Never Invested, want a rental, have cash, what next?

Question

Brett Snodgrass · Answer

Hi @Vincent Plant

In my experience, take your time in finding those properties. Dial in on the specifics on the type of properties you are interested in. And what is really important as you should know is the area.

Also, in my experience as a wholesaler in the Indianapolis market, we could buy a house and still have money left over for a rehab with $30k.

Know where to look, work with some wholesalers with good deals and inventory.

I hope this helps.

God bless.

Ross Denman · Answer

I agree with @Brett Snodgrass regarding being able to purchase investment properties for under $30k, but I think rental properties at that level eat you alive. They are going to be in lower-income areas with a tougher tenant demographic. Because of the age of the homes you will likely have frequent maintenance/service expenses as well. You also can't usually refinance out of these homes as banks prefer to lend $50k+ and these areas are only investment properties with no retail value and little appreciation. I would recommend considering a couple of other options:

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First thought

Use that money as leverage to purchase a better property. It will reduce the cash flow considerably, but honestly, it's probably a better ROI in the long run. Here're some things to think about.

$30k all-in cash

2/1 bath home that rents for $650/mo. Because of the particular problems that comes with these homes, you are likely going to net $450/mo max (taxes $50/mo, insurance $40/mo, maintenance $1,200/year) that's not even considering PM costs. When your tenant moves out, the unit will likely be half trashed and you will probably spend $3000-5000 in getting it rent ready again, which wipes out almost an entire years worth of cash flow. Without even figuring that in, evictions, or longer vacancies, lets figure that you can have an average net of $4,500/year over several years. That 15% ROI which is pretty good... but it doesn't usually work out that way. Plenty of risk with these property types that are hard to put on paper because they can go in so many different directions these rentals can go and it's hard to control every one.

Leveraged $30k all-in

3/2 bath home that's less than 20 years old. This home rents for $1100/mo and is for sale for $89k. Its FMV is actually around $110k and needs about $2k-3k (a little paint, new carpets, and a couple of small repairs/upgrades) to get it ready. Through an offer out for $82k and they accept. The bank wants 20% ($17k) and you have to spend $3k in getting it rent ready. It takes 6 weeks to fix up, market, and have a tenant move-in so you also have a $500/mo mortgage payment and other holding costs totaling a high amount of $500 (just to round things out.) After paying your monthly bills ($500 mortgage, $200 taxes/insurance/hoa, $150/mo property management and maintenance) your net is going to be around $250/mo which is what I see as typical on a financed deal. Your out of pocket cost was $21k for an average net of $3k annually. Just shy of 15% with property management figured in. You also have an appreciating asset, equity, and a lower risk rental.

I have clients find deals like this almost every month right on the MLS, Auctions, FSBO, and occasionally wholesale.

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If you are not a fan of using leverage, it's not too hard to snag a deal for a prehab or rehab. Obviously, you will be selling to investors as there is no $30k retail market, but you can raise your capital to a higher level by doing small rehab/prehabs. Build your capital to something that allows you better opportunities. If you can make 20% on each flip you can get to over $100k in 6-7 flips.

Aaron Cullen · Answer

@Vincent Plant My 2 cents would be to take @Ross Denman advice and leverage that cash. If you have the time I would BRRRR your 3 deals one at a time. Use a hard money loan for the purchase and rehab plus a little of your own money. That way you could get out most of your money and then do the next deal. Do some digging around on BP for that method to see if it might be a good fit for you.

Best of luck!

Never Invested, want a rental, have cash, what next?

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