BUSINESS PLAN. Is this a sound strategy?

Starting Out
9yFollow

BUSINESS PLAN. Is this a sound strategy?

Paul D.
New to Real Estate · NJ · Member since 2016 · 34 posts · 4 votes
Hello BP, I'm 26 I'm starting to plan my first deal. I still live at home with my parents but I have thoughts of getting into real estate. The thought of renting drives me nuts and makes no sense to me. I'm getting to the point where I want to move out and so if I do I want to own. Not rent. I want to make a return and not only that but learn real estate investing. I am running my own business at the moment and figure I get into this in hopes to grow a strong portfolio in time and hit my life goals. With all this said. My plan is that I'm thinking of looking into MFHs and house hacking it. Preferably a 4 plex or 3 plex if I can't find anything in the market but I figure more rooms under one roof the better. I am looking in the north jersey market. I figure to FHA loan on one of these homes, live in there build equity until I want to move out(after the year) into another home or buy another investment. My strategy of payment is to find renting numbers so that my tenants pay the mortgage, pmi, taxes. (Let me know if I'm missing anything that's included for debt service). I myself instead of contributing to the "rent" want to instead put money strictly into the principal to get it down as much as I can as fast as I can. That way a huge chunk of my money doesn't go into interest and my debt can be paid down much faster. Does any of this make sense of the way I'm thinking? I am open for all suggestions. I'm looking to make my first deal and just curious how I should finance it. There's only so much money I have saved up so I'm trying to be as creative as I can. Thanks in advance guys in new in this and appreciate the help!
0Reply
9 views

Most Popular Reply

Samantha Klein
Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
9y

@Paul D. I like the plan however I would not personally try to accelerate your mortgage payoff, and here's why... If you get an FHA loan at lets say 5%, and you think paying it off sooner is saving you alot of interest, you are right and also wrong. If you can invest the money you were going to use for accelerated payoff into another 3 or 4 plex that earns 10-15% COC return then you are essentially double and tripling your money, and the tenants are still paying your mortgage and building equity. The more buildings you buy like that, the faster you can build down payments and buy more, when you hit your magic number for comfort, then you can pay them off but I still wouldn't pay any extra because mortgage rates are so low that it's not wise to do. If you ever need to borrow against your equity, you pay closing costs, ect whereas if you just invest it, you build more and more income and before you know it, you are sitting pretty.

2Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Ryan Arth
    Developer · Cleveland / Akron, OH · Member since 2008 · 922 posts · 399 votes
    9y
    Paul D. It sounds to me like you are saying that the tenants will cover the mortgage and instead of not having a payment at all, you will contribute whatever you can to reduce the mortgage balance. This is a fine plan, just don't do it at the expense of putting yourself in a cash poor situation. You want to have enough in reserves to cover life's ups and downs, as you can't get that money back out without big costs. The only hiccup that I see is that you are self employed, which may cause a problem for financing if you haven't been in business for two years. They will not consider future tenants rent as income to qualify you.
    1Reply
  • Christopher Giannino
    Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
    9y

    Definitely a great idea. I'm in a similar situation where I currently live at home with my family but am looking to move out in the near future. As you said, I'm looking to house hack a small multifamily where most of my expenses (mortgage, PMI, insurance, taxes) are paid by the tenant. My only suggestion is although owning Real Estate free and clear is great, its not ideal if you're looking to scale up. I would save the money and put it towards the next downpayment. By doing so, you can add more doors to your portfolio quicker. Obviously everyone's strategy is different but if you have intentions on building a large portfolio for yourself, you will want to leverage your investments as much as you can. Hopefully you find this helpful.

    1Reply
  • Paul D.
    OP
    New to Real Estate · NJ · Member since 2016 · 34 posts · 4 votes
    9y

    Thanks  so much @Christopher Giannino @Ryan Arth for the response. much help. Check out the link below as this is my latest update to the business plan I have set. Its a little more detail but not exactly. I posted it as a quick summary for  BP forums sake and I wanted feedback on if this strategy sounds solid. That last post was a few weeks back. After more research and studies I came up with an updated one. Thanks guys appreciate it so much! 

    Summarized Business Plan

    0Reply
  • Samantha Klein
    Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
    9y

    @Paul D. I like the plan however I would not personally try to accelerate your mortgage payoff, and here's why... If you get an FHA loan at lets say 5%, and you think paying it off sooner is saving you alot of interest, you are right and also wrong. If you can invest the money you were going to use for accelerated payoff into another 3 or 4 plex that earns 10-15% COC return then you are essentially double and tripling your money, and the tenants are still paying your mortgage and building equity. The more buildings you buy like that, the faster you can build down payments and buy more, when you hit your magic number for comfort, then you can pay them off but I still wouldn't pay any extra because mortgage rates are so low that it's not wise to do. If you ever need to borrow against your equity, you pay closing costs, ect whereas if you just invest it, you build more and more income and before you know it, you are sitting pretty.

    2Reply
  • Paul D.
    OP
    New to Real Estate · NJ · Member since 2016 · 34 posts · 4 votes
    9y

    @Samantha Klein oh ok that makes a lot of sense. So what you are saying is keep my strategy with paying down the mortgage at the speed I want too BUT when I have enough equity paid into the property THEN pull it out and invest into the next property with say such as a HELOC.

     So instead of having the goal to be paid free and clear as quick as I can. I should be thinking pay into the property and raise enough equity for another down payment as quick as I can. My money will be working much harder for me if I do it like this then right?

    0Reply
  • Samantha Klein
    Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
    9y

    @Paul D. That's correct however I am not sure if you'd have closing costs borrowing against the equity and if you did, you'd be defeating the purpose of trying to save money. I would not make any extra principal payments at all, just save money as quick as you can in a separate account and when you have enough saved, buy another property and just keep repeating until you are happy with your income.

    1Reply
  • Paul D.
    OP
    New to Real Estate · NJ · Member since 2016 · 34 posts · 4 votes
    9y

    Ok thank you so much for you advice! @Samantha Klein if I have any other questions I will def let you know. Also if you have the time check my latest post. I have a updated summary of a business plan of my strategy. If you can check that out Im sure your going to have the same advice,but I would much appreciate it! I linked it in one of the comments on this post "Summarized Business Plan". Thanks so much again.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free