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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  • Nicolas Ossa-Laverde
    Investment Consultant/Wholesaler · Fort Worth, TX · Member since 2018 · 30 posts · 19 votes
    7y

    Hello Angela and welcome to BP. In my opinion since you do have the financial ability to purchase cash would be to do so. #1 you are always in a positive equity and cash flow situation #2 you can always refi out incase of emergency. #3 less of a headache having to deal with financing specifics and a cash offer is more attractive to the seller. It just depends on your strategy in the long run. On the other hand if you do not want to use all of your funds you certainly have the ability to leverage. Again, it just depends on the risk vs reward that you are comfortable with. 

    1Reply
  • Alexander Whitten
    Rental Property Investor · Chicago, IL · Member since 2015 · 6 posts · 8 votes
    7y
    Hello Angela, Welcome to BP and congratulations on starting your journey into real estate! I would first encourage you to educate yourself as much as possible before diving into an investment. Books such as the BP’s The Ultimate Begginers Guide to Real Estate Investing and The ABCs of Real Estate Investing by Ken McElroy are excellent places to start. They will encourage you to seek out individuals who are experts in their fields to offer the best advice for your situation and your market. Best of luck!
    1Reply
  • Bryan Blankenship
    Investor · Cincinnati, OH · Member since 2014 · 538 posts · 432 votes
    7y

    Hey @Angela Holmes! Welcome! If given the right situation, try and buy cash at a discount(Pre-rehab), fund the re-hab and re-fi at a later date. It does not work in every situation, however, it does produce maximum cash flow and leverage, to hopefully buy another property and start developing a portfolio. Not sure if you have, but research some real estate Turnkey companies that are in the markets you are interested in. Good luck!

    0Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Hi @Angela Holmes,

    Yes, the answer is "It depends". Do you have:

    1) Good credit and a job?

    2) Are you able to find a property at a discount? 

    3) Does the property cashflow if you finance the purchase (80% Loan to Purchase)?

    4) Will you be able to INCREASE the property value by making renovations?

    If you have good credit/job (and therefore can qualify for a mortgage) and you can buy the property at a discount and/or increase the value by making renovations, then I would buy the property all cash and refinance the property once you've done the renovations and increased the value. This is known in BP as BRRRR (Buy-Rehab-Rent-Refinance-Repeat).

    If you don't have good credit/job, and you can buy the property at a discount/increase value through renovation, buy it cash and then flip it for a good profit. 

    If the property cashflows like crazy even at 80% Loan to Purchase and you have good credit/job, then buy it with 20% down and now, you still have 80% to buy 4 more properties just like it.

    0Reply
  • George J Anderson Jr
    Contractor · Spokane Wa · Member since 2018 · 25 posts · 30 votes
    7y
    @Angela Holmes Hey there Angela. I’m also a newbie here in Spokane Valley. We have a growing market and many many multifamily units that are great deals. I currently manage a 600 unit apartment complex here in town as a maintenance supervisor. If you have any questions feel free to messege me. I’m currently looking into a 4 plex myself.
    0Reply
  • Ricky Nigro
    San Jose, CA · Member since 2018 · 14 posts · 9 votes
    7y
    Originally posted by @Angela Holmes:

    @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!

    Also, I am not expert but from our research thus far, being in CA we might benefit from a Delaware Statutory Trust (DST) vs a regular LLC. CA Tax on LLC is $800 a year. DST avoids that and offers the same benefits. I will soon be engaging @Scott Smith to set this up.  He might be able to give you some guidance as well.

    0Reply
  • Sean Tracey
    Member since 2018 · 1 post · 1 vote
    7y

    I hate to sound like the wet blanket here but keep in mind leverage works both ways Angela....A 10% dip in the market causes your $300k all cash property to lose $30k value on paper while a 10% dip on multiple leveraged properties is $30k/ property. My partners and I made this mistake in 2005-2006. Leverage was great until the market dumped. I don't think we'll see anything like that market downturn again for a long time, but a don't think a correction is out of the question. If you're new to this it wouldn't hurt to take it slow. Purchase 1 property and learn the ins and outs. You can still use leverage to your advantage with 1 property. Good luck with whatever you choose to do. 

