Seeking advice for starting out in real estate investing

[Marc Uber]

Hey everyone! New to this and looking for some advice. Recently started a new chapter in my life and just found bigger pockets, building passive income and the FIRE movement. Hoping to replace my income over time with multifamily units and utilize house hacking. Running the numbers in St. Pete has been tough and seems like nothing will cashflow.

Just looking for some advice to get started. I am in the process of selling a house and should have ~$250K to utilize once it sells…

One idea is to build an ADU at a family members house to get started with only some of the money and hope interest rates and prices continue to fall. While building the ADU, keep waiting for an opportunity to buy a multifamily property. If the ADU finishes before finding a property, I'll plan on living there till I can house hack in the future property. Thoughts? Should I just focus on single family homes initially? Should I look for invest properties outside of Florida to avoid high insurance costs? Since I am selling a primary residence, I don't think I can utilize the 1031 to save money on taxes. Also any property I buy will most likely be of lesser value but is there a different tax saving strategy to utilize?

I have time and the ability to fix up properties so not looking to buy something that is turnkey. My current job I work remotely but have two children that need to stay in the area so outside of St. Pete is possible but I won’t be able to dedicate as much time to it.

Thanks! Looking forward to any help and advice.

[Jana Crum]

Hey Marc, welcome to the world of real estate investing! From my experience with my investments & my clients, a great real estate investment portfolio starts with the end in mind. What's driving you to want to invest in real estate? Since you are looking for passive income from a rental to aid in your income once you hit FIRE & retire, I'd focus on building a portfolio that begins to build on that cash flow to replace your W-2 salary. 

Since you have two children who need to stay with you in St. Pete, I'm not sure if building an ADU is the best use of the proceeds from the sale of your home. Building an ADU to fit all 3 of you might end up being more than $250k. It might be best to divide your cash from the sale into a down payment for a new primary residence and a down payment for a cash-flowing property in the area.

[Ashish Acharya]

Building an ADU

Building an ADU at your family member’s place is a smart move. It uses only part of your $250K and gives you passive income while you wait for the right multifamily property. Living there temporarily could also be a good plan.

Multifamily vs. Single-Family

For house hacking and income replacement, multifamily properties are usually better for cash flow. But if St. Pete is tough, consider starting with a single-family fixer-upper. It’s a solid stepping stone.

Investing Outside Florida

With high insurance costs in Florida, looking outside the state is worth considering. Just be ready for the challenges of managing properties remotely, which may require a property manager.

Tax Strategies

Since you’re selling a primary residence, a 1031 exchange won’t apply, but you can still use the capital gains exclusion. Look into properties that allow for depreciation to offset rental income.

STR rental can also save you taxes, so please understand that loophole.

Remote Work Flexibility

Considering your remote work and the need to stay near St. Pete, consider properties outside the city for better pricing and cash flow. This could give you more flexibility.

[Jonathan Greene]

Building an ADU on someone else's property makes no sense to me. It sounds good to use, but what do you do after that in terms of ownership? You don't need to 1031 a primary residence if you've lived there for a while as you get tax breaks on the sale. House hacking seems like it is the thing for you, but yes, St. Pete is tough.

First, I would adjust your mindset. FIRE is a trap. What is financial independence to you? Financial freedom or time freedom? What is retirement to you? I don't get it. I don't ever want to retire and I don't work a standard 9-to-5.

[Marc Uber]

@Jana Crum - Thanks for the advice and responding! Some additional information that I should have mentioned is that I only have my kids on the weekends and holidays. We typically stay at my parent's house since they have the room for all of us. Luckily the grandparents don't mind and I am able to buy a small property just for myself so I don't need to fit all 3 of us in the potential ADU or primary residence. The budget I was planning on was between $150-175K for the ADU so I could use this as my primary residence as well as a chunk of money for a cash-flowing property. Would this change your opinion? I also was debating a live in flip since cash flow is hard to find but I will keep running numbers in the area to find potential opportunities and deals.

[Marc Uber]

@Ashish Acharya - Thanks for the advice! Currently leaning towards the ADU idea. It would be at my brother's house and we have talked about doing rental properties together. We are looking into creating a trust and eventually he might move into the ADU while renting out his three bedroom house (after some minor renovations). I really like the idea of starting with a fixer-upper. Would you recommend to start with live in flips to build some capital? I would rather play with the house money and build capital for a more expensive multifamily property that would cash flow. Thanks for the tax advice as well. I haven't looked into those yet but I will now. As for starting out, I think I want to stay near St. Pete initially and once I feel comfortable with the process, I can start to branch out to outside the area and even the state.

[Marc Uber]

@Jonathan Greene - Thanks for the advice! Financial independence to me is being able to replace some of my current salary (unless I am able to house hack or have little to no mortgage costs) and that number would dramatically decrease. Because I have two children I want to make sure that I am able to support them as well. However, I mostly want more free time to pursue other lifestyles. I want to open a restaurant in the next ten years because I thoroughly enjoy cooking for others and creating amazing dishes. I am probably similar to you where I never want to retire but want to have the comfort to know if I fail pursuing a dream that it doesn't harm my children. I would be okay on taking the risk if I didn't have others to rely on me. I currently have a very stable software engineer position and eventually hope to cut back hours or become a contractor that works 20 hours per week once I am able to hit some of my financial goals.

