Newbie moving to suburbs of Minneapolis

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Newbie moving to suburbs of Minneapolis

Jessica Wood
Investor · IA · Member since 2017 · 88 posts · 36 votes

Hello!

My family and I are relocating to Minneapolis in December and we will be lucky enough to be investing in real estate full time.  We are looking to invest in the western suburbs as well as the Edina/Calhoun area.  Neither of us will have W2 incomes but we have investment income as well as rental income.  

Our plan right now is to pay cash for a very modest primary residence and refinance when we get up to minneapolis. We would live there for two years and then rent it out. Assn docs say you need to occupy for 2 before renting. While we lived there we'd put in new showers, flooring in kitchen and bathrooms and paint kitchen cabinets white, etc. Make it a more appealing rental unit. 

I have one rental property in Edina that is paid off. I've been renting it out for about 4 years or so & lived in it prior to that. I've spent about 4 hours of work on that place in 4 years so I've been really lucky as far as tenants go. 

Are there specific banks in the Minneapolis area that will be better at lending based on net worth vs. verifiable income?  I currently bank with Wells Fargo but am open to developing relationships elsewhere. 

Our primary goal will be to get single family homes cash flowing ASAP. 

Since cash flow is important to us, we are considering putting as much as 50% down on these properties. Thoughts?

We are leaving a farming operation in Iowa and going into this full steam ahead. Wish us luck! 

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Tim SwierczekPro Member
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
9y

@Jessica Wood  First you are doing amazing and one thing I like about RE investing is that there are many ways to do it.  That being said you asked for advice and while your method is working for you I think you would be better served to put 25% down on all your properties and re-leveraging the to this level.  Then buy as many good deals as you can.  You should be able to easily cash flow as much or more than with your paid off home and you will now be spread out over many properties.  This will minimize risk as @Kevin Powell points out, and it will grow your net worth in the process.  The best news is someday you will have more paid off properties, and while you may think you can do this by paying off a property at a time rental real estate does not work that way.  if you have 1 property paid off you have 1 set of renters paying your profit each month and while its bigger monthly cash flow on one property it is not necessarily bigger cash on cash return on your equity.  When you get more properties, say 5, you have 5 people paying down your mortgage at once instead of one person giving you money to buy one property.  In that case you loose time and lots of it.  By the time you save up for your large down payments you are giving up equity.  If you subscribe that the market is appreciating then you lose a portion of that down payment each year to that appreciation on the house you were going to buy, instead of receiving the appreciation and the principal reduction from your potential 5 tenants you are giving the appreciation to the seller of your future investment property.  Be safe in your investments but be careful not to be too "safe" it will cost you hundreds of thousands of dollars.

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  • Bradley Gudim
    Investor · Fridley, MN · Member since 2017 · 35 posts · 10 votes
    9y
    Sounds exciting. I am new to real estate investing. I live in Minnetonka which is a western suburb. Please feel free to connect. Brad
    0Reply
  • Kyle Lush
    Willmar, MN · Member since 2017 · 15 posts · 5 votes
    9y

    Welcome Jessica! Sounds like a good plan and a good area. I'm another new member from MN. Just getting into REI.

    1Reply
  • Kevin Powell
    Minneapolis, MN · Member since 2014 · 48 posts · 28 votes
    9y

    Hey @Jessica Wood

    Welcome! I am curious why you are putting so much cash down? One of the great pieces of real estate is the ability to leverage your money.  I would like to hear more about what your though process is on that. To me I would like to secure as many assets, for as little cash as possible right now why interest rates are so low.

    A $300,000 Single Family Home at 50% down is a mortgage of $738 a month. A $300,000 Single Family Home with 25% down is a mortgage of $1107 a month. That is a $369 dollar difference in cash flow, but you also have two properties now instead of one. I don't own any Single Family Home Rentals so I am not sure what to expect in cash flow, but if property 2 is cash flowing a little bit that helps reduce the $369 difference. 

    I look forward to hearing more about your strategy about putting so much cash down, and also why you are leaving cash in your first Edina property instead of leveraging that as well. 

    2Reply
  • Jessica Wood
    OP
    Investor · IA · Member since 2017 · 88 posts · 36 votes
    9y

    @Kevin Powell - I don't want to leverage the Edina property because I am thinking of it being paid off as a success and that all of the profits are now 100% income and I have no mortgage expense. 

    Couldn't we use that income to qualify for other mortgages? 

    I was thinking of putting more cash down on each property to jump start my way to having multiple paid off properties and more cash flow. 

    I guess I didn't go over my goals clearly enough & that's because we aren't positive what we will love doing yet. But getting cash flow asap is a priority as we will have to replace our current incomes. My husband will get his real estate license & I will follow suit once our kids are at least in preschool.  Our first endeavor will be purchasing our first rental property in all cash, moving into it, redoing it and refinancing it. The cash reason there is that we won't qualify for a mortgage on paper right now since we run a farming operation and try to keep our income as close to zero as possible. When we leave the industry, that'll change. 

