Here's what I have, here's what I want...now what?

Question

So...after introducing myself over on the introductions forum, I figured I'd jump in feet first and ask the same question that's been asked thousands of times by newbies on this board:

How should I get started?

I'll give a quick financial background...

I don't own any property besides my own, I don't have an LLC. I have about $300k in equity in my own home and I rent out my 722 square foot, single room guest house on a month-to-month lease at $890 per month. I have about $40k liquid in the bank, more in investments. No debt beyond the mortgage, now at about $320k with 28 years left. My income is about $100k/yr, my wife is a stay at home mom. Take home is about $5,400 per month, mortgage is about $3,200. We put money in the bank each month, but then end up using large chunks on rehabbing our own home. Year over year, we are pretty flat in terms of account growth thanks to fixing up our home.

I'm thinking of buying small to mid sized historic cape-cod, cottage and foursquare urban homes and renting them out and rehabbing them as time and money allows, probably selling a few after a few years but keeping "the best." I'd like to eventually find my rentals making enough money to stop working full-time, or sat least allowing me to go into an enjoyable business of my own with little financial stress.

I like to think I'm in a good position to get started...but what do you think? If this was your situation what would you do? Would you go for single homes or multifamily units? How much of my equity can I eat up to finance purchases and who would I get my money from? Is it safe to focus buying in my own neighborhood or should it be diversified?

Excited, confident...but totally in the dark,

--Dean

Jon Holdman · Answer

Fixing up a place to be a rental and fixing it for retail sale are whole different ballgames. You want your rental to be indestructable and cheap and easy to fix up when the tenants destroy it anyway. For a resale, you want to do whatever's been done for other owner occupied properties in the same area. That's typically a nicer level of finish than you would ever do in a rental. You really don't want to finish it out for an owner occupant and then rent it out. You'll end up re-doing that fixup before you sell. Now, if you mean for selling to another investor, then the rental finish is fine. Historic houses can also run into preservation groups or whatever it is in your area that might have authority. That can add cost, time and hassle. Jon

Dean Rinehart · Answer

Thanks for the replies! I think focusing on my local market makes sense not only for familiarity, but management...at least in the beginning. As for the historic bent, I see your points. It's hard for me to overlook tired properties with great details, though. Historic preservation has become a big part of my life and a good waste of my time. And remember I plan on reselling these rentals in a few years after some time upgrading. But, yes...point taken. I'll have to be careful. I would not be buying any homes in historic districts with a review overlay though. I'm pretty much opposed to rentals in these districts, and most around here are huge and not really rental props...so no worries!

Michael Rossi · Answer

Dean, I think you are in a very good position to get started. However, I would strongly suggest that you do your homework before buying anything. Buying "historic capecod, cottage, and foursquare urban homes may or may not be a good idea. The rental property business is ALL ABOUT THE NUMBERS. So, your focus should be on finding properties that will cash flow using REAL WORLD EXPENSE NUMBERS. If you learn the business and buy right, you can reach your dream of getting out of the rat race. If you don't understand the business, you will almost certainly lose a bunch of money and fail like the majority of newbies. Good Luck, Mike

Account Closed · Answer

Great suggestion. Focusing on what will help you grow your wealth during the growth stage rather than focusing on preservation the wealth you really do not have. I like it. To address the initial post... If one is property as an investment you really need to decide what you want to accomplish. If income is the goal then likely you will end up avoiding historic property. The renters are not going to pay extra just because the property is old. Renters have a specific amount of cash for the rent and they can not pay a lot extra for age. If you want to buy, fix and resell then historic works for a few. It is a tough way to make money if you have to stick to original details. If you are mostly dressing up a tired property then there is more room to make money while still adjusting for the prevailing style. You happen to have a lot of equity. If you are going to use it expect you need income or a way to pay it off in the short term. It might be enough for a cash purchase in many markets while in others it really is no more than a down payment. Focus on the numbers as MikeOH suggests. The numbers will keep you honest. John Corey

Dominic Enea · Answer

You should work in a market you know. If that is where you live now, then that is fine. Diversification is important when you are trying to preserve wealth. If you are trying to grow, then you will want to focus you energy, time, and money in an area that you are an expert in. Good luck in your investing.