Is this a crazy idea for a first time investor like me?

Question

I've been interested in real estate investing through rental properties for quite some time, but I'm finally to the point where I want to stop thinking about it and actually DO IT. That said, I could use some expert advice to help me know if my idea for getting started is crazy.

I own a condo that me and my family live in. We have enough equity in it to pull out $25k to buy a rental property. The condo itself would also make a great rental (should rent for $300-$400 more than my mortgage & HOA payments based on comps).

My idea is this:

- Do a cash out refinance or HELOC on the condo to pull out $25k

- Use the $25k as a downpayment on a rental property in another state that is more affordable (there is nothing for sale anywhere near me for less than $250k)

- Rent out our condo

- Move into a single family home that we rent from someone else

My thought is that would give us 2 rental properties and a house with a yard to live in (which we also want for the kids).

What do you think - would I be biting off more than I can chew? Please poke as many holes in my idea as you can - I'm here to learn from you all.

Tom S. · Answer

@Aaron McDonald

As I mentioned in my post, I have people I trust, mainly my father to manage the properties and since I'm from there originally, word of mouth for electricians, plumbers, etc as needed.  I generally post the rental ads (Craigslist) myself and do all of the screening, credit checks, leases myself via email.

I think the key is knowing people in the area you plan to invest in.  Not sure your background, but if you have friends or family in other areas country, that could be a good starting point for out of state investing.  Of course, do your due diligence on the area.

Good luck!

- Tom

Tom S. · Answer

@Aaron McDonald

I'm doing almost exactly what you're proposing with good results.  I live up in Santa Barbara and rent my primary house because of the prices up here.  I've acquired a number of rental properties in Vermont which is where I'm from, plus I have people there I can trust, which is key to managing the properties.

Numbers are far better.  Last property I got was an REO duplex for $45k, put $25k into it for rehab, for a $500 / month mortgage over 15 years (factoring in my down payment).  Rental income is $1400 per month.  Can't do those numbers in coastal California!

Hope that helps and reach out if you have questions.

- Tom

Aaron McDonald · Answer

@Kevin Harrison

Great advice - that's the kind of feedback that I need to be aware of and keep in mind.

Kevin Harrison · Answer

I cant tell you what to do and I don't know what your financial situation is but be aware of a few things.

1) you keep saying you are off setting your cost by $300 a month, but in reality you are increasing your expenses by $500 (by renting) a month according to your numbers and that doesn't even include vacancy or maintenance on the condo alone.

2) at least if you buy the Fixer Upper you are paying yourself so to speak while you live there and in the end increasing the value of what you bought

3) you are going to get much better financing on an owner occupied home as opposed to a investment property

There are a few other things I can think of but I don't know enough about your situation to know if they apply.

Jim Viens · Answer

@Aaron McDonald One other thing to consider (in case you haven't already): Make sure your HOA allows rentals.

Aaron McDonald · Answer

@Lonnie Coleman

I definitely see what you are saying about the pitfalls of out of state investing.

@Tom S.

Great to hear that you have been able to do this successfully! Agreed that the numbers that you posted are out of the question out our way. How have you managed the rentals from across the country? Do you have a property manager?

Lonnie Coleman · Answer

Part of my post was cut off, just be careful when venturing into a different state to invest while being new to the game. This is a wonderful business and you certainly don't want to be derailed early on.

By having tenants where you live will allow you to stay close for managing/monitor your property. Screening them and seeing how well they turn out in the early stages will hopefully set the tone for a long term return on your investment. But if this is all new to you, unless you have a management service or someone to manage your property out of state, this could potentially set you up for a disaster early on.

As mentioned, this is an awesome business, I just hate to see anyone develop a bad taste in the early stages.

Good luck!

Lonnie Coleman · Answer

Hello Aaron,

It's wonderful to see you're ready to get in the game. It's unfortunate you're in an area where it's so expensive. As I viewed your post, I just wanted to point out a couple of things to hopefully help raise your eye brows.

By venturing into new tenants, you definitely want to make sure the both of you have a meeting of the minds when renting your property. Make sure your numbers are correct in clearing a cash flow which covers the mortgage, taxes, insurance, HOA etc.

It sounds pretty tough venturing out and finding another property for your family to live in

Aaron McDonald · Answer

Thank you both for your feedback! Here are the factors that made me think about going the rental route for our primary residence:

- Even fixer uppers in decent neighborhoods in my city go for $500k+ right now (we are tied here with school and family, so can't move to a different city)

- If we were to use the $25k as a downpayment on a $500k house for us to live in, our mortgage payment each month would go up about $1600 (but we would have the $300 income from our condo rental to offset some)

- If we were to rent a comparable house to what we could buy, we would only be paying about $800 more per month for housing costs and that would be offset by the $300 income from the condo rental AND the possible cashflow from the rental that we would buy with the $25k

So I looked at that and thought that the lower monthly housing expense increase for renting as our primary residence combined with renters paying down 2 mortgages for me instead of 1 made it a more attractive option. Does that make sense?

Kevin Harrison · Answer

I have thought about renting out our primary residence and getting a rental home a long time ago. But the only way it ever made sense to me was if the rental was going to be significantly cheaper than the primary and the primary would still cash flow. It is not necessarily a bad idea give your circumstance but if I were you I would get the HELOC and buy the house instead of renting it, maybe a slight fixer upper for a good price, live in it for a few years while you fix it and pay off the HELOC and the when you are ready just buy another.

Is this a crazy idea for a first time investor like me?

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