    I guess I could take 500k cash and spread it very thin and be very highly leveraged and grow very quickly but I'd rather start off slowly and conservatively. 

    Thoughts/ideas?  Lender ideas?  

    0Reply
  • Jessica Wood
    OP
    Investor · IA · Member since 2017 · 88 posts · 36 votes
    9y

    @Bradley Gudim - wonderful!  I forgot to mention I'm from the area. I grew up on Lake Minnetonka. We are trying to get into the Minnetonka school district but finding a lot of extensive rehabs or teardowns for 300k. The market is crazy right now. 

    Would love to be kept in the loop regarding any meet ups in the area!

    0Reply
  • Jessica Wood
    OP
    Investor · IA · Member since 2017 · 88 posts · 36 votes
    9y

    @Kyle Lush - thank you!  Good luck to you, too!

    0Reply
  • Kevin Powell
    Minneapolis, MN · Member since 2014 · 48 posts · 28 votes
    9y

    @Jessica Wood I know that I personally can use the income generated by the properties because I have been a landlord for a several years now. It sounds like you have as well so I wouldn't see why not. 

    Another way of saying "spreading yourself to thin" is "putting all your eggs in one basket". If you are cashflowing $800 from one property right now but have a bad tenant, repairs, etc. you don't have any incoming cash. That is a danger of SFH vs MFH and the risk increases if you only have one SFH. If cash flow is your game shouldn't you be looking at multi family vs single family?

    Can you share some numbers on your Edina investment? Rent, Cash Flow, etc. Maybe I am WAY off on SFH returns. Unless you are absolutely crushing it as far as rent it seems odd if cash flow is the goal.

    Cash on cash return assuming $800/MO and $200,000 purchase is 4.8%. You can buy bonds instead and generate nearly the same return.

    Here is a BP article referencing leverage.

    One nice thing about having a large portion of equity in a property would be getting a line of credit against the property to use as another source of cash. I have used Community Resource Bank for that in the past and my contact there is Sam Ringstad <samr @community-resourcebank.com>. Just remove the space between the r and the @. 

    0Reply
  • Jessica Wood
    OP
    Investor · IA · Member since 2017 · 88 posts · 36 votes
    9y

    @Kevin Powell - Edina is actually a condo. Two tenants. Rent $1260 total. Purchase price $69,900 foreclosure. Worth about $120-130. Assn dues + taxes are $440/month. 

    Maybe you're right and we should look into multi family. 

    0Reply
  • Peter Ulstad
    CPA / Investor · Minneapolis, MN · Member since 2017 · 30 posts · 19 votes
    9y

    Hey @Jessica Wood, welcome to the real estate game and welcome back to Minnesota! I'm a native Iowan so I understand the desire to move from the great corn state to MN!

    I'm in the same camp as @Kevin Powell on this one. One of the amazing things about real estate is the concept of leverage. I believe we were brought up in a world where the concept of owning something free-and-clear was considered "good" and debt was considered "bad". However, I'm a firm believer that getting the highest returns on my dollars invested is my primary goal. Leveraging assets is a great way to accomplish this. 

    Good luck to you and I'm sure we'll see you around!

    0Reply
  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Jessica Wood  First you are doing amazing and one thing I like about RE investing is that there are many ways to do it.  That being said you asked for advice and while your method is working for you I think you would be better served to put 25% down on all your properties and re-leveraging the to this level.  Then buy as many good deals as you can.  You should be able to easily cash flow as much or more than with your paid off home and you will now be spread out over many properties.  This will minimize risk as @Kevin Powell points out, and it will grow your net worth in the process.  The best news is someday you will have more paid off properties, and while you may think you can do this by paying off a property at a time rental real estate does not work that way.  if you have 1 property paid off you have 1 set of renters paying your profit each month and while its bigger monthly cash flow on one property it is not necessarily bigger cash on cash return on your equity.  When you get more properties, say 5, you have 5 people paying down your mortgage at once instead of one person giving you money to buy one property.  In that case you loose time and lots of it.  By the time you save up for your large down payments you are giving up equity.  If you subscribe that the market is appreciating then you lose a portion of that down payment each year to that appreciation on the house you were going to buy, instead of receiving the appreciation and the principal reduction from your potential 5 tenants you are giving the appreciation to the seller of your future investment property.  Be safe in your investments but be careful not to be too "safe" it will cost you hundreds of thousands of dollars.

    3Reply
  • Keith Fjelsted
    Contractor · Rosemount, MN · Member since 2016 · 54 posts · 23 votes
    9y

    Welcome back to Minnesota (in December).   Best success to you and your husband. If ever we can be of assistance or if you have any questions let us know.

    1Reply
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