The ADU seems like a potential way to keep my mortgage expenses down since I would just pay for it up front with the sell of the property. Unfortunately, the house that I will be selling is still under construction and planning on not living in it... Also the ADU would be on my brother's property and we are looking into utilizing a trust. His main house would be potentially one that can cash flow for us as a rental when his daughter moves out in the next year or so. My brother and I will be running the real estate business together so investing in his property seems logically to me. What do you think?

[Jana Crum]

@Marc Uber Thank you for the additional information, that gives me more context. I love the Live-in-Flip idea, that's what I do. But if your main focus is starting to build a cash-flowing rental portfolio so it can replace your W-2 salary, I'm not sure a Live-in-Flip aligns with that. Mainly because you'd have to pay for rehab in addition to a down payment & closing costs plus it's not a cash-flowing investment strategy. 

Also, I think @Jonathan Greene made a good point- it's not the wisest thing to pay to build an ADU on someone else's property unless you already have an easement or they deed you the section of land you'd build on. What happens to your $150-175k if the family member who owns the land you built on needs to sell for some reason? Unless you own the land you built on, have an easement stating your right to use & access the ADU, or a contract stating such, then you most likely could lose your $150-$175k investment plus you'd have to find another place to stay.

All in all, even with the additional context my suggestion would stay the same. Since you don't need a lot of space, buy a starter home to live in & then use the rest of the funds to purchase a cash-flowing rental in the area. It's the option with the least complications & sets you on the path to FIRE, which is your ultimate goal!

[Jonathan Greene]

Quote from @Marc Uber:

@Jonathan Greene - Thanks for the advice! Financial independence to me is being able to replace some of my current salary (unless I am able to house hack or have little to no mortgage costs) and that number would dramatically decrease. Because I have two children I want to make sure that I am able to support them as well. However, I mostly want more free time to pursue other lifestyles. I want to open a restaurant in the next ten years because I thoroughly enjoy cooking for others and creating amazing dishes. I am probably similar to you where I never want to retire but want to have the comfort to know if I fail pursuing a dream that it doesn't harm my children. I would be okay on taking the risk if I didn't have others to rely on me. I currently have a very stable software engineer position and eventually hope to cut back hours or become a contractor that works 20 hours per week once I am able to hit some of my financial goals.

The ADU seems like a potential way to keep my mortgage expenses down since I would just pay for it up front with the sell of the property. Unfortunately, the house that I will be selling is still under construction and planning on not living in it... Also the ADU would be on my brother's property and we are looking into utilizing a trust. His main house would be potentially one that can cash flow for us as a rental when his daughter moves out in the next year or so. My brother and I will be running the real estate business together so investing in his property seems logically to me. What do you think?

Overall, it's a pretty solid long-term plan without overreaching. I still don't like the ADU idea unless you plan on buying half of his property overall so it's all equal.

[Eric Fernwood]

Hello @Marc Uber,

You mentioned only properties. The problem with focusing solely on the property is that properties don't pay rent—tenants do. If your goal is financial independence, you need reliable tenants. A reliable tenant stays for years, pays rent on time, and takes good care of the property. Reliable tenants are the exception, not the norm.

A common mistake is assuming that all renters are alike so the property type is not critical. This isn't true. Below is a diagram illustrating the three main tenant segments in Las Vegas.

If you unknowingly purchased a property that attracts the Transient tenant segment, turning a profit will be nearly impossible due to high vacancy costs. Additionally, tenants in this segment have low-paying, low-skill jobs and are the first to be laid off and the last to be rehired, during economic turbulence.

We purchase properties that attract a subsegment of the Permanent segment. Our average tenant stay exceeds five years, and we've had just seven evictions in over 16 years out of more than 1,000 tenants. During the 2008 financial crash, property prices plummeted, but our clients experienced no decrease in rent or vacancies.

My point is that the tenant segment your property attracts makes a huge difference in income reliability.

What do I recommend?

Select the Tenant Segment First

Start by identifying a tenant segment with a high concentration of reliable people. Once you identify this segment purchase properties similar to those they are currently renting. You can target a specific tenant segment by matching the segment’s housing requirements.

Each tenant segment has specific housing requirements and is unlikely to rent properties that don't meet all these requirements. For example, in the illustration below, the tenant segment's housing requirements are listed on the left. On the right are four similar properties, but only one matches all the segment's housing requirements. The other three properties will not be considered by the segment.

So, focus on selecting a tenant segment with a high concentration of reliable individuals and purchase properties that meet their housing requirements.

