First time buyer as rental investment
New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes
First time buyer as rental investment
Most Popular Reply
Real Estate Agent 路 Chandler, AZ 路 Member since 2022 路 215 posts 路 156 votes
4yPhoenix used to be a very inexpensive market but since Covid has appreciated more than any other market. For appreciation Phoenix has diminishing returns, I believe investors still have reason to be optimistic when looking at population growth at an all time high vs. New SFH Starts is at an all time low, supply and demand are on our side but I still believe with how prices are now less people will move here over next decade. Major benefit that my out of state clients point out is that AZ is known as "non judicial" or Landlord friendly state compared to many states on the West Coast. I've had several clients to 1031's form their home state to AZ because of politics.
20 Replies
- 4yJason WrayPro MemberBanker 路 Nationwide 路 Member since 2020 路 2k+ posts 路 1k+ votes
Sohel,
Townhommes area good way to start as long as the HOA is not extremly high. A Townhome qualifes FHA, and conventioanl where a condo may need a condo apprvoal through FHA or Fannie/Freddie. Townhome is managed by the property management company so as long as the monthly HOA fee is reassonable its a good choice. Less in taxes and usually requires an HO6 policy instead of a full HOI hazzard coverage on an SFR which can cost 10X more per annual.
You may also want to consider buying a duplex, or 3-4 family and if you do not own a primary you can go FHA and put only 3.5% down and occupy a unit for a year or less if you buy another home or move out to a bigger space.
- Real Estate Investor 路 Williamson County, TX 路 Member since 2011 路 1k+ posts 路 961 votes4y
Phoenix rents are going down. Might wait and see how things shake out. Living in an expensive state you need to be careful not to view other markets as bargains in comparison. Look at price vs rents and rent histories. Markets cycle.
- 4yDrew SygitBusiness MemberProperty Manager 路 Royal Oak, MI 路 Member since 2012 路 12k+ posts 路 9k+ votes
We think the Midwest is a GREAT place for OOS investors to consider!
YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods: https://www.biggerpockets.com/...
Your biggest question shouldn't be WHERE to invest, but HOW you will invest!
Many OOS investors set themselves up for failure because they don't truly take the time to understand:
1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.
2) The Class of the PROPERTY they are buying - which is relative to the overall area.
3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.
4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.
5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.
6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.
7) That OOS property Class rankings are often different than the Class ranking of the local market they live.
8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.
9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.
10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.
11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won鈥檛 pay them enough for the time required and even then it鈥檚 too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC?
Good luck with whatever you decide馃槉
Logical Property Management4.9458 Reviews - Rental Property Investor 路 Centreville, VA 路 Member since 2019 路 1k+ posts 路 799 votes4y
@Sohel Mahmood I have found a lot of value in the mid west markets. I prefer to invest in Cleveland and similar to you, the housing market in Northern Virginia is also very high so I decided to go out of state. It has helped me scale a lot faster in my real estate journey
- Real Estate Agent 路 Los Angeles, CA 路 Member since 2018 路 2k+ posts 路 1k+ votes4y
Phoenix was one of those hot markets that is cooling off quickly based on some reports.
You will also need to talk to a lender about the pros and cons of buying an investment property before the primary. I had a client who wanted to do that and it was going to complicate things.
Why not house hack first and then buy out of state? Put less money down, better interest rate, and if you already have roommates, your lifestyle wouldn't change. Especially being in a high priced market means that rent/value increases are a higher dollar amount. For example a 3% increase on a $3K a month rent is more cash than a 3% increase on a $1k a month rent.
- Real Estate Agent 路 Chandler, AZ 路 Member since 2022 路 215 posts 路 156 votes4y
Phoenix used to be a very inexpensive market but since Covid has appreciated more than any other market. For appreciation Phoenix has diminishing returns, I believe investors still have reason to be optimistic when looking at population growth at an all time high vs. New SFH Starts is at an all time low, supply and demand are on our side but I still believe with how prices are now less people will move here over next decade. Major benefit that my out of state clients point out is that AZ is known as "non judicial" or Landlord friendly state compared to many states on the West Coast. I've had several clients to 1031's form their home state to AZ because of politics.