    1Reply
  • Ryan Chaw
    Rental Property Investor · Sacramento · Member since 2018 · 23 posts · 2 votes
    7y

    @Angela Holmes I currently own 3 single family homes that I rent out by room that does around 9% cap rate each. I recommend you calculate how much you can rent it for, then calculate the mortgage if you do 15 or 30 years and 20% vs a higher percentage down. 15 years will give you a lower interest rate, but you have a higher monthly payment. Figure out if rental income minus expenses is positive. In my opinion, I would leverage because since you are entering a market you haven't gone into before, you may or may not be able to establish a cash flow you are satisfied with. Leveraging your money allows you to buy more houses in Modesto if this one works or buy houses elsewhere if the one in Modesto does not work. Hope this helps. I have a personal calculator you could use to calculate cash flow if you would like.

    1Reply
  • Armin Nazarinia
    Saint Paul, MN · Member since 2018 · 189 posts · 107 votes
    7y

    @Angela Holmes- Welcome to BP. That is awesome, as many said "it depends" I would say this depends on what your goals are with this, are you wanting the four-plex to provide cash flow and that's it? Are you wanting to grow your portfolio and buy more than 1 four-plex? I would try to identify your goal for getting into real estate and build your strategy around that. If you have the cash that is great, also spend a little on an attorney and CPA on how to structure your business to protect the rest of your assets. Very excited for you!

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Ian Walsh, That's one of the most profound and helpful thoughts I've seen in a long time.  It also made me think that the same thing applies when using OPM.  Easy access to cash - yours or others -  can create a barrier to learning rather than a path to success!!!!!  Triple Votes from me!  

    The 1031 Investor5140 Reviews
    WebsiteView Page
    2Reply
  • Cassandra Sifford
    Rental Property Investor · New Castle, DE · Member since 2016 · 376 posts · 158 votes
    7y

    Welcome to BP!!!  If I had those funds, I'd first educate myself and network with like minded experienced individuals.  Purchase one property, but not at my max budget ... maybe half.  Something more reasonable and finance it through a bank.  Drop the 20% down on it, go with a 30yr mortgage and pay extra on the principal.  Make sure you can get about 9% + cash on cash return and make sure to consider all the other expenses.  I've watched a few of Brandon's podcasts and he recommends $150 per door for a SF and $100 per door for a multifamily property.  Research the 1% rule also so you can somewhat quickly determine if a property would be a good investment or if you should move on.

    Well wishes ... Cassandra :)

    0Reply
  • Denise G.
    Bay Area, CA · Member since 2018 · 46 posts · 32 votes
    7y

    angela, keep me posted on what happens.  I live in san jose also, and like you know people in the central valley.  I have been poking around modesto and turlock for a single family. I am still figuring out math, so i'm not in a position to steal away your purchase, but I would love to know how your math works out if you get it.  4 plex for 300's sounds like foreclosure. Am I correct?

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

    @Brian LeBow  Thank you.No,  I am not putting all my funds into the rental just a portion. My goal is monthly cash flow.

    0Reply
  • Richard Elvin
    Investor · Cleveland, TN · Member since 2016 · 280 posts · 187 votes
    7y

    @Angela Holmes
    Welcome to BP. I really like the track you are on and I think you'll be very successful! Have you thought about paying all cash and then getting a HELOC? There are a few national banks/credit unions that will to 80-85% of appraisal. That would be kind of like having your cake and eating it too. You would own the property free and clear, while having ready access to the cash when another opportunity arises.
    PenFed credit union doesn't list it on their website, but they do 80% refi on investment properties. My brother refi'd with them within the last 18 months. I can't post a link on this site, but google pen fed credit union. I'm not affiliated with them in any way, aside from my brother having done a refi with them. Feel free to dm me if you want. I can get you the name of the guy my brother worked with if you would like. (I don't remember it offhand, I would have to get it from him.)

    0Reply
  • Roger Hefner
    Yuma, AZ · Member since 2015 · 140 posts · 137 votes
    7y
    @Angela Holmes i had a similar financial hange in my life. I think depending on age and what you want to do ,work or not work you need ro consider. Im 56 and decided to pay cash for 8 properties. Reason os I dont want ro work. If I was younger and eager I would leverage bit at maybe 50 or 60 LTV.. because of time . Either way maybe just sit on your money think it out more. I also have learned RE is a game of patience. Good luck.
    1Reply
  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @Ian Walsh Wow I never would have thought of it that way. Thank you for the advice.

