but no rental experience.

Angela Holmes
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.

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David FawcettPro Member
Modesto, CA · Member since 2017 · 40 posts · 61 votes
7y

@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. 

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  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @John Cumpton Thanks so much for the 1031 info. I will DEFINITELY discuss that with my CPA and my Broker friend. 

    0Reply
  • Francene Lacey
    Phoenix, AZ · Member since 2017 · 7 posts · 4 votes
    7y

    @Angela Holmes ~ You will do amazing since you are seeking advice from the BP platform with years of combined experience. The first line of thought for me is protecting your personal and business assets, get legal advice on the best protection for you as a RE Investor.

    If you prefer a cash purchase vs leveraging, check on the seasoning requirements of Traditional and Hard Money Lenders in the event 'Life' happens and you decide to Refi. Also consider a Line Of Credit with a draw period that will meet your financial objective.

    I agree with several replies regarding consider hiring a Property Management Co, who is Licensed: Professional certifications or licenses from trade organizations such as: the Institute of Real Estate Management, National Apartment Association, National Association of Residential Property Managers and the Community Associations Institute.

    Set your Legacy up correctly now and enjoy your journey!

    3Reply
  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @Francene Lacey Thank you Francine. I will definitely look into hiring a property management company. Legacy is right, I plan on leaving a legacy for my kids and grand kids. 

    1Reply
  • Elise Hazzard
    Property Manager · Saint Petersburg, FL · Member since 2016 · 183 posts · 51 votes
    7y

    @ Angela Holmes

    You are at the right place and your relative will be happy to see you are building with her gift instead of spending.

    Perhaps out of CA d/t tax implications? I've just written our property tax checks (paid annually in November)...it's really staggering most years and can substantially affect your ROI. However, you no doubt can command much higher rents in CA.

    Good luck and keep posting!

    Elise

    2Reply
  • Javi Chipi
    Accountant · Miami, FL · Member since 2016 · 88 posts · 30 votes
    7y
    @Angela Holmes leverage is one of the main benefits of investing in real estate. Probably a large down payment and then financing for the difference will work best. You can run the numbers on a spreadsheet to determine what is ideal for your situation. Interest has a cost so if the rate is too high you should consider that in your projections.
    4Reply
  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @Elise Hazzard Thanks for the motivation. 

    0Reply
  • Stephanie Wankel
    Rental Property Investor · Lone Tree, CO · Member since 2017 · 18 posts · 13 votes
    7y

    @Angela Holmes welcome to the wonderful world of real estate investing. As so many other's have commented, there are endless options to how you can invest in this space. You on the right track with educating yourself first. A couple things you might want to think about or learn more about. The difference in being an active and passive investor, so you can determine how involved you want to be in the day to day property management. Read about investing for cash flow, it's hard to do in markets like CA, in which case you might want to explore purchasing outside of your market. Lots of good threads on that topic here as well. One other idea, attend local real estate meet ups, they often have speakers  and lot's of different folks doing different things in the space. 

    2Reply
  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @Stephanie Wankel Thank you for the advice I am still deciding if I want to be involvd with the tennants. I agree California is so expensive. I will really need to educate myself on buying out of my comfort zone area.

    0Reply
  • Matt Lorenzo
    Rental Property Investor · San Jose, CA · Member since 2018 · 17 posts · 4 votes
    7y
    @Ricky Nigro where do you meet? I’m in San Jose as well and would like to meet up for sure. Thanks.
    1Reply
  • Stuart Dukeman
    Rental Property Investor · Haymarket, VA · Member since 2018 · 2 posts · 1 vote
    7y

    @Angela Holmes You already received a ton of great advice. Congratulations on the generosity you received and the opportunities that you are now presented with. There are many opportunities available to you and perhaps you should consider a variety of options. You could obviously leverage the funds and perhaps have multiple properties or pay cash and hold just a single one or you could invest as a partner in a larger, multifamily property. What are your goals? Do you want to invest for monthly cash flow or the long term appreciation? Are you truly interested in being a landlord or do you just want to hold real estate to grow your wealth? If your goal is long term wealth but you have no real interest in being a landlord, there are still many options available to you that may be a better strategy than putting all of your funds into a single rental. BP is a great place to help you figure it all out. Best of luck. I'm sure you will find the answer you're looking for.

    1Reply
  • Brian LeBow
    Property Manager · Arcadia, CA · Member since 2015 · 37 posts · 17 votes
    7y
    @Angela Holmes congratulations!! Seeking advice here will set you up to make well informed decisions!
    1Reply
  • Diana Muresan
    Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
    7y

    I would definitely finance, do 20% down if you can go owner occupied, if not then 25% down as investment. You need to decide upfront if you are going to finance the property down the road as it makes no sense to do a delay financing, your interest rate will always be higher on a refi compared to a purchase, plus you will need to pay again for title fees. I have 6 multi units in my pipeline this month alone, I close a lot of MF in all states, using cash instead of finance is not necessarily a good negotiation technique as seller wants to get the best offer regardless if is cash or financed, plus the 20%-25% down payment is already working on your side. I had couple of files in FL where the only reason why the buyer bought cash thinking he could to a delayed financing later is because the realtor rushed them and put pressure claiming that would increase the odds of getting on the contract, the realtor just wanted to close faster and didn't care what was best for the client. It ended up that non of them actually qualified for the delayed financing and both had to wait for the next tax season to show better income.

