Getting started - next steps and timeline?

Question

Hi Everyone,

I am just getting started with the idea of Real Estate as a possible investment or (future) full time business and still in the learning stages. Over the past few weeks I've been reading books, listening to various podcasts, and have signed up to go to a local REI group meetup next Tuesday, basically just absorbing all the information I possibly can. I have a general idea of what I'd like to do but could use some advice on specifics and timeline given the good situation I find myself in.

Where I'm at now:

- Zero debt, personal or business. I relocated from Colorado back home to Texas in March of this year. This allowed my wife and I to be closer to family. We used the proceeds from selling our primary residence in CO to pay off debts (cars, student loans, credit cards - all of it gone).

- Gainfully employed as a software engineer.

- Renting a house while building savings. Our current lease ends in April 2017 and goes month-to-month after that.

- Can throw about $3,000/month into savings after basic monthly expenses (with a few exceptions such as a new baby coming in September). Currently have around $10k in our emergency fund, and would like to double that before putting any of our own money into investments, but at this rate that should only be another few months.

- Excellent credit, last time I checked my score was 774.

Goals/Where I'd like to be:

- Buy a personal residence at 10% down/15yr mortgage and stop renting by the time our current lease is up next May.

- Looking into buying and flipping 2 houses in the next 12 months to help fund the above. Not quite sure where to start with this part.

-  Within 7-10 years, I want to own enough cash-flowing rental properties to replace 90% of my income at my W2 job at which point I'd quit and continue to invest a large portion of that money into real estate.

So I guess my questions are:

What else can I or should I be doing at this stage?

How can I accelerate my timeline without introducing a lot of financial risk? I currently have no liabilities other than rent and basic living expenses, and am willing to take on some calculated risks to speed things up, but I do still have a job and family to tend to, so I can't just start making large bets without a cash cushion in case something goes wrong.

Thanks for all input and feel free to ask any clarifying questions!

Mark S. · Answer

@Josh L. It sounds like a decent plan to me.  I think a lot of people purchase their own primary residence before they take the plunge into investing, especially when you are considering the lifestyle your family is used to.  But as Greg mentioned there are inherit risks in flipping a home.  I am not sure the degree of rehab you are looking to do on the property but the more you fix the higher the risks become.  Personally living in the DFW area I am not sure how much you need to fix up at the moment.  The value of homes is going up very quickly, at least at the moment, so you should see gains in that way.

It may be a good idea to look at your options for a cash out refinance after your purchase before you buy.  There are different loan programs and if you plan on getting two mortgages within the next couple of years it is good to plan ahead so you know how the mortgages interact with each other.

Good luck with your purchases!

Thomas S. · Answer

I would first advise you not buy a personal home until you are financially stable with investing Renting is by far less expensive that owning. A personal home is a life style choice not an investment. A home is a liability not an asset.

Additionally flipping is high risk and starting out is either boom or bust. If it is a bust you do not want the added baggage of a personal home.

If you are not experienced at real estate and particularly flipping your plans of 2 in a year may be unrealistic.

To replace 90% of your income expect to earn $100/door/month to do so.  To replace $100K you will need possibly 80 doors.

Josh L. · Answer

Thanks for the responses, guys. For now I'm planning to spend the next few months saving up cash and reading/learning everything I can get my hands on prior to taking the plunge. My wife insists on buying a personal residence first, and doesn't like the idea of living in a duplex/triplex. I really couldn't argue with that, so I think we'll be looking for a fixer-upper that we can live in after remodeling, but with high enough ARV that we can refinance and cash out some of the equity to put towards buying a rental soon afterwards. Does that sound like a reasonable plan?

Mark S. · Answer

Hey @Josh L.

It sounds like you are in a good spot to get started, having that much extra cash every month you should be able to qualify pretty easily for your mortgages, leveraging your investments will help you generate higher returns albeit with more risk.

Since you do not have a history of renting out properties you will have to jump a couple more hurdles.  If you purchase a rental property that currently has a lease you would be able to use 75% of the rent to help you qualify for the mortgage.  If the property is not currently leased than an appraisal would have to determine the market rent for the property and then you could use part of the rental income to qualify for the loan.

But if you are able to put $3k per month into savings I doubt you will have a problem with qualifying even without rental income.  If you don't need the rental income to qualify it will make everything easier for the mortgage process.

There are a couple other things to be aware of though.  You eventually will be limited in your purchasing power because it becomes harder and harder to get mortgages the more you have.  Also you would need to pick a loan program geared towards your goal of purchasing a primary residence next year.

I think a good place to start would be to create a plan for how you can most effectively leverage your investments over the next couple of years.  Too often new RE investors do not understand how their ability to qualify for mortgages will change depending on your situation.  This can end up being a real problem a couple of years down the line.

Let me know if you have more questions that I can help with!Thx

Kevin Grinstead · Answer

Hi Josh, Welcome to BP and Colorado. There are many possibilities on how to start. If you wanted to start with a rental properties there are some you could get in for as little as $100k depending on the neighborhood. Most lenders would want you to put 25% down on a rental property and in order to use the income for your primary residence they would want you to have at least 12 months and some require 24 months of rental income to count it towards your debt to income ratio.  One thought might be to purchase a duplex and then live in one side and rent out the other. If you do that you might be able to qualify for FHA financing and only put down 3.5% of the purchase price.