    0Reply
  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @Roger Hefner I totally relate. I have worked since I was 18 and took care of two sick parents the last 15 years. I would like to enjoy some more free time. I am too burned out from taking care of them and am leaning towards paying cash.

    0Reply
  • Aaron McElhiney
    Specialist · Sandy, UT · Member since 2018 · 5 posts · 1 vote
    7y

    Hi Angela,  Consider buying outside of California. There are plenty of great markets to build your portfolio in and it's not always close to home. Get good local management to ease your buying and management concerns.  Right now we're seeing a lot of investors for Vacation Rental Properties.  The returns can be much higher than long term rentals, but does require top notch management.  You can even block time for yourself to use the property.  Just something to consider.  Good luck!     

    1Reply
  • Evan Hooks
    Rental Property Investor · Spotsylvania, VA · Member since 2018 · 21 posts · 20 votes
    7y
    Run the numbers. Then run the numbers again. $300k may be the asking price but your offer should be based on the numbers. You’re in a great position. Congrats! Let us know what you decide.
    1Reply
  • Vasheka Oliveras
    Woodbridge, VA · Member since 2018 · 12 posts · 4 votes
    7y

    Hello Angela, I am also new here, and I can't really answer your question; however, you have some great advice above, welcome to BP.

    0Reply
  • Sharleen Sy
    Member since 2018 · 1 post · 1 vote
    7y

    Hi Angela,

    I'm in the Sacramento area and do my investing in Sacramento and Yolo county due to the growth we've seen as a by product of the Bay Area's rising cost of living (as I'm sure you're experiencing first hand). I'm currently in escrow on a fourplex in the area and chose to leverage rather than throw a bunch of equity in. The thought behind that is to have the tenants pay the property over time while I use my remaining money for other investments as a lump sum whether it be down payment for other properties or stocks, CD, etc. 

    You could always pay cash to avoid interest and loan costs and refi down the road if you want to pull your cash out and pay those fees when/if you need to. The only thing is to keep in mind that the market will shift over time so if you're in it for the long haul, you should be fine. But if the market takes a dip or correction, you should be ready to be ok with the property potentially dropping in market value. I don't know Modesto well enough to comment on what the anchor businesses are to keep that local economy stable but maybe something to consider...?

    It really comes down to what your goals are. Are you wanting to purchase one investment property and call it a day? Multiple properties? Will you want the rest of the money for a "rainy day" or to pay with in other ways? 

    Hope that helps!

    1Reply
  • Christopher Lombardi
    Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes
    7y
    @Angela Holmes I would make an offer with multiple options for the seller. For instance, tell them you’ll pay cash and close in a month for 260k. Or option two, 290k with a mortgage and three month closing. Maybe option 3 with seller financing. Either way, all options should work well for you and let the seller pick the one that’s best for him. Good luck
    2Reply
  • Angela Holmes
    OP
    San Jose, CA · Member since 2018 · 25 posts · 38 votes
    7y

    @Lien Vuong Hi Lien, Thank you yes I am over whelmed by all of the honest advice that has been given on BP so far. I appreciate your input as well.

    0Reply
  • Jason Graves
    Rental Property Investor · San Diego, CA · Member since 2018 · 242 posts · 234 votes
    7y

    Angela,   

    When my grandmother passed away I was in the same boat.  After doing this for 25 yrs my suggestion is to consider 5 plus doors.  That gets you working w commercial lenders who have much better options.   75 % of the rents also help qualify for the loan.   It’s weird but the larger you can the lower your risk becomes.  My point is it’s safer to put $500k into 1 10 plex vs $500k into 1 studio in SF

     I would put 20-30% down and enjoy the mailbox $.   Keep your power dry and remember “Cash is king “.  Using leverage and keeping cash on hand has served me well.

    1Reply
  • Account Closed
    Investor · Portland, OR · Member since 2017 · 182 posts · 115 votes
    7y
    @Angela Holmes here is a thought—- owner finance some land and build a spec home, or even duplex with your uncle. The Best Learning expierence for sure!
    0Reply
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