Where and how to invest?

[Logan Allec]

What to do?  I know nothing.  I don't even know my strategy.  I'm looking for wisdom, stream of consciousness, whatever--any suggestions that wouldn't require me to step away from my current employment.  I have a growing pot of disposable income to invest as I'm single, living like a bum, and keeping steady at a decently-paying job.  I want to make the smartest moves I can financially before settling down, getting married, buying my own home, etc., and I'm willing to live like a pauper in order to do so.

I've been seriously considering buying turnkey property out-of-state (I have been thinking in Austin for appreciation [that's what the turnkey companies tell me--though some reports I've found online claim that Austin is wayyyyyy overpriced right now] or Indianapolis for cash flow [ditto]), but given my age and station in life I feel like I can be a bit more "risky" than merely paying retail (or more) for a property to get a few thousands a year in cash flow just to sit on it and wait until the mortgage is paid off.  Or is that just youthful naivety talking?  Does this rather boring approach actually pan out if I start now and acquire 5ish properties by the time I'm 30 and 10ish by the time I'm 35?

And this probably sounds silly, but recently I got the illustrious and romantic idea to purchase a 4-plex using FHA financing in San Diego (read: expensive and won't cash flow, but vacancies would be low [very desirable city], and although prices have increased substantially in the past few years, I have to think there's still some room to grow, especially if I'm in it for the long-haul, though I know that multis don't appreciate as much as singles). Is there any redeeming value to this idea? I figure I am going to buy a personal residence in the next five years anyway, so might as well take advantage of the FHA program. Or is this stupid and should I just keep my expenses crazy low like they are right now and invest invest invest somewhere else? My gut tells me the latter.

Any words of wisdom?  Were you ever in my shoes?  If you weren't, what would you do if you could turn back the clock?

[Aaron Montague]

First figure out your strategy.  Not everyone in the RE game wants to be in the property ownership world.  There are lots of options.  Here is my stream of thought given your current situation:

San Diego: Alter your strategy a bit.  Buy the 4 family, fix up, convert to condos, sell the condos for a small fortune above rehab and purchase price.  I'd grab your realtor's license in the mean time so you can list your own properties.  If you hang out in your free, minus taxes, home for 24 months you can sell that one as well and you don't have to pay taxes on the first 250k of profit.

Not San Diego: Hook up with one of the BP members doing rehabs in the Midwest.  Invest with one at a reasonable expectation of return and see how things work out for you.  This will teach about a completely different set of investing skills than my San Diego thought.

The number of properties:  This isn't as important as the profitability of your entire portfolio.  12 places making $250/month each is similar to 3 places netting you $1000/month each.  Subtle difference are costs to acquire, taxes, etc.

Notes: I'm not well versed in note buying, but there are many here on BP that are.  If ownership isn't your thing, mortgages and liens may be.

Happy Hunting no matter what you pick.

[Account Closed]

Not sure if you've heard this saying, but someone once told me the following.

"If you put two people together, one with money and one with experience, the one with money will end up with the expeience and the one with experience will end up with the money." If you do a deal with someone, share in the cost and create a contract. I wish there were a way to rate the integrity of sellers and buyers on BP. Perhaps there is and I don't know how to tell.

I guess my first words of advice. Do your own alalysis, peel back the onion on every property: verify utilities, services, infrastructure, etc. For example, just because the property receives a sewer bill does not mean it is connected to a sewer. In some locations this can happen.

[Francisco Nieves]

Hey @Logan Allec quote. It's how most of us started out. 

[Rodney Kuhl]

@Logan Allec Welcome to BP and best of luck as you get started! I am an investor and wholesaler in Indianapolis. It is definitely a great rental market if that's ultimately the strategy you decide to use. There are definitely some good TK providers here in Indy that provide great cash flowing properties. Good luck.

[Jennifer T.]

I just had to click on your post to find out how you are only paying $300/mo. in rent in Tustin. Time to rent out the other half of my NOLA duplex and move back home to OC. ;)

But seriously, I know I am not the only one on the site to wish I had been in your situation AND already thinking about REI when I was in my mid 20s.

Before making any moves, I would use the BP site to get a feel for what kind of REI most appeals to you. Then learn as much as you can. Don't stall in "too much information I have to do everything perfectly"....but establish a strong knowledge/understanding in order to preserve and expand your investment. It can be a fine line, I know, I know!

For example, when I bought my multi, I became a homeowner for the first time AND a landlady. Did I educate myself and thereby make mostly good decisions? Yes. Was I also pretty clueless about some aspects of having tenants/owning a house and also make some bad decisions? Most definitely. Did it still work out pretty fantastically. Most definitely.