- New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4yHi Jason,
Quote from @Jason Wray:
Sohel,
Townhommes area good way to start as long as the HOA is not extremly high. A Townhome qualifes FHA, and conventioanl where a condo may need a condo apprvoal through FHA or Fannie/Freddie. Townhome is managed by the property management company so as long as the monthly HOA fee is reassonable its a good choice. Less in taxes and usually requires an HO6 policy instead of a full HOI hazzard coverage on an SFR which can cost 10X more per annual.
You may also want to consider buying a duplex, or 3-4 family and if you do not own a primary you can go FHA and put only 3.5% down and occupy a unit for a year or less if you buy another home or move out to a bigger space.
Thanks so much for your response. This is very informative. From the lenders point of view, what are the cons of buying rental property first instead of buying primary?
Regarding multi-family homes, is it still profitable considering current market's interest rate?
Thanks,
Sohel - New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4y
Quote from @Marian Smith:
Phoenix rents are going down. Might wait and see how things shake out. Living in an expensive state you need to be careful not to view other markets as bargains in comparison. Look at price vs rents and rent histories. Markets cycle.
Hi Marian,
Thanks for your kind response. I will definitely keep these suggestions in mind. Regarding market cycles, many are saying house price will go down and others are saying not to wait for that and go for investment whenever one is ready. What's your thinking?
- New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4yHi Drew,,
Quote from @Drew Sygit:
We think the Midwest is a GREAT place for OOS investors to consider!
YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods: https://www.biggerpockets.com/...
Your biggest question shouldn't be WHERE to invest, but HOW you will invest!
Many OOS investors set themselves up for failure because they don't truly take the time to understand:
1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.
2) The Class of the PROPERTY they are buying - which is relative to the overall area.
3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.
4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.
5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.
6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.
7) That OOS property Class rankings are often different than the Class ranking of the local market they live.
8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.
9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.
10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.
11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won鈥檛 pay them enough for the time required and even then it鈥檚 too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC?
Good luck with whatever you decide馃槉
Thanks for those tons of info. Really appreciate it. Those are helpful in my learning path. I am open to midwest also but at first, I would like to learn the pros and cons of buying rental investment first instead of buying primary residence. Any investment that can possibly provide positive cash flow is of my interest.
Thanks,
Sohel - New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4yHi Aj
Quote from @Aj Parikh:
@Sohel Mahmood I have found a lot of value in the mid west markets. I prefer to invest in Cleveland and similar to you, the housing market in Northern Virginia is also very high so I decided to go out of state. It has helped me scale a lot faster in my real estate journey
Great to know your investment journey. I would like to learn the pros and cons of buying rental investment first instead of buying primary residence. Can you share yours?
Thanks,
Sohel - New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4yHi Rick,
Quote from @Rick Albert:
Phoenix was one of those hot markets that is cooling off quickly based on some reports.
You will also need to talk to a lender about the pros and cons of buying an investment property before the primary. I had a client who wanted to do that and it was going to complicate things.
Why not house hack first and then buy out of state? Put less money down, better interest rate, and if you already have roommates, your lifestyle wouldn't change. Especially being in a high priced market means that rent/value increases are a higher dollar amount. For example a 3% increase on a $3K a month rent is more cash than a 3% increase on a $1k a month rent.
Thanks for your response. I am interested to learn those complicacy of buying rental property first instead of primary.
What is the feasibility of doing house hack in California. I am located in the bay area and it may be too risky for me in case of vacancy. I do not know any other consequences.
Thanks,
Sohel - New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4yHi Andrew,
Quote from @Andrew McGuire:
Phoenix used to be a very inexpensive market but since Covid has appreciated more than any other market. For appreciation Phoenix has diminishing returns, I believe investors still have reason to be optimistic when looking at population growth at an all time high vs. New SFH Starts is at an all time low, supply and demand are on our side but I still believe with how prices are now less people will move here over next decade. Major benefit that my out of state clients point out is that AZ is known as "non judicial" or Landlord friendly state compared to many states on the West Coast. I've had several clients to 1031's form their home state to AZ because of politics.
