How should I(first timer) start investing w/ my saved up capital?

Question

Hello Everyone,

New member and first time poster here. I'm a 23 year old Commercial Real Estate Analyst in Indy. I have been researching RE investing over the past year or so and currently have about 10-12K that I am ready to invest. The problem is I still have no clue how to even begin. I have this job now which provides me with some stability in terms of cash flow, but I want to find the right investment to start with and was hoping for a little advice from you experts in terms of direction to go. I want something I can make a little income off of and fix up in my spare time in hopes to flip eventually. I was considering either a duplex or small multi-family property, but like I said, while I do have a decent knowledge of the industry and market, there is nothing better than experienced pro's and I would love some advice. Thanks in advance to all of you and happy hunting!

Josh Mitchell · Answer

@James Roberts have you thought about buying a duplex and living in one half of it? This would allow you more flexible lending options, and also would allow you to learn the ropes of fixes/landlording. If I had to re-start I would look at doing something along these lines.

Steven Loveless · Answer

I'll echo @Josh Mitchell, save up during remainder of your lease, then start shopping. If I could go back in time ~7 years (before wife and kids) I would do exactly what your Plan A is - buy an owner-occupied duplex with a 3.5%-5% down loan and house hack. Rinse and repeat every time you have the reserves available to get a new home, until you are at your conventional mortgage cap. That way you can ease into the process with slightly lower risk all while getting into the properties with less money down. (All assuming you can find cash flow positive properties of course.)Once you get to a point where you can't move around (without really pissing off a spouse), saving up for those 20-20% down payments (plus reserves) makes a much higher capital requirement barrier. I would personally suggest conventional over FHA products - when I have compared they are less expensive over the life of the loan, and the extra 1.5% down payment really isn't that big of a burden.

Ryan Canfield · Answer

@James Roberts Hi James - my personal opinion is if you are willing to owner occupy a duplex or similar property it would be well worth it. For my wife and I, it has been a great experience so far. Like the comments above, it allows you to buy a property with less money down if you are willing to live in the property and it also allows you to gain valuable landlord experience. You could do it and even find out that landlording may not be right for you. If that was to happen, at least until you figure out your next step you could be offsetting your monthly living expenses.Let us know what you end up deciding to do!

Josh Mitchell · Answer

@James Roberts Just to clarify on what @Justin Howe said, if you get an FHA loan the PMI will be on the life of the loan so in order to get it removed you would be required to refinance into a conventional product. Also, FHA comes with more overlays, and upfront costs than a traditional mortgage does. If you are looking into condo/townhomes or something in an association, there will be rules as to if FHA loans are accepted or not as well. Just do you research, crunch the numbers, and decide what works best for you. I would recommend just saving up for that 10.5 months left on your lease, and then when you are 3-4 months out, start really digging into some properties and seeing what the best one for you would be.

Justin Howe · Answer

@James Roberts Yes the payment will be higher because you're putting less down and you'll have PMI (private mortgage insurance) added to the loan. But once you have 20% equity, you can drop PMI or refinance into a conventional loan. While you're waiting for your lease to finish, I'd start networking with local investors in your market. That way you can learn from the pros and when the time comes, you'll be better fit to pull the trigger on a deal.

Spencer Stevens · Answer

James Roberts If you plan on owning it but not living in it then you will have to put more money down. If prices are good in your area and 15% - 20% down payment is close to 12k then maybe that's a possibility. Moreover, I would check with a banker to see how much you would be required to put down on an investment property.

Justin Howe · Answer

@James Roberts You absolutely could purchase a duplex and not live in it. However it might be more beneficial to live in one unit and rent out the other for two reasons.1) If you live in it, you can apply for a FHA loan with only 3.5% down instead of 20% on a conventional loan.2) It's a great way to learn the landlording business and it will massively cut down your living expenses. Look into "house hacking". It's worked wonders for a lot of people starting out.

Mags S. · Answer

The big advantage upfront with doing an owner occupied multi-family property are the loans you would quality for as an owner occupant and the much smaller required downpayment. You won't need to live in one of the units for very long.

Rich Cavanagh · Answer

@James Roberts, Sounds like your first target is house hacking with a duplex. All of the above users have given you a ton of great advice. Only thing I would add is a bit of bigger picture advice. Regardless of your first step, start watching BP podcasts! I can't stress that enough. You can even cherry pick the ones that catch your eye in regards to your investing style. IE, single fam / multi fam.Read the books the guests mention as well.

James Roberts · Answer

Thanks everyone for your input, most of you seem to think my best option is to just wait it out and save up so I think that is going to be my course of action but I'm adding a possible twist to it. I'm gonna continue researching duplexes, quads, etc. in my area until I get my bonus come Xmas time. Depending on how much it is and how much I have saved, I may be able to just do a conventional loan, granted this is only if I have found a property I truly believe I can make money on. I will then just manage that until my lease expires and then if there is a vacancy I will do owner occupied, if I'm fully occupied with good tenants and financially able, I may just get another duplex and do owner occupied in that one since the down payment will be so much lower. However, if in December there is nothing really on the market that I like, I'll just continue saving and educating myself so I'm ready when my lease expires. Any thoughts or comments on this strategy?