My starting point

[Taylor Kendrick]

Hey all,

I'm looking to enter the RE market with a few rental properties, ideally in the Chicago suburbs. I'll have the option to invest anywhere from $50,000 - $100,000 in down payments. I'm targeting rent-ready single family homes and multi-family properties (2-4 units). 

What is my real budget here? I'm curious how many properties I could reasonably afford up front. Does it make sense to diversify and make 2+ purchases with this initial seed? My instinct tells me yes if I can find quality properties at my price point, but that there could be some benefit to putting it all on one potentially more reliable/higher quality structure. 

I'd love to hear what the rest of you folks might do if you were in my situation. Thanks a ton.

[Nathan Gesner]

Quote from @Taylor Kendrick:

It depends on your market.

If you buy $100,000 houses in Ohio, you could afford 3-4 homes. You could only buy one house for $400,000 in Cody, Wyoming.

NOTE: please do not spend every dime you have to purchase property! You need to maintain a reserve to handle unexpected costs in the first year.

How much should you maintain in the reserve? It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one significant expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a typical scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 annually? You could probably afford $20,000 without much impact on your budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cash flow from my current rentals. I also have a $175,000 line of credit ready if something catastrophic happens. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, that you should sit down and assess your finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.