What would you do? First ever post

[Francis Branagan]

I'm looking to act upon my long time interest and goals of real estate investing. I just turned 23 and I bought my first home a year ago with 25% down. I like my home and plan to stay here for quite a while. Between what I had saved and can still save I will have around 120k and very good credit to start with. My goal is more of a buy and hold strategy, I currently am in construction field that i love but because of the long hours and harshness on my body I would like to start cutting back or be out completely in around 10 to 15 years. While working I won't really rely on my profit from rentals instead I want to keep rolling it into more properties or possibly income if work were to slow down for times.

The properties are in a blue collar more of a low income town that I grew up in and still live near. The homes I'm looking into are 40-85k (tris and quads usually 150to 250) with property taxes (south jersey) around 300 a month, rent 750 -1000. Some of the homes in this area are all cash homes especially the really good deals.

I was thinking about financing 2 with 25% then possibly buy one cash if it begins to grt tough to find loans. I will also use a proven property manager I know who charges 10% rent and first months rent with a new tenant. (He handles leases, court appearances, eviction, matinence, etc.)

I'm looking for advice, past experience, or what you would do differently. How many would you expect to have in 5, 10, and 15 years? What would you do or did to obtain this many houses? Should I pay off my home? Would you avoid gov section 8 housing? 

Any help or advice would be greatly appreciated.

[Michele Fischer]

Hi Francis, be sure to add a profile picture.

When I was pregnant with my first child, I spent all my energy reading up on how to get through childbirth. I realized I was ignoring the next part, how to take care of the infant. As you analyze and try to figure out what property to buy, be sure you aren’t ignoring what comes next, the landlording piece. You mention a property manager, do they successfully deal with the low income property types you are looking at?

In general, renting to low income tenants is riskier, but provides a better return. Decide if you want to deal in that market, or if you prefer to buy nicer properties in nicer areas.

Advantages of low income:

Lower property investment cost. $/square foot and square footage is lower, so purchase price and repair costs are lower. Our motto quickly became “safe and clean”, allowing us to stay focused on using the cheapest products available in rehab.

Higher occupancy rates. Applicants are often living with friends or family, so are often able to move in mid-month, as soon as the unit is ready. More stable tenants tend to need to give notice, and move near the first of the month.

Lower expectations. Low rent tenants are willing to live with more flaws, fewer extras, and won’t be as demanding about discretionary maintenance and improvements.

Fewer evictions. Low income tenants are more willing to move out when the situation gets bad. We have not had to deal with someone living in the unit rent free for months while we work through the eviction process.

Disadvantages of low income:

More turnover. Low income tenants are not as stable, so they tend to move more often. Even some of our best tenants have become nightmares at move out. Dealing with move out, unit rehab between tenants, and prospective tenants is a huge time, energy, and cost drain.

Higher utilities cost. Water/ sewer/ garbage is about the same cost for a 500 square foot unit as it is for a 3,500 square foot house, so utilities become a bigger percentage of total rent and costs with smaller units.

Collecting rent is time consuming. Very few tenants mail us a check or deposit the funds in our bank account. Some bring the cash to our front door, more have us come get it at their front door, and both involve texts back and forth to coordinate schedules. We often have to initiate the conversation to find out where rent is, and we often have multiple trips to collect partial rent during the first two weeks of the month. We admit part of this is due to our desire to visit the properties more often and our willingness to be flexible for our tenants. It may be possible to set expectations and have low income tenants pay less hands-on, but it is a consideration.

More difficult to screen applicants. Most of our applicants have no bank accounts, have terrible credit, and it is difficult to know where they’ve really been living.

Lower loan amounts. It is more cost effective to mortgage and refinance one property worth $150,000 than two properties worth $75,000. The inspection and appraisal costs are about the same for a $30,000 house as a $300,000 one.

Easy to over improve. It is so easy to get into the trap of wanting to get the property to the standards you would want to live in. Such spending brings risk of being destroyed by tenants or never getting the value out at sale.

Whether you go low income or not, there is no guarantee of getting a rent check each month, of the property being taken care of, or having a smooth turnover experience.

That aside, I would say leverage your available funds. Maximize the loan amounts you can get, don’t pay off your house, and consider a home equity line of credit on your primary. You should be able to get at least 5 traditional loans, then explore portfolio loans  or other creative financing (Brandon Turner has a great book) if you want to keep going.