[Mike D'Arrigo]

@Logan Allec said, figure out your strategy first. Too many people get involved in real estate without having a clear strategy and objective. You're in a great position and have a lot of options available to you for such a young age. Cash flow buy and holds can be a great way to replace your income and retire if you want. You're young enough where you can build a portfolio if that's what you want to do. I would caution you about investing solely for appreciation though. You can't control appreciation so it's only speculating. Personally, I don't think this is a good time for appreciation. We had a good run up in nearly every market the last 2 years but that was primarily a recovery from the 2008 crash. YOY appreciation rates still look great but the appreciation rate is cooling significantly all across the country and will continue to do so. Clear Capital does not expect to see much appreciation nationwide in 2015 even in the typically high appreciation regions like the West coast and CA. Interestingly enough though, they are predicting the highest appreciation next year in the Midwest which is not usually thought of for appreciation.

You also have to be careful when chasing appreciation. People often assume that appreciation is uniform throughout a market when it's not. Often, the appreciation is limited to higher end owner occupied areas and not the rental neighborhoods. Although Dallas and Austin have strong, growing economies, I prefer the Midwest like Indianapolis and Kansas City. Most people don't realize that the unemployment rate was actually lower in Indianapolis than Dallas as of September. You get far better rent to price ratios and lower property taxes and homeowners insurance in Indy. Texas' property taxes and insurance are among the highest in the nation which really eats in to your cash flow. I'm not sure why you say that Indianapolis is way overpriced like Austin. In fact it's the opposite. Indy is one of the most affordable markets in the nation and always has been. Yes, prices have gone up a lot in the last 2 years, but you can still get great turn key properties for $60K that will rent for $800/mth or more.

Mike

[Hattie Dizmond]

@Mike D'Arrigo is generally correct.  You definitely need to define a strategy, before committing any of that available capital.

And, while I agree with Mike about not chasing appreciation, I do believe the Dallas market provides solid ~6% or better appreciation YOY in all but the least desirable areas. Again, you I agree that you should never invest with appreciation as the determining factor in whether you do the deal. You make money WHEN you buy. If the deal isn't a deal at the time you bought it, then it's not a deal, because you can't predict the future. (There may be cases where CRE violates this statement, but I'm specifically addressing residential properties.) However, I do like the idea of leveraging a hybrid approach to get into larger properties.

If I can find a property that will cash flow in a strong micromarket here in DFW, I would be content to hold it for 5 years as a short-term buy & hold property, with the intent to flip it at a later date.  That buys me 5-years of equity built with someone else's money and a minimum of 6% appreciation YOY for 5 years.  Those deals are really hard to find, because the areas that support them are in an inverted value:rent situation at the moment.  However, I would do those types of deals all day long, because they are a deal at the moment I do the deal.  If I never sell that property, it is still cash flowing for me.  Therefore, I'm not depending on appreciation to salvage a bad deal.

As far as Indy having lower unemployment than Dallas...  Well, all I'll say is that Dallas leads the nation in new job creation and job growth.  I'm sure Indy is a perfectly lovely place and there are probably lots of opportunities there.  However, I'll put my money on Dallas continuing to outperform the rest of the country.

[Marian Smith]

In NW Austin 10616 Mellow Meadows, 78650 was converted from apartments to condos--with, I kid you not, a coat of paint slapped on and new carpet--and sold to Primarily California investors for around 150k per unit.  come 2010 I often stood next to a guy at the courthouse auction and he would bid 35k but only for the 2/2's.  not thev2/1s.  I saw one 2/2 go to a couple for 50k at auction.  They'd list for 55-60k on the ML and sell pretty sell fast.  They were never worth anywhere near what the investors paid.  California is so expensive everywhere else seems dirt cheap.

One guy who did seminars in California sold brand new homes in two Round Rock golf course communities.  If those investors managed to hold on they are now okay because Austin didn't decline much and now Austin rents are way up.   But I saw at least a few 3000+ sq ft investments at one course auctioned off in the crash.  One California investor had financed hers as a second home and had subsequently taken out a home equity loan.  then foreclosed.  Taxes are over 3% and HOAs are 85$ month at the golf course communities.  The smaller 1600 sq ft were originally 150-165k and I only saw owner occupied short sales there--with job losses I presume.   That is what the seminar guy owned or owns,  a small one story on the golf course.  

I recommend stocks for a California twenty year old.  learn to read a balance sheet and buy micro cap stock if you want to be involved, otherwise dollar cost average in a total market etf.  