How to Identify a Tenant Segment

The process for identifying the segment for income reliability is straightforward. Ask several experienced property managers: “What properties would you buy if you wanted tenants who stay many years, pay rent on time, and take good care of the property?” I did this, and most identified the same properties. These are the properties you need to buy if you want a reliable income.

Once you've identified your target segment, purchase properties that match their housing requirements. This approach eliminates guesswork and luck because you're buying properties that attract a segment with reliable people. If you buy a random property, you are just hoping the tenant segment the property attracts is reliable.

[Marc Uber]

@Jana Crum and @Jonathan Greene - Okay my plan is to focus on multifamily and house hacking initially then. Allow me to save capital from my current position to invest in more properties. Also I can qualify for FHA this way. Also thanks for the info and thoughts on the ADU. My brother and I talked this over. He wants to convert his main house and the ADU into rental properties. It sounds like we will determine the best path with a CPA to make sure we both have equal ownership in the property. While we are waiting for the ADU to be built and to obtain our first multifamily property, we are going to start renovating his current house to make it ready to rent out. Thank you for all the advice! I am sure I will need more once we get to the next phase.

[Marc Uber]

Quote from @Eric Fernwood:

Hello @Marc Uber,

You mentioned only properties. The problem with focusing solely on the property is that properties don't pay rent—tenants do. If your goal is financial independence, you need reliable tenants. A reliable tenant stays for years, pays rent on time, and takes good care of the property. Reliable tenants are the exception, not the norm.

A common mistake is assuming that all renters are alike so the property type is not critical. This isn't true. Below is a diagram illustrating the three main tenant segments in Las Vegas.

If you unknowingly purchased a property that attracts the Transient tenant segment, turning a profit will be nearly impossible due to high vacancy costs. Additionally, tenants in this segment have low-paying, low-skill jobs and are the first to be laid off and the last to be rehired, during economic turbulence.

We purchase properties that attract a subsegment of the Permanent segment. Our average tenant stay exceeds five years, and we've had just seven evictions in over 16 years out of more than 1,000 tenants. During the 2008 financial crash, property prices plummeted, but our clients experienced no decrease in rent or vacancies.

My point is that the tenant segment your property attracts makes a huge difference in income reliability.

What do I recommend?

Select the Tenant Segment First

Start by identifying a tenant segment with a high concentration of reliable people. Once you identify this segment purchase properties similar to those they are currently renting. You can target a specific tenant segment by matching the segment’s housing requirements.

Each tenant segment has specific housing requirements and is unlikely to rent properties that don't meet all these requirements. For example, in the illustration below, the tenant segment's housing requirements are listed on the left. On the right are four similar properties, but only one matches all the segment's housing requirements. The other three properties will not be considered by the segment.

So, focus on selecting a tenant segment with a high concentration of reliable individuals and purchase properties that meet their housing requirements.

How to Identify a Tenant Segment

The process for identifying the segment for income reliability is straightforward. Ask several experienced property managers: “What properties would you buy if you wanted tenants who stay many years, pay rent on time, and take good care of the property?” I did this, and most identified the same properties. These are the properties you need to buy if you want a reliable income.

Once you've identified your target segment, purchase properties that match their housing requirements. This approach eliminates guesswork and luck because you're buying properties that attract a segment with reliable people. If you buy a random property, you are just hoping the tenant segment the property attracts is reliable.

This is very interesting and I haven't heard or read about this yet. I will need to do more research on this for St. Pete. Currently, I know there is a market in St. Pete for small rentals near downtown targeting the young professional crowd (22-35). Seems to be a large number of single people in this range wanting to live in the areas we are targeting. Does seem like multifamily could be targeting a transient group but I'll have to see and connect with some other investors in the area that have small multifamily rental properties to see the vacancy rates. Unfortunately the public schools in St. Pete aren't highly rated so targeting families at a higher price point for single family homes doesn't seem possible to me at the moment since these house are more expensive and most families will commute to private, charter or magnet schools so location doesn't mean as much. Cash flow seems only possible with multifamily homes due to interest rates and high price of the properties but only if they can be rented out! Thanks for the info. I will add this to my todo but unsure at the moment on how to determine this. The small market research I did initially by looking at rental sites seem to show a low amount of options in the 1 bedroom and 1 bath range so unsure if that means that they are desirable or just not many in St. Pete.

[Wale Lawal]

@Marc Uber

Building an ADU offers lower initial investment, steady income, and flexibility. It can be completed on a family member's property without major legal hurdles and allows temporary living. Multifamily properties can help address cash flow challenges in areas like St. Pete. Single-family homes have lower acquisition costs and less tenant management complexity. Investing outside Florida and considering remote management and property management are viable solutions. Tax-saving strategies include primary residence exclusion, depreciation, Opportunity Zones, and business structures.

Good luck!

[Jordan D'Silva]

welcome! While it sounds like you have an opportunity to get your hands dirty, I would make sure to iron out your long-term goals. If you want to build something big, then it may make sense to do that, make mistakes, and grow from it. But if not, it also may make sense to look for passive investments or joint-ventures with more experienced people. Happy to talk further!