Thanks. Good to know some political benefits there. I know that market is in a cooling phase now and it is also true that supply is low. My goal is find a sweet spot where positive rental income is still possible.
Thanks,
Sohel - Rental Property Investor 路 Mississippi Gulf Coast 路 Member since 2022 路 205 posts 路 168 votes4y
Sohel,
There is no problem buying an investment property before you buy your primary home. Investors do not care about this. When you do buy your primary home you may have to show proof that the rental is being rented if you expect to use first-time buyer programs. Even with this, you can do a first-time buyer after a couple of years.
I am from California and it's a lost cause for investing unless you just have lots of dollars you want to park and are not concerned about the new zoning rules that permit building additional homes on existing lots even in dense housing projects. Also those taxes, well you know the story.
My last Phoenix investment property was sold about three years ago, I still get frequent calls from wholesalers who want to "buy it". The market is getting very cool there.
If you want to try another market, look at the Mississippi Gulf Coast. I have a listing for a 2x2 that the seller wants to get out quickly. He just asked me to lower it to $78k. Rents about $1,100-$1,200 and it's in a good place for an STR. Just an idea about some of the values. Yes, this one needs about $20k in work but still a good buy. There are many more. And's warm here.
- 4yJason WrayPro MemberBanker 路 Nationwide 路 Member since 2020 路 2k+ posts 路 1k+ votes
Quote from @Sohel Mahmood:
Hi Jason,Quote from @Jason Wray:
Sohel,
Townhommes area good way to start as long as the HOA is not extremly high. A Townhome qualifes FHA, and conventioanl where a condo may need a condo apprvoal through FHA or Fannie/Freddie. Townhome is managed by the property management company so as long as the monthly HOA fee is reassonable its a good choice. Less in taxes and usually requires an HO6 policy instead of a full HOI hazzard coverage on an SFR which can cost 10X more per annual.
You may also want to consider buying a duplex, or 3-4 family and if you do not own a primary you can go FHA and put only 3.5% down and occupy a unit for a year or less if you buy another home or move out to a bigger space.
Thanks so much for your response. This is very informative. From the lenders point of view, what are the cons of buying rental property first instead of buying primary?
Regarding multi-family homes, is it still profitable considering current market's interest rate?
Thanks,
SohelThe only problem that I see a lot is investors buy the investment property first and forget that you cannot use the rental income until you have filed taxes for that year and have the full 12 months. So lets say you have limited or lower income and cannot support (2) mortgages you would have to wait a full year and file taxes to use your Schedule E income in order to offset or have extra income to support a investment firt and a new primary mortgage payment. I have seen a lot of people stuck because they buy a rental and then beofre a full year is up want to buy a primary and their DTI debt to income ratios are too high and annto be approved.
The opposite actually works in your favor so if you purchased a primary first but wanted to buy another property as a rental there are DSCR programs that do not use perosnal income just the proposed rents per month. But if you make good money and have sufficent liquid reserves you will be fine either way. I only offer these scenarios to help avoid issues as a preventive maintenance type of foreshadowing.
- Real Estate Agent 路 Los Angeles, CA 路 Member since 2018 路 2k+ posts 路 1k+ votes4y
@Sohel Mahmood
It鈥檚 more from a lending perspective and will they count the rents if you don鈥檛 already own a primary. That鈥檚 what one lender told me but you need to double check.
You can house hack in California but you may not be cash flowing right off the bat. California is all about appreciation because there isn鈥檛 enough land to build. For example, I could house hack my residence now and actually make money but I鈥檓 just choosing to keep the house to myself and rent out my accessory dwelling unit separately. When we first bought it and built everything out, we would鈥檝e been short. It鈥檚 all about the long-term play and reality is you鈥檙e gonna have vacancy on some level wherever you go but California tends to have lower vacancy rates.