[Mike D'Arrigo]

@Hattie Dizmond If I had to choose between living in Dallas or Indianapolis I would choose Dallas, but for cash flow and RO,I I'll take Indy all day long. Once you get through with your property taxes and homeowners insurance there in Dallas, there's not a lot left. Now if I already lived in Dallas it would be a different story since there is no state income tax, but for the out of state investor, the property taxes are a deal breaker to me. As far as appreciation, Indy has been no slouch in that area. Median prices were up 11% YOY in October and unemployment was only 5.8%. Plus,  Clear Capital is predicting the Midwest to lead the nation in appreciation in 2015. Indy is looking real good to me.

[Hattie Dizmond]

@Mike D'Arrigo No argument from me there.  I don't think insurance is that bad, and I'll take the property tax over the income tax, but - as you said - I live here!

It's  tough environment for the buy & hold investor at the moment.  However, there are deals to be had.  And, if I were in a situation where I needed to sell those properties at a later date, I would rather do that in Dallas.

Any way...good to rekindle our Dallas/Indy debate!  ;-)

[Walter W.]

Logan, 

Two years ago, I was in a nearly identical situation. I bought a SFH in the Seattle area (VERY low cash flow-maybe similar to San Diego?) and a few turnkey properties across the country (Jacksonville, Indianapolis, and Kansas City). I am happy to share my experiences if you would like. Send me a message and we can chat.

Short story-both strategies have worked for me.  Just make sure you buy at the right price.

Walter

[Elizabeth Colegrove]

Your strategy and goals are beyond IMPORTANT. My husband is active duty military. That means that local is relative. We both work full-time, in very demanding fields. We live off one income and reinvest the other. We have learned to turn our transient lifestyle to a positive. We buy both pure invest and personals turned rentals. Living in a home that you are going to use as a investment is a great idea because of the low entry costs. 

While everyone has their strategy we have been buying alot of home in California. Personally the low taxes/insurance and high appreciation is very appealing. 

I love to self manage because I have kept my vacancy to almost 0 AND have no management costs. While I self-manage from afar, there are still hidden costs like the $200 an hour handy man because I needed to have something done than and he had me trapped. Or the $250 plumber for the caulk leak or the $105 to instal and $125 microwave because the tenant was unwilling. 

Personally I am a fan of buying close because those costs add up and they don't mean value to your property. 

So look around there are TONS of different styles of landlording.

[Logan Allec]

Thanks, everyone who replied.  My long-term strategy is to have enough passive income by the time I am 35 (i.e., in 10 years) to support myself and my family in the case of emergency, job loss, etc.  I suppose a more pointed question is whether or not it is possible to attain this goal by purchasing a run-of-the-mill turnkey property at retail, every year for 10 years, in a stable market like Indy and applying all excess cash flow to principal reduction.  Would I need a more aggressive strategy than this?

[Ali Boone]

I vote, go with your gut. What's the perk of low vacancy if you are still losing money on the deal? Which is what will happen on a 4-plex (or any plex) in San Diego, unless you are getting really snappy and strategic and investing for appreciation. Indy is great, as are other markets (even Dallas and Houston, but not Austin). I'm not an advocate of buying a primary residence unless it's based on the idea of buying it with fun money, not as an investment. People may argue me there, but whatever. My theory- buy cash-flowing rental properties (or whatever good investments) and build that capital, long before buying your own property and certainly before buying an "investment" property that loses you money every month.

[Gordon Cuffe]

skip the Austin idea for appreciation. You might as well buy in CA for appreciation since you live there. Here is an idea buy a house at below market value that needs updating and nothing structural with a FHA 203k loan. You can buy a home with this home improvement loan since you do not have a FHA loan. Move into it for 2 years with roomates then sell for a profit. If you got a really good deal, then sell it right after it is all fixed up.

The other people on here gave you good ideas also.     good luck. you should be fine.

[Pete T.]

Read, learn, and follow what makes the most sense and interests you.  If you have the interest, the time you put in wont feel as much like work.

[Steve Vaughan]

So this isn't a singles ad?  Single, 20s, good income...   Seriously, the good news is you have a lot going for you!  Having a good income, money to invest, good credit and low out-go spells options!  Listen to those that know more than I.  If I was an investor near Tustin I would be nervous!

[Account Closed]

Great conversation.  It's great you're thinking the way you do and are focused on building wealth while you're young.   I wish I had done that.  

