Where to buy?

Question

Hey gang,

So I've been studying the market, educating myself, and following the actionable tips that the guys recommended on the podcast, one of which was talking to a local lender (or a few), and so here's where I'm at.

First of all, I don't make that much, so my initial buying point is also not that high (fortunately I'm in Milwaukee and not Chicago of SF). Running those mortgage calculators I suppose I'd qualify for a loan up to about 120k, and I'm spending the rest of this year paying down debt (not that much, I'm already about 1/2 way), and saving for a down payment, but the question is what to do.

I'm considering, this time next year, one of these two things:

1. Following Brandon Turner's advice and buying a multifamily, but this leads to the related issue and the question of this thread, where to buy? The multi families in my price range are not in very desirable areas of the city, and while I'd be okay with living there (because it's a house hack), I wonder what advice people have about buying cheaper properties in shotty areas? The ones I've been looking at online all need crazy cosmetic work, but if you can get them cheap enough it still seems like a deal. For 200k I could jump to better areas, but again I don't qualify for these loans - plus, it seems like the lenders want 20% down on multi families for first time buyers, and though I have high savings goals, I don't think I can pull off 40k in a year, haha. (My lender is checking into FHA for me though, maybe that's an option).

2. Live in flip. But this seems like it'll just be a slower process since you have to wait two years to avoid capital gains taxes, and again, I probably can't buy in great areas, but certainly better areas.

The main question, again, as I sort through the various options and continue to learn over the next year, is where to save? I need to pick a market right, how do you choose?

Thanks in advance.

JTM

Dolly Caswell · Answer

Well first of all @Joshua Martin, I have to say I wish we had prices here in Alaska like those you've mentioned! Currently, I don't think you can touch a decent duplex for less than $200k or close to that and 4 units are $400k to $600k depending on area and condition, of course.

IMHO you need to consider, your age, your strength, your "taking care of all the little problems" abilities, the distance from where you live (if you don't owner occupy) and then think forward a few years and imagine that you've fixed and fixed and fixed a "beater" property that has been very difficult to keep rented because the area is awful and real estate HAS NOT gone up in value. You'll have tax write-offs and hopefully some cash flow, even after your fixing, but think about how much nuisance it is...and is it worth it? Maybe it is!

Now think about the property in the great area that is easy to rent, doesn't need much work, and in general you can sleep at night and not worry about it. If real estate HAS NOT gone up in value you still have a property in a desirable area and have less/little trouble renting it.

I can't even imagine living in a huge city like Milwaukee, but you will have lots of area choices. If you are going to be the manager, then try really hard to "like" the areas closer to you because you'll get really sick of driving clear across town to let someone in who lost/forgot/locked in their keys or fixing the toilet. Again, all this if you decide not to owner occupy.

After all is said and done, look at the worst case scenario, within reason, make some intelligent calculations and decide if you can still pay for and repair and love your investment.

Joshua, look for a motivated seller, one who will carry the note for you, be patient and buy what you can really handle.

blessings,

Brandon Stevens · Answer

Id agree with dawn, there are good areas you can find duplexes in the the 100-150k range, heights, bayview etc....if you want to buy in the 200k range then you might think about flipping a property so you can have a bigger down payment and be able to afford one of those.

Capital gains are what they are, put aside half of what you profit to make sure your covered next time uncle sam comes around.

Nonetheless, hacking is a great way to start and Milwaukee is an easy market to enter via that route. Gl.

David Dachtera · Answer

Also, @Joshua Martin, you'll want to study up on how to attract and work with private lenders, especially if you do any fix-and-flips, fix-and-holds or major rehabs.

There's also a way to use private money to acquire and repair, then refinance more traditionally to pay off your lenders (and even extract part of the profit!) as you move into your next strategy (sell or hold).

Worth a look...

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Dawn Anastasi · Answer

@Joshua Martin there are plenty of areas where you can get a nice duplex for $120k or less.

