Excited but learning

17 Replies

Howdy,

Excited to be here. I've done a lot of reading and thinking about owning rental properties. I've owned my own home for 18 months. I'm trying to convince my wife to rent out our current place and buy another place as a stepping stone to wealth. She's almost on board.

I'm very excited.

So far I've been looking around my area. Nevada County in California. I feel like every deal I see is something like 200k, which at 5% down (if we move into it) [email protected]% mortgage is $907/month. Yet rentals for comparable properties are mostly in the $1500-1700 range. None of them even come close to the 50% rule I've been reading about.

Same issue when I look higher at 250k houses, or lower at 150k houses, same issue where the mortgage is 60-80% of potential rental income. After I start adding in taxes, vacancy, repairs, insurance and 2.5% "other" expenses it quickly moves to negative cash flow analysis.

How should I go about looking for more viable deals? Is there a particular forum here that I should read through? I feel like my ideal first step would be to find a 3/2 1500-1700 sq ft property to buy, owner occupy for 12-24 months. Rent out my current place (3/2 1700 SFH) and get a taste of being a landlord, while also buying a place that could potentially be my second rental after I've lived there long enough.

Thanks for any thoughts,

-Dustin

Welcome Dustin! The 50% rule is tricky in California with minimal down payment. Use the resources here and network your butt off until you find what's right for you! Keep us all informed on your real estate journey!

Thanks Jeff.

My understanding is that minimal down payment will give better returns on the money tied up in the property. If I put 25% down, sure I can find positive cash flow, but then it'll be a much lower ROI, and a much larger down payment required. (Read: Will take 5x as long to save up.)

Thinking maybe the solution is to start looking at properties that are close, and sending offers that are just under what I'd need to make the numbers work (thus a little wiggle room to move up from that.) I.E. 200k place, that I'd need 180k for the rental income to work, maybe offer 170k. Although it's 30k under the list price, eventually someone might say yes.

Are you saying that the average deal in California is either: 1) diamond in the rough, acquired by hard networking or luck, 2) requires appreciation to get a decent ROI (gambling?) or 3) suffer a really low ROI with a high down payment? 25% down on a 200k, with $100/mo cash flow on 50k tied up, doesn't look as nice as 5% down $100/mo on 10k tied up. (Obvious, just curious what the lay of the land is around here.)

Like I mentioned earlier. I've done a lot of reading both in purchased books, and websites where there are all sorts of success stories about a cute little 80k find that with 5% down, eventually rents for 750/month and cash flows 150/month. I'd love to do that. Again, and again, and again.

Not sure where to look. But, I've just scratched the surface of these forums. Spent many hours reading threads the last two nights. So I'll keep reading.

Thanks for the feedback.

-Dustin

A larger down payment will lower your monthly mortgage cost. Also, making a lower offer and negotiating. Homes are often listed for much more than they are worth. Sites like Zillow will often show other houses that have sold recently in the area and for how much. Make your offer on paper, and make it personal. It is the seller that makes the final decision, so not being a robot like everyone else will help you. I heard on a podcast here by Brandon that if an offer you are making doesn't make you blush a little, you are offering too much. A GOOD, REPUTABLE real estate agent can help you find deals based on what you are looking for. You tell them what kind of home (single family/multifamily/duplex/etc), price, and neighborhood. They will do a lot of heavy lifting for you, and they can also help people find alternative ways to help with financing. If you need help finding an agent, ask homeowners or other investors you know in the area about the agent they use/used. Referrals are better than looking that up.

Good luck.

Originally posted by @Christopher Thompson :

A larger down payment will lower your monthly mortgage cost. 

Right, but it also ties up more capital, and reduces the ROI. If this is what's required in California, that's good to know. I'm just becoming educated on my area. ;)

Also, making a lower offer and negotiating. Homes are often listed for much more than they are worth. Sites like Zillow will often show other houses that have sold recently in the area and for how much. Make your offer on paper, and make it personal. It is the seller that makes the final decision, so not being a robot like everyone else will help you.

Great points. Very useful reinforcement.

I heard on a podcast here by Brandon that if an offer you are making doesn't make you blush a little, you are offering too much. A GOOD, REPUTABLE real estate agent can help you find deals based on what you are looking for. You tell them what kind of home (single family/multifamily/duplex/etc), price, and neighborhood. They will do a lot of heavy lifting for you, and they can also help people find alternative ways to help with financing. If you need help finding an agent, ask homeowners or other investors you know in the area about the agent they use/used. Referrals are better than looking that up.

Absolutely. Will do. Thanks for the feedback. I'll start listening to some of the podcasts tonight.

Hey Dustin, welcome to CA :) Unfortunately there are very few places in CA that will yield positive monthly cash flow. A lot of CA folks end up investing out-of-state (I'm one of them) chasing the cash flow, or some stick to appreciation potential here, or...well, it all depends on what your goals are. But yeah, cash flow unfortunately isn't much of a thing around here. (good work on the math! A lot of folks don't understand the numbers)

@Dustin Graham I think you need to market yourself to distressed property owners who might be looking to sell quick if you're looking to find good deals. Research ways to market yourself to these kinds of people and hopefully you'll have some luck.

@Ali Boone Thanks for the confirmation. I'm still going to push for finding something that I can get some positive cash flow on. Even if the ROI is low the first time around, it'll be much easier to sustain I think. ;)

@Matt Petrovski Good point. It's going to take some practice as I am not a salesperson by nature. I do think there are some great opportunities around for distressed properties though, but also, I'm completely new to estimating rehab costs. Thanks.

