How to Start.

Question

I am thinking about buying a townhome in a nice part of the houston, texas area which will probably go from anywhere between $150,000 - $175,000, to live in for about a year and then plan on finding renters to move in to pay the rest of the mortgage. When i move out i plan on immediately looking for more properties to purchase for alot less and maybe doing some work to them and rent them out as well. Which brings me to a couple of questions.

1) Is purchasing a house for that price advised for your first property when you are planning on investing??

2) Quite simply, whats a good way to start??

1)  Is purchasing a house for that price advised for your first property when you are planning on investing??

2)  Quite simply, whats a good way to start??

Ann Watkins · Answer

@Stefon Bostick

Hi Stefon,

In my opinion at that price point you are limiting yourself because townhomes are a smaller market segment, and can be harder to sell/rent. It will greatly depend on the location and demand for that area in a year. You mentioned moving out and purchasing other properties but your saying you're renting the first one, but maybe you plan to sell it...wasn't sure.

So it depends, if you're financing or paying cash. In a year, you won't have enough equity (room) to re-fi and get out of the property. But if cash then you can probably...maybe...get it for a lower enough amount to have some equity in it.

I personally would not acquire potential rental property at that price point with or without a mortgage. Mainly, because should I ever have to service that note due to vacancy that would be a drain on my operating budget for everything else. And if I had that much cash, I'd be looking at more than one property. But that's just my business model...

Also, what do you think would be the most you could rent it for...just going by the price, without any other variables maybe $1600 high side? I have properties I purchased for $50k, that have rented for years at $1200-$1300. So with the right properties you could be looking at 3 SFRs, same money out but possibly bringing in $3,600 monthly before expenses.

I agree with Darren, getting a duplex is a great way to get started because while you're living in the property, someone else is paying your mortgage or a good portion of it, and when you move you will have two properties already in place.

May I ask why you want to live in the property for a year? You can pm me if you want to discuss more. Congrats on getting started, that's the important thing!

Brightest Blessings!

Eric Black · Answer

Hi Stefon and congrats on getting started.

There are a lot of variables that go into answering your questions so it's difficult to answer them. As for the purchase price and if it's advised to pay that much, that depends. Is a house in that price range within your budget? How much will you be putting down? Once you move out, will the rent you can charge cover all expenses? If you'll be buying the house FHA and only be putting down 3-5% then it may be difficult to get rent to cover all of your expenses. I'm not familiar with Houston so maybe it won't be but you'll need to do your due diligence.

There are many good ways to start but it depends on what you're comfortable with. As you'll hear mentioned often on the podcasts, buying a duplex, living in one side and renting out the other is a good way for some investors to get started. You can get owner-occupant financing but still have someone else paying at least part of, if not the entire mortgage for you.

One thing to consider if you do purchase this townhouse. How long are you planning on holding it? Even if you're planning on holding it for a long time you need to have an exit strategy in case that plan doesn't work out and you need to sell sooner. So consider possibly living in the townhouse for 2 years before renting. That way, if you have to or choose to sell sooner, as long as you have lived in the property for 2 of the past 5 years, when you sell the property (within that 5 year period) you don't have to pay any capital gains tax! So you could live in it for 2 years, then move and rent it out and then sell it up to 3 years later and not have to pay any capital gains tax, up to $250,000 if you're single or $500,000 if you're married. That's HUGE, especially if you're in a market that is expected to appreciate well such as Houston.

Just some food for thought. Good luck!

Stefon Bostick · Answer

Once again, all the advice is awesome guys!

Ann Watkins

Thank you for the info and Will definitely PM you for some more insight but to answer a few of your questions im definitely gonna be financing when it comes to purchasing my first property.  And my original plan (which has just drastically changed in the last hour. lol) was to get approved for the house, finance it, move in, begin paying the mortgage, live in that house for a year, find people to move in and pay me hopefully a little more than the mortgage so that i could have a small income while allowing someone else to pay the mortgage for me.  Then after so many years when the mortgage was paid off i was going to sell the house for profit.  That was my original plan before starting this post and im pretty sure it is not a smart one at this point after reading some good advice from you guys.  Your "buying houses for cheaper" idea is very very interesting and that will be another point of study in the near future for me.