    I would first wet my feet with a first building, see how it goes for a few months or a year, learn what it means to be a landlord, either hands on or delegating a management company and move up to purchase more, depending on your funds available and your desire to pursue real estate.

    2Reply
  • Ronald Starusnak
    Property Manager · Syracuse, NY · Member since 2016 · 601 posts · 384 votes
    7y

    Angela, let's say you have $200,000 in cash. Of course you could buy 1-2 units and have them paid off, or you could use the $200,000 as a down payment on numerous properties, provide small upgrades to increase the value of the property and cash out refinance to repeat the method. I have offered to pay the closing costs of anyone in my family so they are able to utilize this method and increase their portfolio's exponentially, because truly when you get that ball rolling, the only limits are how far you want to go. 

    1Reply
  • Ronald DavisPro Member
    Rental Property Investor · Baltimore, MD; Real Estate Professional · Member since 2018 · 16 posts · 14 votes
    7y

    @Angela Holmes First, you should consult an attorney and set-up an Limited Liability Company (LLC) (CA does not have series LLCs but your attorney can help you with other options) use this option to purchase property in the LLC name and not yours. And if your credit is good then you should always first consider using OPM (Other People Money) when buying real estate and only using your personal funds for down payments and closing cost (time value of money: money today is worth more than tomorrow's money - financing is a beautiful thing even gives you limited liability protection when everything's financed verses owning free and clear).

    Also, I agree with @Tom Shallcross but only using this option when you find a good deal with multiple bidders and fast close to beat out other competition for the property is more attractive to seller.

    If your family are in the real estate business use them as much as possible and build yourself a real estate team to invest in real estate. Again, I suggest getting yourself an attorney to purchase properties in an LLC name and not yours and keep a close watch on everyone you work with in real estate business. Thank your relative for her wisdom of helping you now to build your legacy (remember to pass it forward). Take care and welcome to BP.

    3Reply
  • Curtis BidwellPro Member
    Rental Property Investor · Olympia, WA · Member since 2014 · 781 posts · 744 votes
    7y

    @Angela Holmes  cash vs debt is an age-old debate.  Our friends at Memphis Invest just published an article that may help you.  

    https://blog.memphisinvest.com/wheres-the-balance-between-paying-off-debt-and-investing?utm_campaign=Weekly%20Blog%20Update%20-%202017&utm_source=hs_email&utm_medium=email&utm_content=67764104&_hsenc=p2ANqtz-_16v4jwnsMkjcmRRGwVrrIhGa12rx1qIfWAJ3KFHQyUKZQCNr3N8DxgPCq-NPB977O5rHB3zRsArve2HOP2rXtYU1Msw&_hsmi=67764104

    Personally I like to maintain about a 70% debt position, putting 25-30% down.  This allows for good cash flow should markets go soft, and lets the tenants pay down my mortgage. 

    Keeping cash in the bank makes you attractive to lenders and allows you to jump on the next opportunity when it comes along. 

    Podcast Guest on Show #95
    2Reply
  • Jonathan Worner
    Winona, MN · Member since 2017 · 3 posts · 3 votes
    7y

    Hi Angela, 

    I's Fairly new to BP myself. I think its great you are using your good fortune to build something for your fortune and wellbeing. I don't have any personal experience to add as of yet from my own experience but I would like to offer my encouragement to your real-estate endeavors. From what I have learned I believe it is best to use the money as a down payment and leverage what financing you can achieve as this has the potential to give you a greater cash on cash return. However is you keep your eyes out I am certain there exists plenty of potential for a good deal you could buy outright especially if you put in the work to find an unlisted property as it wont have the visibility of a listed one and therefor, if you can overcome the challenges of searching for unlisted property, less competition from the general market. I like @Tom Shallcross's idea to buy outright and refinance later as this provides you a healthier immediate cashflow when you consider there is no mortgage to pay and still gives you the availability of some capitol to pull out for repairs or your next project and is a concept I had not yet encountered in the sense of an initial cash purchase. Once again best of luck, I look forward to hearing how this all works out for you.

    1Reply
  • Janice Reynolds
    new york city · Member since 2017 · 40 posts · 23 votes
    7y

    welcome to bp, i agree with David, on buy one property at a time with 20% down that way you will be able to learn from each purchase and be able to grow.

    1Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    7y

    Welcome to BP @Angela Holmes.  It's great you're on BP trying to get info., and learn. No matter where you invest, I'd get to know as much about the area as you can. Most cities have good areas and areas that are problems. There are people on BP that own property in every area of the country so you'll be able to find someone that can advise you on neighborhoods, etc. 