Originally posted by @Ali Boone :

Do you think you can find it nearby?

Well, I figure I'll ramp up my analysis of all deals within ~60 miles really hard, keep an eye out. And if I can find something that is very close, perhaps right at 0 cashflow after expenses, then put in a written offer low enough to hit positive cash flow. I've seen a few that look close where cash flow including vacancy 6%, repairs 8%, comes to right about $0/month that could be 100+ if I can get the place for a 5-10% discount (190k instead of 200k, for example)

That's my thinking anyways. I've got a lot of reading, podcast listening, and deal analyzing to do though. So I've got a lot to work on right now.

But at least it's fun work! :) I'd say in that case, the $0-100 cash flow properties, research or know whether they are good candidates for appreciation potential? Because if they aren't, you may really be missing out on some long-term profits. One big repair and that zero to minimal cash flow is GONE, for years. So I would definitely want the famous CA appreciation potential on my side (and it's not applicable in all of the CA cities like it is in the big ones). For example down here in SoCal, Palmdale and Lancaster are kind of like those properties where you might be able to barely squeak out a penny or two in cash flow, but a) the tenant pool out there is rough and b) the desert cities are the last to appreciate the and first to depreciate.

Then one last thing I would research too is CA tenant laws. It may not be one big repair that gets you, but one bad tenant may be worse, thanks to the tenant laws.

With that said though! Anything is possible (maybe). And more importantly, it's about investing where and in what you are most comfortable with. That is always worth more than some extra dollars in my opinion.

Originally posted by @Ali Boone :

But at least it's fun work! :) I'd say in that case, the $0-100 cash flow properties, research or know whether they are good candidates for appreciation potential?

Yup! The ones I'm looking at certainly have awesome appreciation potential. I just don't like relying on that if the entire US market decided to take a down turn next year. I like to think of appreciation as icing on the cake.

Then one last thing I would research too is CA tenant laws. It may not be one big repair that gets you, but one bad tenant may be worse, thanks to the tenant laws.

Yea, I had a friend where they had to foreclose because of a bad tenant. So I understand the downsides!

Thanks Ali.

You bet! One upside though...if the appreciation potential is there, just remember that the value of a house only matters if you are trying to sell or refinance....so even if it took a mega downturn between now and the appreciation time, that doesn't matter unless you try to sell it! Just hold it through until the appreciation comes in :)

Good luck! Keep us all posted.

     Hi @Dustin Graham -- I do most of my work in your general area.  Mostly rentals, some flips.  Things were definitely a little easier to be had a couple year ago, but there are still deals out there.  I am always on the look-out for a property that might have a second unit on it -- many times they sell for little to no premium.  I'm also often willing to take on tenants with little credit and no steady w2 income since we have such a cash economy up here, so long as I get hefty deposits and higher then average rents.  There are also opportunities to set up your own second units on acreage properties -- normally by moving a used manufactured home onto a permanent foundation.  You might add $1600 in rent, for maybe $80k in cost to an existing property in this manner.  I also look at opportunities to create legal second units in places closer to downtown where the layout may lend itself to this, and where it is allowed.

    Some folks are also doing well with Airbnb, and while it's more work, you may see better numbers once you get a reputation.  In general there's a huge rental shortage so you can sometimes command greater then what you might consider market rents both short and long term.

    I'm also expanding my radius to look past Nevada County into placer, el dorado, yuba, and some other areas.  Vacant land flips and land rentals may be viable too given all of the prop 215 in the area, but those have lots of risks of their own of course.

   In general, if you hustle, you might find a place that could cost you $200k all-in, that you might get $2,700 for rent between two units as an example -- but that seems like top of the mark numbers at this point unless you are willing to rent to some high risk situations.  For CA in an area with rapid rent appreciation, some might consider those pretty good numbers, although personally I am worried about what happens to rents in a few years when our cash crop moves mostly from personal grows to commercial operations -- for me it's a short to medium term play in the area.

    This isn't the midwest, so you may need to temper your expectations a bit, but you may well be able to carve out some 1.5% rule properties that have built in appreciation by finding or creating second units or adding second inexpensive houses to lots.

   Anyways, let's get together and chat some time and compare notes.  Always nice to meet someone in the area from BP there aren't many of us.  And if you are considering little $80k places that might rent for $750 take a look at some rural spots outside of placerville -- those don't fit my model but they might work for yours.

re's

John

     Also regarding that 8% repairs cost.

-If you have a 1200SF house in a C neighborhood getting $700 in rent per month, you may well spend 8% in repairs ($650 or so per year).

-If you have a 1200SF house in a B+ neighborhood getting $1700 per month in rent, your repairs cost may look like a similar $650 or so per year, so you are looking at more like 3-4% in repairs.

Be careful with a lot of the "rules of thumb" on biggerpockets, they tend to apply more towards places that rent at the low to mid end of the spectrum. Better to run a full analysis and base your maintenance, CAPEX, vacancy on actual educated guesses and not just rules-of-thumb keyed as a percentage of gross rents.

Originally posted by @John D. :

Be careful with a lot of the "rules of thumb" on biggerpockets, they tend to apply more towards places that rent at the low to mid end of the spectrum. Better to run a full analysis and base your maintenance, CAPEX, vacancy on actual educated guesses and not just rules-of-thumb keyed as a percentage of gross rents.

 Thanks! I think this is a good statement that seems to be in line with what I'm starting to find. Gotta run all the numbers around here.

And, great feedback on Nevada County. We are in an interesting spot between Sac and Reno.

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