Investment property number 1

[Ramada Evans]

Hello BP community. I’m at the point where I’m really want to take action on getting my first investment property.

We have quite a bit of equity in our residential property so we were thinking about refinancing and using the cash out for another property. How should we go about this?

Also I looked for different properties but in my market (CO) it is challenging. I did see a duplex in the northern part of the state.

I also was considering my birth state (Florida), getting a house and doing Air or rental. Any good suggestions on which may pan out better?

Thanks to you all.

[Randall Alan]

Hi Ramada,

I'll throw some suggestions / concerns your way...

While real estate investing is lucrative, you have to find a good deal.  Now is NOT the time (in general) to find good deals.  The real estate market is ON FIRE - which is likely why you have so much equity in your house... but having to buy back into the same hot market, you will pay a premium price for the typical purchase compared to 18 months ago.  That doesn't mean you won't find a great deal... or that real estate isn't worth it right now, there are just far fewer great deals right now.  

When we started out, we set a minimum of $300 cash flow per door that we bought.  So if it was a duplex, it needed to make $600; Single family home - $300.  We have raised that minimum since we started, because we found we can usually find better deals than that - but have some sort of measuring stick to tell you what is a 'good deal'.   Also know that cheaper homes typically make just as much money as expensive homes - which sounds kind of like non-sense, but when you run the numbers you will likely find it to be true.  We compared buying a $200,000 house, versus a $75,000 house as a rental.  The $75,000 house made more net profit due to the lower cost of the loan, and the relatively higher rent we could charge per square foot.

If you invest remotely - you will most likely have to use a property manager.  I'm not a big fan of property managers - mostly because if you calculate what percentage of your PROFIT they take, it is pretty extreme on a financed property.  10% of gross rents (the typical pm fee) equals about 33% of your net profit each month after you figure in all your other expenses.  It really puts a hit on your net cash flow.  So that is just something to consider.

I'm not an AirBnB guy... but will offer you this... I looked into a vacation rental in your state (Colorado) - and the realtor said that if you reached 50% occupancy on the typical ski rental, you would not break even on your expenses. (In other words, it was a pure appreciation play on the property, and you may actually lose money along the way)  Apparently turn-key rental service that included snow removal, booking services, cleaning, etc was a 30% fee in the resort areas.  I was shocked!  That's not to say that would come close to equating to buying one in Florida (where I live), but it drove home the fact that occupancy rate is a critical calculation in the AirBnB space.  Yes, you will make a lot more per night that you rent out your unit; but you have to actually rent it enough nights to make that work out.  If you are buying near Disney or something, probably no problem.  If you are buying in a non-tourist area... maybe not as easy.   I personally do long term rentals (yearly leases)... it is just less commotion, and fewer moving parts.  

A few random suggestions... look in 'weird' places for opportunities... we have bought more than one rental off of Craigslist. Which, while that sounds like something 'scammy', as long as you are using a title company to close, there is really little risk. We have bought from wholesalers. We have also called plenty of "snipe" signs you see on the side of the road. We almost bought 5 duplexes at once from one of those calls from a landlord who was looking to get out of the game. We have also bought off the foreclosure market... that's usually an 'all cash' deal, so not for everyone, but there are better deals to be had there than off of MLS. Your local county clerk's office usually has information on how that works. Otherwise, spread the word about being interested in buying properties. You will be surprised how many people will come back to you or refer you to people THEY here that are looking to sell their homes.

Hopefully you find something useful in all that.

All the best!

Randy