All Forum Posts by: Spencer Kelly

Boy...this is some seriously good advice. I learned plenty myself. You're absolutely right about the multi family stuff right now. The prices on mediocre props is outrageous. 

Welcome to the community!

It seems you're in a very unique position here. Lots of capital to start but no regular income. Very rare to see that on here. 

One thing to consider is that a commercial loan may be possible due to less stringent requirements. However, that is a question for a lending specialist or agent and I'm sure one will chime in here eventually. 

Based on your very specific situation, I think you should consider starting with one multi-family rental property to buy and hold...here's why. 

Multi-family rentals tend to generate the best income and typically, the more units, the better. Now, because you don't have income, that will hurt you for conventional mortgages which offer better rates than commercial loans. So, for you're specific situation, getting a "regular income" is, in my opinion, a need. So, what you should look into is starting a single-member LLC (consult with a CPA and an attorney to make sure you set it up properly and to minimize your tax burden). Once you have that set up, use that LLC to hold you're first rental. Generally, I use individual LLC's to hold each property to limit the liability to each individual property (again, a question for an attorney).

That LLC, lets call it Nalty Rentals 1 LLC, is going to hold your first rental property. Now, the rest of this is going to be very generic and random but just to give you some numbers...

You buy a duplex for $350,000. 3 bed, 2 bath on both sides, 1200 sqft per side. A commercial loan will require 25% minimum so the down costs $87,500.00. Lets say, out of pocket with closing costs, it's $95,000. Now, based on market conditions in the Twin Cities right now, a duplex in the NW metro or northern metro is going to require some cleaning up. This is completely based on the property but for the sake of these numbers, lets say it's $5,000 for cleaning and minor repairs. You're in $100k with the rehab. 

Now, once you're property is cleaned and fixed up, in the NW metro you can garner rents anywhere from $1600 to $1900 depending on variety of factors. Neighborhood, layout, size, garage stalls, etc. For your purposes, lets figure a bit conservative and go $1700 per side giving you $3,400 gross income per month pre-expenses. Now some math...

$350,000 - Purchase
25% down = $87,500.00
--------------------------
$262,500.00 - Commercial Loan amount with a (apprx) 4.0% interest rate 
= $1,250.00 - Mortgage
+ $300.00 - Taxes
+ $200.00 - Insurance
--------------------------
= $1,750.00 - MTI
+ $250.00 - Utilities (you can choose to have tenants cover some utilities. Best to cover water and electricity)
-------------------------
= $2,000.00 - Expenses

Now, a lot of people on here will grill me for not including cap ex and setting aside repairs...but this is about getting you an income to help your investing down the line. 

$3,400.00 - Total Income on the Property
- $2,000.00 - Expenses
------------------------

$1,400.00 - Net Income (Also, 14% Cash on Cash ROI which is pretty good)

Now, what you should do is take the money being generated by the property and use a good majority of it to pay yourself a distribution or a salary (again, check with CPA). If you take $1,200 of that income and call it your "regular income", while it isn't a whole lot, you are in a better position to qualify for conventional financing. The fact that you have an income generating property, no "consumer debt" like credit cards or car loans, no student debt (I'm assuming) and you have an income, this should qualify your for conventional financing. You have assets, no or very little debt (unsecured) and an income. As long as your credit is above a 700, the low income shouldn't be a huge problem. (Mortgage agents should weigh in on that)  

Now, you've got your first rental generating you income. You'll be able to learn quite a bit about the process through this first deal and you'll be on your first step towards real estate investing. 

For your situation, I personally wouldn't recommend doing a fix and flip because it doesn't solve your income problem and flips can turn upside down QUICKLY if you don't have experience in construction or you haven't done flips before. Fixing rentals first that you plan to hold (and BRRR) is a good way of learning the process of rehab.

Also, since you're trying to move to the NW metro, you could also consider "house hacking". Buy a duplex and living in one side while you rent the other. The tenant ends up covering a handsome portion of your mortgage allowing you to live at very low cost. Eventually, when you're in a better position, you buy a home for yourself and rent out the side you moved from. 

You said you "worked" for yourself. I'm curious what it is you do for work. 

Definitely. Feel free to message me and we can discuss more. 

There are a few ways you could go about this. It depends on where you're at in your life. I was fortunate to have my Dad who's been in the construction industry his entire life as a subcontractor. I personally have owned my own construction company since I was 21. 

The best way to learn is by doing or by watching the do-ers. One option that I've recommended in the past is to hire a contractor (which will take more money) but tell them you want to learn the process and understand construction better. 8/10 contractors will be fine with that as they're used to homeowners looking over their shoulder anyway. Haha. Bring the contractor in and just ask them about things you are curious about. 

One of the most important things you can learn and understand is scheduling and phasing...the process of construction. I've seen first-timers and new investors burn thousands of dollars because they did things out of order. Knew a guy who was a new investor, thought he knew it all because he watches HGTV every day. He got his first flip and the first thing he did was put new laminate floors and carpets in....

Needless to say, once he was done remodeling the rest of the house, he ended up having much of the carpet replaced and even had to rip up some of the laminate flooring that got scratched and stained. Ended up costing him about $10k in labor and materials because he didn't understand phasing.

Work your way from top to bottom, ceilings, walls, floors. Ask yourself, "do I need to get behind the drywall in the ceiling"? New lights might require that, new heating or cooling systems, new electrical lines. Then ask yourself, "do I need to need to open the drywall on the walls"? This would be needed if your putting in new light switches or outlets, new plumbing work in bathrooms or kitchens and a host of other things. Make sure you get all that work done first before you even start thinking about paint colors and ceiling textures. Floors will usually be the last or one of the last things you do. 

Watch your contractor work through your project and ask questions. Pay attention to how they phase the work and how they schedule everything. After a few times of doing this, you'll begin to notice things more...things out of order in a schedule, trades that have lead times, understanding the importance of the schedule for trades that are really busy (typicall electrical, plumbing and roofing can be tricky depending on the time of year). Once you start noticing things like that, you'll know your learning. 

One last piece of advice, when it comes to electrical, plumbing and roofing, leave it to the professionals. Hire reputable contractors that are licenced and insured and check their references. Trying to DIY these things may save you some money but they will likely end up costing you in repairs or replacement due to failed inspections with the city. It just isn't worth the time you spend for the little bit you MIGHT save. 

Good luck on your future projects!

Seeing as how you're in my market I thought I'd chime in. 

That seems a touch high. I bank with a smaller, local bank and they quoted me at 4.5% with my credit on a secondary residence. My credit is pretty good but it's nothing crazy. I'm in the process of closing on a deal where the mortgage company knows it's an investment property and after paying for points I was able to get it down to 3.7%. I worked with a broker so they were able to pull a wide range of options. I did have to pay to get it down from 4.2% but depending on your strategy it might be worth paying for points off your rate.

My strategy is a long term buy and hold so locking in 3.7% is going to be pretty awesome in 15 or 20 years. Paying a few thousand extra dollars now (if you have it or if it fits your calculations) to get a lower rate locked in for 30 years will pay for itself a few times over. It also helps get your cash flow up right off the bat if that's part of your strategy as well. 

Good luck!