- Bay area, CA 路 Member since 2021 路 383 posts 路 306 votes4y
I have been investing out of state. I am also in the bay area, CA.
Everyone's situation and risk tolerance are different. As per your budget and future goals, properly advise can be given.
Let me know if you want to talk more.
- Member since 2022 路 11 posts 路 7 votes4y
@Sohel Mahmood I am currently halfway through David Greene's book on investing in out of state property. If you haven't read it, I highly recommend it. It will give you some better insight and give you answers to questions you may have (or answers to questions you didn't even think of!). You can find it through this site here: https://store.biggerpockets.co...
Or Amazon. I'm not affiliated in any way to of this book but thought I'd give you a recommendation that can help! Good luck! - New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4y
Quote from @Rick Albert:
@Sohel Mahmood
It鈥檚 more from a lending perspective and will they count the rents if you don鈥檛 already own a primary. That鈥檚 what one lender told me but you need to double check.
You can house hack in California but you may not be cash flowing right off the bat. California is all about appreciation because there isn鈥檛 enough land to build. For example, I could house hack my residence now and actually make money but I鈥檓 just choosing to keep the house to myself and rent out my accessory dwelling unit separately. When we first bought it and built everything out, we would鈥檝e been short. It鈥檚 all about the long-term play and reality is you鈥檙e gonna have vacancy on some level wherever you go but California tends to have lower vacancy rates.
Hi Rick,
Thanks for your valuable insights. House hacking is not for me right now (at least not in California). I am more interested in out of state townhomes/condos that can provide a reasonable cash flow with minimum headache.
- New to Real Estate 路 Member since 2022 路 10 posts 路 3 votes4y
Quote from @Allyson Dohan:
@Sohel Mahmood I am currently halfway through David Greene's book on investing in out of state property. If you haven't read it, I highly recommend it. It will give you some better insight and give you answers to questions you may have (or answers to questions you didn't even think of!). You can find it through this site here: https://store.biggerpockets.co...
Or Amazon. I'm not affiliated in any way to of this book but thought I'd give you a recommendation that can help! Good luck!Hi Allyson,
Thanks. Will definitely try that out.
- Real Estate Agent 路 Los Angeles, CA 路 Member since 2018 路 2k+ posts 路 1k+ votes4y
Quote from @Sohel Mahmood:
Quote from @Rick Albert:
@Sohel Mahmood
It鈥檚 more from a lending perspective and will they count the rents if you don鈥檛 already own a primary. That鈥檚 what one lender told me but you need to double check.
You can house hack in California but you may not be cash flowing right off the bat. California is all about appreciation because there isn鈥檛 enough land to build. For example, I could house hack my residence now and actually make money but I鈥檓 just choosing to keep the house to myself and rent out my accessory dwelling unit separately. When we first bought it and built everything out, we would鈥檝e been short. It鈥檚 all about the long-term play and reality is you鈥檙e gonna have vacancy on some level wherever you go but California tends to have lower vacancy rates.
Hi Rick,
Thanks for your valuable insights. House hacking is not for me right now (at least not in California). I am more interested in out of state townhomes/condos that can provide a reasonable cash flow with minimum headache.
Hate to break it to you, but as someone who has a condo rental and clients who have the same, there is just as much of a headache with condos and townhouses than stand alone 1-4 units. It is just a different type.
You have high vacancy costs because of the HOA dues.
If work needs to be done, you can't just get to work, it has to go through an approval process. For example if there is a roof leak, yes, the HOA handles it, but you call the HOA, the HOA gets the approval to send someone out to look at it, then they give a price, and then fix it. If you own it all, if a roof leak happens, you call the roofer and it is done in a day.
There can also be rental restrictions and can change over time. For example you may be allowed to rent today, but then rules change and now you can't.
The only advantage is the low cost of entry for purchase price and remodeling. Typically you can get away with a cosmetic rehab rather than dealing with systems.
The only caveat to all of the above is in high cost areas or major metropolitan areas (SF, NY, LA, etc.) where you can leverage the affordability problems by providing a less expensive option.
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