@Ali Boone

Thanks so much for the formulas.  Thats one thing that was definitely missing from my original plan is numbers.  I had ran across a couple of calcs in previous blogs but hadnt' paid attention to them thinking my plan was sound which is not the case.  Very appreciative of this and thanks again.

Chris K. · Answer

Thanks for that link

Eric Black · Answer

Stefon,

Just remember, when you rent out the place, your rent amount has to be able to cover more than just the mortgage. It must cover taxes, insurance, maintenance, vacancy, property management (calculate this even if you're self managing), etc.

Eric Black · Answer

Hi Stefon,

No need to apologize about your questions. I didn't mean your questions were green, I was just saying the answer, at least to question number 1, will be different for each person based on their circumstances, income, experience, comfort level, etc.

I was using FHA as an example. Just remember, if you put only 3% down then your housing costs are going to be higher so that's a higher rent you'll have to charge. And although things may change drastically in the next 1-3 years you need to do some research now to make see if current rents would cover all of your expenses. If they won't now I wouldn't assume they will later. Assuming rents will be more in the future is pure speculation.

In my opinion, the property needs to cash flow on its own from day 1 (when rented). Your income from your job is to pay YOUR expenses, not your property expenses. They're good to have in case of an emergency but if you're having to use your income to cover the expenses for the property (when rented), it doesn't sound like a good deal. Again, just my personal opinion.

Kudos on being ready and willing to do the research and planning. We all know how easy it is to get excited about buying a property when starting out and unfortunately a lot of people make big mistakes because they buy something that isn't a good deal because they are so excited to get started. It doesn't sound like you're going to fall into that crowd. Keep up the steady approach and you'll be a successful investor before you know it!

Happy to help when and where I can. I'm still learning too.

Ali Boone · Answer

I definitely agree with the duplex idea to start. It's a great way to get a low down payment on an investment property from the get-go.

The big thing you want to look at with any properties are the numbers. For example, if you buy that house for $150-175k and were to plan to rent it out later on, what would it rent for? Would it be profitable when you did start renting it? My guess is no. Depends on the rents, but I doubt the rents on it would be high enough to cover all expenses.

Numbers are #1 in investing and rental properties. Make sure you have a huge grasp on them and run them for every property you consider, including if you were to buy a duplex for yourself to rent out the other side. To help, try this formula (which does not consider any rehabbing if you had to do work on the property)-

http://www.biggerpockets.com/renewsblog/2013/01/19/real-estate-math/

Good luck!

Stefon Bostick · Answer

First off, thanks guys for your input, the more the better and it helps me put things in perspective and make better decisions starting off.

@Eric Black Forgive me for my green answers as i am honestly fresh into the real estate scene and just looking to get started.  Anyways, last i spoke with a realty company i did not have to get an FHA loan based on my credit and would only have to put 3% down on a house that i am approved on.  I did plann on living in the house for a year but after your explanation of things it probably would be a good idea to stay for 2 years because of the capitol gains tax i was unaware of.  After that 2 years has passed i would continue living in the house until i found suitable renters who are willing to pay enough to cover my expenses.  I will also keep a full time job which will be bringing in cash flow as well to help with my expenses.

@Darren Sager  and @Eric Black the duplex idea was something i was totally unaware of as an option and makes alot of sense.  I will begin researching owner/occupant financing and go from there and weigh my options.  It all boils down to what you said Eric and that is doing my due diligence and me asking these basic questions is part of that.  I have alot of research to do and whatever i do decided to do won't happen until next year sometime so i have plenty of time to be proactive and figure out what im going to do and your help is much appreciated on such a basic topic.

Darren Sager · Answer

Can you find a duplex to live in for that amount and start supplementing your living expenses from day one?

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