Corey Woodruff · Answer

Listen to podcast 132 with @Brie Schmidt she is very smart and is an active investor in Milwaukee so that podcast is perfect for you. From the podcast it sounds like she deals with lower end multi family properties and has very successful and actually added 50 properties in one year!

hope this helps

Joshua Martin · Answer

Thanks again everyone. @David Faulkner & @Scott Sewell, I appreciate the insights, and that's what I'll be looking to do, i.e. more or less both plans. Buy a shitty property in the best area I can, and the bigger the better (up to 4, and hopefully 4). I'll be keeping you posted guys, and I'm sure more questions will come up along the way.

JTM

Scott Sewell · Answer

Hey Joshua,

Great questions! And you've gotten some good advise, but I just can't help but chime in. Just my $.02: I'm with Brandon (and @David Faulkner above) on this one.

With Real Estate, the one thing you can't paint, carpet, trim, or rehab out of the property, is location. No matter how good you can make it look, it's always going to be in the same place. (unless it makes sense to spend some SERIOUS money)

That being said, if I was just starting out, would I buy property in a "bad" area? If it's in a war zone ("D" area).......   H*** NO!   (I have no desire to have to carry a gun to collect rent) However, if I could find a beat up, ugly 8plex in a "C" area....... YES!      All day long.  And I have.

Of course it all comes down to the numbers, and a deal has to be that: A DEAL. A bad area is going to be more management intensive, but if it pays, so be it. It also does wonders for your development as a property manager, your BS meter will get fined tuned (along with many other skills).

You appear to be a younger person, and time is on your side. Just because you buy in one area today, doesn't mean you can't buy in another tomorrow. And over time you would simply sell the more problematic properties to exchange for better (less management intensive) ones.

And that would be my advise: buy as many units as you can handle and afford (be sure there's enough cash flow to cover anything that comes up). If it's a house hack, try to get at least a 3BR so you have two to rent out. If you can handle at least a 4plex (and you don't need 20% down to owner occupy) go for it! If you do it right, you'll be living rent free from day one, and generating income when you get your next property.

Good Luck Josh! And great investments to all.

David Faulkner · Answer

For your 1st property, I'd buy the ugliest, most run down "cosmetic fixer" (good bones with dated/ugly finished) property in the nicest neighborhood that you can afford on a property that will still cash flow. You can still "house hack" a single family home, live in it, fix it up, and rent rooms out if you can't afford or don't want to buy a duplex or larger. A property like this will be lowest risk in terms of holding its value and long term appreciation as well as offer the highest quality (lowest risk) tenant class ... even if the cash flow numbers don't look as great as lower end neighborhoods (and they won't), this is a much lower risk way to get started and learn the ropes of being a real estate investor. Once you have a few of these under your belt, then you can venture into the bigger and/or riskier stuff if you like since you will have more experience to deal with that then, or you could just continue on with the nicer, lower risk stuff ...

Joshua Martin · Answer

Dolly,

Thanks so much for the feedback, those are all really good points for me to think on and consider. You're right too, I need to be patient. My initial plan two months ago was to spend a year educating myself and saving before buying a property, and then jump in. Maybe I should stick to that, but you know how easily it is to get sucked into potential deals on Zillow...

Another question, and pardon my ignorance, but what do you mean 'find a seller who will carry the note for you'? That's a financing angle I don't understand. Seller financed?

Thanks again.

JTM

Joshua Martin · Answer

Thanks Dolly. I actually understand both the 1031 exchange practice or the cap. gains exemption based on 2 year occupancy. The guestion wasn't so much about taxes at all as about 'where to buy.'

I'll reformulate: do you buy cheaper in worse areas? Or buy less in better areas? For example, I could get a four family in some areas of Milwaukee, which looks appealing given the prices, or I can buy a duplex in a better area for the same price. See my question?

Thanks in advance.

JTM

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