How Would You Move Forward?

Question

Hello!

Looking at purchase a first home but the issue is the homes we’d like to invest into in our area are far too expensive. My fiancé and I are open to investing out of state and are actually in a trip in Texas to check out real estate see how we like the idea of staring a family here.

Our Starting Point (Conservatively)

- Located in Camarillo, CA

- 120k portfolio in the stock market subject to short term capital gains with a potential tax bill of 15-20k

- Current W2 monthly income after taxes: $7k

- Side hustle 1 income: $200 month     ($200 in profit)

- Side hustle 2 income: $1400 revenue     ($0 profit) - debt at 29k

- Current debt: $47k     (Auto: $29k Student Debt: $18k)*the auto loan doesn’t show on our credit for some reasonHow would move forward in our situation?

We also are considering continuing to contribute to the stock portfolios and open a line of credit when it makes sense. Has anyone had a positive experience with that?

V.G Jason · Answer

Got to love the Columbus Cartel, they have to be the most shameful plugs on BP. This @Jimmy Lieu in particular floods the boards with the nonsense.

@Abdur-Rahman Felton I would echo what Nathan said. Those side hustles seem like a waste, drop them. Even turo, there's tail risk with a car rental business. Any thing going wrong there and you're deeper than you think in it.

You should work a part time job to get out of that consumer debt, and no turo is not it. Once you're behind on that, you need to build a bigger cushion than what you got real estate investing. Physical asset investing does not grow linearly, you'll get some jabs in the face, maybe a tight slap like an AC stolen or a tenant flooding your bottom floor. It's going to cost you a few thousand, so come in from a position of strength. Or you'll be like that cleveland guy @Mohsin Mazhar who saw it and wants to quit already.

This isn't for the faint of heart, and sure is not for the one's without deeper pockets. The equity portfolio is good, I wouldn't use 100% of this for that. I would maybe use 20-30% of it, get it to LTC gains, pay off your consumer debt, and put some more cash away to invest properly. 1 property every 3-4 years is doable, and not behind the curve. That's ahead of the curve. You'll be light years ahead of the world in 8-12 years, just be disciplined not an impulsive floozy.  You say you're open to house hacking that's great, and may be the easiest and the lowest barrier of entry just this has detrimental impact to family formation if that's what you're aiming to do. So know the downsides.

Kerlous Tadres · Answer

Hey Abdur,

Have you thought about investing here in Columbus, Ohio? There is a lot of appreciation that is coming here to this city with Intel, Google, and Microsoft. I currently have two duplexes here in the Columbus area!

Nathan Gesner · Answer

The first thing I recommend is that you look at yourselves and be honest. A side hustle that earns $200 a month is not worth the effort. A side hustle that earns $0 and has you $29,000 in debt is a major burden.

Get a part-time job at McDonalds for $15/hour and earn $1,200 a month. If both of you do it, that's $2,400 a month.

Mobile car detailing at $100 a car can net you $500+ on a Saturday.

Rent your car on Turo. Even better? Get rid of your car and you can save hundreds per month on insurance and gas.

I think you need to quit your side hustles immediately. Do everything you can to pay down the debt, and work on side hustles that actually produce income to help accelerate the process. I wouldn't consider investing until you have zero debt, complete control over your finances, and money saved up for the purchase.

Becca F. · Answer

I agree 100% with @Nathan Gesner and @Rick Albert's comments. I would house hack and increase income if I were in your situation and find different side hustles and pay down the debt.

As far as OOS investing, please read the many posts from people in HCOL areas, especially California, who are losing money on OOS properties (myself included). If you go OOS talk with a few local investors (someone unbiased not trying to sell you anything) and do lots and lots of research and fly/drive to the area.

We have Proposition 13 in California so our property taxes only go up 2% a year (unless a major renovation is done where you would be reassessed) but you're dealing with higher prices like you said. Most other states don't have this type of cap. If you house hack, you also get a homeowner exemption on the property taxes. It's $7000 in CA.

I did a line of credit on a property. It was a hybrid between a HELOC and an equity loan but I wound up refinancing to a larger amount with fixed rate conventional loan (to pay for a renovation). My rate was fixed but if I needed more money I'd need to pay down the balance then if I draw more it would be at the new higher interest rate. What type of line of credit were you referring to, a HELOC or something else?

Jimmy Lieu · Answer

Hi Abdur, I would recommend taking a look at out of state investing especially in the Columbus Ohio market. Still tons of great positive cash flowing deals that hit the 1% rule and TONS of appreciation potential. Happy to connect and answer any questions you may have!

Abdur-Rahman Felton · Answer

Hi everyone, thank you everyone for the pointers and the food for thought!

In an effort to be concise and conservative about our current situation I left out some info. There were also some great questions!

+ $12k in savings accounts

The $200 side hustle is automated as I don’t spend more than 30 minutes a week on it!