    San Jose is definitely a spendy area, as is all of the bay area. Though, even in high demand areas such as that, there are opportunities if you're creative. Room rentals, airbnb, etc. It's crazy people have to drive for 2 hours each way for work! 

    Anyway, good luck on your ventures! 

    2Reply
  • Suhan Junaid
    Rental Property Investor · Lake Worth, FL · Member since 2016 · 29 posts · 16 votes
    7y

    @Angela Holmes, it all depends on your specific situation and what you'd like to accomplish. 

    If you are really flexible. I'd use your ability to pay cash and close quickly to get as best as price as possible. Note that a fast close does not mean without diligence. I would still run the full gamut of diligence including property inspection, contractor walk through (yes, those two are different!), and maybe even an appraisal.

    I would then do any work you need, fill it with tenants and then refi to get your money out - that way your mortgage (and other) payments will be offset by rental income.

    I would also recommend looking into a professional property manager even though you have family in the area to check up on the property. I'm not sure if your family, or you, would like getting maintenance or emergency calls. Additionally, property managers are in the "flow" of the market - they know what your units can rent for and what improvements you could make to maximize potential income. They can also aid with bookkeeping and getting batch discounts from vendors.

    The only other item I think it might be worth considering is if you can dip into small apartment buildings (5 or 6 plexes) from the get go. I initially started with all four plexes. I realized quickly that bank loans for such properties are very cookie cutter and rigid since they're sold to Fannie and Freddie. For instance, each time I did a refi on my 4 plexes, I couldn't get my income from the rental properties to count towards my debt to income ratio until I owned the property for two years (without going to private or hard money lenders that wanted higher rates or a lot of points). I've found "commercial" (5 units or greater) financings significantly more flexible and actually cheaper to obtain (I think this has to do with RESPA obligations for the lender as well as the Fannie / Freddie thing). And I would argue having 4 units is not that different than 5 or 6 units.

    Cheers,

    Suhan

    1Reply
  • Art Bridgeman
    Member since 2018 · 11 posts · 2 votes
    7y

    @Angela Holmes Hi Angela, please make sure to set up an LLC before you buy and then buy it in the name of your LLC to protect your remaining inheritance. Also, Leverage is good if done properly, but with all the cash and a trusted contractor, you can buy an auction property in cash for a better deal. Get on the schedule of when the city your interested in auctions the property. You can get this information also from www.Auction.com. I bought my first property here online remotely.

    1Reply
  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @Art Bridgeman Thank you for the info on the LLC. My CPA advised me to set up an LLC before buying my first four plex as well. I almost forgot he advised that until i read your post. I Appreciate it!

    0Reply
  • Charles Holmes
    Flipper/Rehabber · Atlanta, GA · Member since 2017 · 1 post · 1 vote
    7y
    @Angela Holmes although I agree with most of the advice here I agree with @Trevor Gaal most. You have to educate yourself as not to loose money. Bigger pockets is a great place to start. And find a mentor that truly has your best interest at heart. One who wants to see you succeed and not try and take advantage of you. This will put you on the fast track and give you the guidance and experience you need to be successful in this business. Just my 2 cents. Good luck.
    1Reply
  • Dan HandfordPro Member
    Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
    7y

    @Angela Holmes The nice thing about asking your question here on BP is that you will get some many opinions on what you should do. I would recommend that you NOT invest in CA as the laws are not landlord friendly and you could lose all of your profits with a bad tenant that you have a hard time evicting. 

    I think you have to also ask yourself if you want to be a landlord and be an active investor or just reap the benefits of cash flow by being an investor in a large multifamily syndication.

    Have you considered investing in a syndication?

    I am from the Carolinas but will be traveling to San Jose in a couple of weeks. I am hosting a meetup in San Jose. Maybe we could connect at our meetup that is planned...you can find details here:

    https://www.biggerpockets.com/forums/521/topics/641823-multifamily-investor-nation-breakfast-networking

    1Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    If you have cash when starting in this business, it can be pretty harmful.  It can create a crutch and not force you to learn how to really make it .  It can put your money at higher risk because you aren't as efficient at reducing risk.  Learn your market and learn to market.  Then you will know really well what to do with that cash.  Pretend you don't have it at first.

    3Reply
  • Lien VuongBusiness Member
    Real Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
    7y

    Welcome @Angela Holmes! I'm glad you're already able to experience the hospitality and wealth of knowledge of BP! I think the folks here have given you plenty for advice but definitely go at it slowly and try to get a feel for being a 'landlord' first. 

    This is clearly an incredible opportunity for you to build wealth and create ultimate cash flow and financial freedom and I see that you're not taking this task light. With that being said, I personally would buy a cash flowing property that's at least a four unit - less risk for vacancy - that currently cash flows under the 20% down payment structure with with added value. That could be repairs you could do as well as increase in rents to create stronger income. 

    Be careful not to buy properties that need a lot of work as that can be very overwhelming and you'll be burned from this industry quickly. I would additionally keep in mind and remember that this is a PASSIVE income stream so that will help you make better decisions in allowing other to manage and create less of an intrusion on your daily life. 

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