What is the best strategy for me to get started in real estate investing?

Question

Hello everyone! I'm a 25 y/o looking to get into real estate investing. I'm looking to start a path to financial freedom for me and my family, so I've been doing tons of research but can't seem to put my finger on what's the best route for me. A little background about my financial situation: I currently live with my girlfriend and our child (plus our dog) in a house I bought back in 2020. I was able to get the house with an FHA loan in the Fort Worth area for around $250k and with a ridiculously low interest rate. Currently, the house is probably worth over $350k as some people in my neighborhood with similar houses have been able to sell their homes for similar prices. My goal is to eventually use this house as a rental property, as it's less than 10 years old and the neighborhood has no HOA. I make over $100k at my W2 and my girlfriend makes around $70k at hers. I also have about $45k in stocks. I'm trying to find the best way to get into investing so that we can eventually have a nice portfolio of cash flowing assets, but I'm struggling to get started. Should I use my equity to get started? Should I pull from my stocks? Should I just wait and save until I'm ready to invest? Any ideas would be a lot of help!

Chris Seveney · Answer

@Will Stuberfield

Do not get a HELOC now to invest as you will essentially be taking 100% loan on an asset where prices have never been higher and interest rates are not going down anytime soon, and if they do go down it’s most likely due to falling home prices.

Continue to save and remember it’s a marathon not a sprint. Most will probably disagree with this philosophy but it there are times to be aggressive and times to be passive. Unless a grand slam of a deal comes along- you will be better sitting there with the cash just waiting for the right opportunity

Will Stuberfield · Answer

I’m definitely in no rush. I’m a conservative spender and I’m definitely ok with waiting until the I find that home run deal. We are pretty comfortable now, but I just feel like with the way things are going, I’ll need to have some sort of business/ investment tool to retire in the future. Hopefully real estate can get me to my goals.

Will Stuberfield · Answer

Yeah I was calculating that pretty badly. If I do it your way, I’d have negative cash flow (if I’m thinking the rent would be what I think it is). The more I’m looking into this, the more I feel like I should just hold until the market is right. However my finance mind is telling me that my money will never be as valuable in the future as it is now, due to this inflation.

On a positive note, marriage is happening soon so I will be able to reap some of those benefits. We are just thinking there may be some benefits to buying a home under her name before we get married, maybe getting some first time homebuyer benefits, then using both of our assets to start our real estate investment journey once we are married.

Erin Church · Answer

How are you counting cash flow? When I'm calculating to determine if I want a property, my "quick and dirty" is to take the rent, multiply by 0.70, subtract PITI, and that's what I consider cash flow.  I think of 30% (the "missing" 0.30) as room to cover management, capex, maintenance, vacancy. I also tend to have properties with little capex requirements (I fix it all in the beginning). I have a feeling that you're looking at rent minus PITI. If you are, then anything that goes wrong (like a water heater) will wipe out all "cashflow". Obviously, they're still paying the mortgage down and you're potentially still appreciating, so it could be worth it.  With you making $170k, I'm guessing you could have a pretty hefty savings fairly quickly. I did a quick look and found: A family of four estimated monthly costs are 4,282.6$ without rent.

So, if we add in even $2500 for your mortgage, you're around $6800/mo, or $81,600. (I know you're not a family of 4, but I figure a dog and a few meals out is about equal to a kid ;-) )

Also, if you ever decide to get married, you should do it because it's a great fit for your family, but I want to mention that getting married is financially advantageous for healthcare and taxes. :)

Daniel Molina · Answer

Hi Will,

Looks like you are in a good position and based off what I read you may have a few options. Have you looked into what your current house can rent for, and would you be cash flowing after home expenses are all paid for (mortgage, vacancy, capex, management and utilities)? One route is to look into getting a new home near Fort Worth to live in so that you can rent out the current home you live in. Only if it cashflows and makes sense for you to move. You can only use a FHA loan on a new home to live in if you refi out of the current one (can only have one FHA loan at a time). There are conventional loans that will let you do 5% down on owner occupied purchases if refinancing doesn't make sense number wise. Another route is to buy another investment property nearby. You will need to put down 20-25% for almost all investment loans. This is why I would look into buying a second home to live in first. You can get the second home with less down and if you were to rent the current home you live in you would be more familiar with your current home's condition since you have been living there. Have you looked into a HELOC for financing the second home's down payment?

What is the best strategy for me to get started in real estate investing?

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