I currently work 50-60 hour work weeks and the bulk of our income is from mine.

The side business tied to debt is a Turo business! This wipes out our monthly car payment and insurance at the minimum. Haven’t had to contribute to those in years! The numbers presented were conservative numbers and the total profit so far this year on the Turo side of things is just under $3500. Have been doing this for a few years and there has been lengthy dry spells like this month. We are using the profits to clear the debt involved as well. We started at 80k in car debt at the beginning of the year, re-evaluated, took a loss by selling one of the vehicles and paid down another. The business financials are as follows

- net worth: $20,500

- assets: $49,500

- liabilities: $29,000

The line of credit we were specifically looking into is a line of credit against our stock assets. Which will be expanding as we contribute and I continue to vest through my employer

Oh and the best part! We pay a total of $800 in rent per month! We have roommates and are on board for house hacking in the future

@Nathan Gesner @Rick Albert @Becca F.

Samuel Diouf · Answer

Hey Abdur, I love the hustle!

I would really focus on raising capital so you have enough reserves to mediate risk. As for where to invest.. There are some great opportunities in the Ohio markets. Many investors from California are choosing to invest in the Midwest because of the low barrier to entry and yearly cash returns making more sense in these lower priced markets. Ohio markets show up 3 times in Zillow’s 2024 hottest markets, with Columbus and Cincinnati taking the top 2 and 3 spots. I moved from Florida to start investing in Columbus because of the same reason.

https://www.zillow.com/learn/hottest-housing-markets-2024/

Rick Albert · Answer

There are a couple of things:

1. Are you open to house hacking? That's how I got started. You can put less money down and still get some money coming in (not cashing flowing positive). You could put less money down on a higher valued property here than you could buy almost any multifamily out of state.

2. The auto loan and student loans are fine but from a lender perspective but they care about the monthly payments, not the total.

3. I agree with @Nathan Gesner, I'm not sure what the $200 side hustle is and if it is worth it and I'm confused on the second side hustle. How much time does the $200 side hustle take? Calculate the dollar per hour. The second side hustle sounds like you are working for free and even worse, in debt. Is it driving Uber or something? Do you need the car or was it just so you can do this second side hustle?

4. How much do you have in regular savings that you can use to buy a property?

5. I have my reservations about Texas. I considered Texas and was going to submit an offer but then we did more analyzing and realized it is tough. There is tons of new construction, which means competition (and the only way to be competitive is to lower your rents) and with high property taxes, makes it hard to cash flow. Some would argue that Texas doesn't have state income tax but who cares because you get all the write offs anyways. It's a moot point.

On the surface, I would consider house hacking here and play the appreciation game. You can leverage HELOCs to buy more properties (I haven't down a down payment since 2015 and between HELOCs, 1031 Exchange, and a partnership, by next week I will have a total of 16 doors with almost no money out of pocket). Camarillo is interesting because not only do you have the outlets, but you also have CSU Channel Islands and you are a less expensive alternative to areas like Thousand Oaks.

Alecia Loveless · Answer

@Abdur-Rahman Felton My sister invests in Texas and has a mid-sized portfolio. Her property taxes have gone up over 100% on her portfolio over the past 3 years.

Just do your due diligence and be sure to look for how much the property taxes have increased in the past 5 years.

In my market taxes can be a deal breaker. It’s one of the first things I look at when evaluating properties.

Becca F. · Answer

@Abdur-Rahman Felton

Thanks for clarifying and the additional information. I'm not familiar with taking a line of credit against stocks and the interest rate and  terms. I wouldn't take out any more debt if I were you.

Your rent of $800 is really reasonable, my advice is still to continue increasing income, decrease other expenses (cancel unnecessary subscriptions, cut down on going out, all those little things add up to a lot.) Your $12,000 savings is definitely not enough for any type of cash reserves.

With affordable properties in the Midwest, on my Indianapolis Class C#1 house (owned about 1.5 years). purchase price $130,000, sounds good right?  I have gotten 8 repair calls in 12 months. This was a house that had repairs done after an inspection and was renovated by the seller. I'm -$300 to -$500 most months. If I get a full month rent (minus PM fee) I'm pleasantly surprised. Also the AC unit was stolen before tenant moved in (thieves climbed a fence) so I'm out $4700 (labor and unit) - didn't file an insurance claim because my premium would go up. I'll hold onto this property for another year or so to see if it stabilizes and if the appreciation will outweigh my costs.

Let's not mention the C#2 house I bought - I'm selling this one. lesson learned, so I've been paying a mortgage on a vacant house for several months. I have lots of cash reserves to cover all the expenses so I'll be alright.  I have a lot of passive activity losses on my tax returns which will keep getting pushed forward. My money could have better been invested elsewhere.

I know that so many people want to get into real estate but people can lose money in RE. And I worry about people advising beginning investors to cash out the 401ks or similar advice. I completely agree with @V.G Jason about coming into this from a position of strength.

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