I'm curious from some of the other posters, what are you looking for specifically in an investment property? Cashflow? coc roi? grm? cap rate?  what specific number works for you in an investment?  Also, will you take a lower cashflow or roi for a better bet on appreciation?  Im in Austin and It's impossible to compete with other areas for cashflow and roi but I think we have a lot better upside on appreciation.  Several people think that should be ignored when deciding to invest (or at least not factored in)  What do you guys think? @Ali Boone @Hattie Dizmond @Mike D'Arrigo 

[Mike D'Arrigo]

@Account Closed Those are good questions. There are always trade offs and you need to decide what is your most important criteria. I don't think that you should totally ignore appreciation but I don't think you should count on it either to make your investment work. In my opinion, an investment should be able to stand on the cash flow alone and appreciation is gravy. Every market in the nation is seeing significant slowing in appreciation rates and some markets could see some decline in 2015 so I don't think this is a great time to be betting on appreciation. Another thing to keep in mind is that appreciation isn't uniform in any given market. I hear people saying that such and such market has great appreciation but they're overlooking the fact that every market is made up of a microcosm of smaller markets. Just because parts of Austin are appreciating doesn't mean that all of Austin is or any other market for that matter. Typically it is higher end areas with a lot of traditional consumer demand that see appreciation so if you're buying in lower end rental areas, you might not benefit. A rising tide doesn't always raise all boats.

[Matt R.]

FHA in OC is an opportunity few would pass up. Your future kids will thank you. Thanks, Matt

[Karen Schimpf]

@Logan Allec,

I agree with everyone in suggesting, write down your strategy/goals. You will find some great strategies to utilize by being a part of BP.

Buying notes are a great way to invest but they could be harder to come by since our economy has turned around.

If you want to be a true RE investor, I personally recommend buying a duplex or fourplex close to where you work or live and near a hospital.   The reason you want the property to be close to where you work or live is so that it is easily be accessible to manage, repair, evict and etc.  Having property managers can quickly eat into your profits and it can cost $50 bucks to screw in a light bulb:)  I don't recommend going in with a partner unless you write out a contract so that there is a clear understanding of the partnership. Business partnerships are very much like being married:) Homes, duplexes and fourplex hold their value better than a condo but also it has a higher chance of being profitable and less down time between renters.  If you can't find a duplex or fourplex in your desired area than a home with 3 or more bedrooms will work.  I recommend renting out rooms versus the whole unit.  Renting out rooms will increase the cash flow even more and once again less down time.  Lastly....location, location, location is very important.  Finding a duplex or fourplex near a hospital is typically a great location because hospitals will have the work force needing to rent no matter what happens to the economy.

Good Luck!

[Chad W.]

Paying off your student loans has a guaranteed return on investment and doesn't require nearly as much effort as investing in real estate. I would always go after the low hanging fruit first while you learn about the market and what you want out of it. 

[Logan Allec]

@Matt R. "FHA in OC is an opportunity few would pass up." Thanks for your opinion, man. I'd really like to hear your thought process more. Are you referring to purchasing a multi-unit using FHA financing (what I alluded to in my original post)? Or just a single-family home for myself?

As far as multi-family FHA in SoCal goes, and perhaps this is just naive myopia, but it seems to me that putting 3.5% down on an $800k 4-plex and living in one of the units while renting the other three for a sum total of $6,000 gross per month would just be a colossal cash drain considering the huge mortgage payment.  It would seem that this large debt load/mortgage payment would prevent me from qualifying, and this cash flow detriment would prevent me from even saving enough, to invest in anything else any time soon given my limited capital.  Would you mind elaborating a bit?

[Blake Merrell]

Logan, 

Great post! We are similar, but at opposite ends of the spectrum. I too am in my mid twenties, not married, living like a bum (My food bill per week is about ~$35.00). I am in Indianapolis. Our only difference is that I know exactly what type of real estate investments I want to get into, but I am not financially prepared quite yet. I have $50,000 saved, but want $100k before I quit the family business and start REI full time. Another year and I should be set! I will buy my first flip and never look back.

I love flipping, construction, etc. so will flip for fun (+profit!), while keeping the easy-to-rent cash flow properties for myself. Once I prove I am capable of this my family business will likely back me to continue in my endeavors (and in return will get some of the meat on the bone!) 

Cheers to being single and taking risks while we are young! 

[Clint Kreider]

Hi @Logan Allec Regarding your "FHA on a 4plex" scenario your numbers are slightly off. You could likely find a 4plex in a less desirable area of OC for about $850K and collect about $5500 monthly in rent initially with upside to raise rents to about $6500 (with upgrades). Buildings like this will normally be in poor to average condition. If you were living in one of the units you would need to deduct $1300-1400 per month.

So, you're right. You would not be able to cash flow. It is rare for a buyer to put anything less than 25% down on buildings like this in Orange County. With 25% down you could expect to cash flow at about $700/month with upside to $1700/month.