First Time Homebuyer 2 years ago - ready to invest, now what?

Question

Hi all, been scouting the forums for a while and decided to ask a question myself.

Wife and I purchased our first (primary) home Jan 2021 in Los Angeles with interest rate of 2.6%. We're mentally ready to purchase another property as a LTR or STR (unsure at the moment, STR catches our eyes but not confident on COC return).

What should we know PRIOR to purchasing the 2nd home as a real estate investment? What's something you wish you knew before purchasing your 2nd home? Anything you'd do different? Thank you so much!

Mike Gordon · Answer

I only have LTRs so I can't give you much advice on STR, but here's some general advice on getting a first investment property that I wish I knew:

- Look in places where it's easier to rent, even if it costs a bit more. I have two homes in one city. One is in more of a suburban area and one in a more urban area of the city. The urban one rents more quickly and has a larger pool of qualified renters. The biggest cost isn't repairs, it's vacancies.

- I'd suggest not to go negative in cash flow. Start at even at least. You don't want to have to pay out of pocket each month when you only have 1 investment property.

- Consider paying a bit more for newer and nicer at first, it's easier to manage

- Managing your own property for LTR isn't that hard if it's within driving distance. For you, that could mean Las Vegas where values are dropping (depending on your goals)

- I'd suggest not buying your first investment in CA. It's a pretty tenant-friendly state. Not to say that it's bad to invest in CA - returns in CA can be really good but you have to be ready for the headaches. CA property never goes down over the long term so it might be good for a 2nd, 3rd, or 4th investment.

- If you can move out of your current home into a new one, that's a great way to build a portfolio - by leaving a trail of homes.

- Establish a conservative reserve fund at first. I would keep $10k in reserve for properties until I have accumulated enough to pool the reserve funds.

- I don't think you need an LLC at first for one or two investments. Buy insurance instead.

I own rentals in CA (Torrance), Tucson, and Louisville.

Mike Gordon · Answer

- To not go into negative each month, that means i'll have to put a bigger down payment >10% to lower my monthly mortgage rate for the rental and increase the rent correct?

Yeah it does. I tend to be conservative so not everyone would give that advice. But in a market where we don't know where prices or rents are headed in the next few years it pays to not have to worry about it, IMO.

- What are your thoughts on turnkey properties/company thats out of state?

I haven't done turnkey. All of the ones I've bought out of state are ones that I've found either on my own or with help from a realtor. I've had to put money into a few of them to fix them up, but I wouldn't call any of my deals BRRR.

I've browsed turnkeys though. I think they are priced at or above market price because they make it easy, they're providing a house that's in shape to be rented and a property manager so they charge a premium. A lot of the cheaper turnkeys are in areas I wouldn't buy in - either declining population or high weather risk. So I personally think that the deals I find that I do my own analysis on and put work into acquiring pay a better return. If I had a LOT of money I might look at turnkeys because they're easier. But then I'd probably be buying apartment buildings anyway.

- How did you start your first rental?

I moved out of it. I was in the Army and stationed in a small town outside of a military base. I actually did house hacking before I knew that was a thing, had a couple roommates. Then I left it behind and had a property manager manage it. It didn't do very well, maybe paid me a 5% return a year when I finally sold it, but it did teach me the good and bad about rentals. This is why I'd say find an area that's easy to rent first - that first rental of mine was hard to rent.

The second rental was a condo in LA that I also lived in and left behind. That did a whole lot better. It's really easy to rent and rents have risen a lot.

My first one I bought specifically as an investment was in Tucson, AZ. I bought it at a 6% cap rate and now it's returning much more on the initial investment, though ROE isn't especially high because it's gone up in value a lot.

It's hard to take the first risk, it wasn't until that first investment property that things started to snowball in a good way. I think committing yourself to doing it within a period of time and sticking to it are the best way to get the ball rolling.

Dan Portka · Answer

With investment property you're stuck paying 20%+ down payment. Investing in LA can be challenging for that reason and why I started buying out of state. You could buy a duplex in LA and move into the new property with a 5% down payment and then rent out your current home (I wish I had done this).

Wyatt Seidel · Answer

Great question Alan! If you are using a lender, make sure they put a mortgage lien on the property. For my second property I purchased, I didn't have my lender put a lien on the house, then when I was done remodeling within three months and went to refinance, I wasn't allowed to refinance within six months because of title seasoning. And thus had to wait an additional three months before I was allowed to refinance and pay back my lender.

If you're buying in cash (your own capital), this doesn't pertain to you. But if using a lender (private or hard money) and you have to pay them back at some point, make sure to have them place a mortgage lien on the property so you don't have to wait for title seasoning.

Jeff Roth · Answer

Hi Alan-

Congratulations on starting your real estate investment journey.

To answer your questions:

1. What should you know PRIOR to purchasing a second home as an investment? Make sure whatever you buy cashflows as a long term rental even if it starts out as a short term or mid-term rental so you have a fallback cashflow position should regulations change or the market for short term or mid-term rentals change in your area. Whatever you buy, make sure you have cash reserves or cash equivalent reserves for unforeseen events after buying. Finally, whatever you buy, strongly think about using a property manager to make your investment as passive as possible.

2. What is something I wish I knew before purchasing the second home? Markets do not always go up. If you can, wait for the market in your area to bottom or close to where you think the bottom is before purchasing. Remember, increases in interests rates take time to fully have an effect on the overall market.

3. Anything I would do differently? Yes, never sell anything if you can. Hard to find good deals or deals with low mortgage interest rates. Right now, the mortgage is an asset if it is low and will stay low for the life of the mortgage.

To your success!

Shilpa Padte · Answer

Possibility of getting into contract is much better now than earlier two years. You can't go break even with the current interest rate but rental income will cover part of your monthly morgage payment which you can use in your loan application to qualify you to buy investment property. I am a loan officer working in Bay area. Feel free to DM me to talk in detail about the current mortgage status.

Dylan Speer · Answer

I'd consider investing in some alts (syndications). I work at a company that helps clients do this. I'd be happy to chat

Alex Evans · Answer

Hey @Alan Phan

It is a great time to purchase if you are not wanting to compete against as many people as you were in 2021 when you bought your primary residency. Now is a great time to look into a market where the COC could be better than where you are from. Looking at Markets such as Memphis where 7-9% COC is still available could be a great opportunity because you also do not need as much upfront capital to make a purchase.

I would be more than happy to discuss Investing out of state with you here in Memphis. Feel free to reach out!

John Clevenger · Answer

@Alan Phan To not go negative, You'll want to make sure your rental income more than covers your mortgage at a minimum. It's harder in some markets like California as you may have noticed, but in the midwest and other lower priced markets it is very attainable. I know here in Indy you won't have a problem finding something that cashflows.

Turnkey is a great way to minimize risk, however you pay a premium for that which often comes at the expense of CoC return. With the right property it will be a GREAT first investment property as it should be relatively hands off after closing.

Investing out of state may seem scary as you won't be able to be there yourself as much however it typically comes with far more opportunities comparative to more expensive markets. The key with investing out of state is having a great team in place. People that lead with integrity and transparency will make all the difference.

Good luck in your journey!

Alli Breighner · Answer

Hi Alan- I'd love to connect and offer advice where I can.

Feel free to shoot me a DM if you're interested in discussing LTRs/STRs. Would love to get the ball rolling for your next rental property!

First Time Homebuyer 2 years ago - ready to invest, now what?

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