How much risk is too much?

Question

Hello, everyone! I understand that the answer to this question will be different because everyone has a different on opinion on how much risk to take. I'm 19 years old I live in Romeoville Illinois, I want would like to start investing.However, I know that if I don't have any money I can partner up borrow hard money and get creative, but for my first deal I want to make it simple I would like to save up to 15,000 dollars for a down payment on a property with a maximum of 5 units. I'm really not sure on the units, however, I want a property with a price of around 110,000 my strategy would be to rent out the property and let the tenants pay the mortgage. Once the mortgage is paid off or I think I have enough equity I would use the equity in the house to buy a bigger deal and so on. My question is I've been educating myself on real estate investing. There is a very famous real estate investor who beliefs, that your first deal should be of around 16 units or more if it less then it's not worth it. Firstly I respect his opinion, but for me, it is to much risk to take for my first deal especially if making mistakes is part of the learning process which I would like to avoid but it happens to everyone. If something went wrong at first I would much rather have problems with let's say two units than 16 units. Plus I would use my fist small deal to gain experience. In my opinion, I'm more comfortable increasing my properties over time. What do you guys think, Sorry if I was not clear enough, Thank You, for reading

Juan Mendoza · Answer

Thank You, Kenneth, Yes I think the NOI would not be bad considering that rents are pretty high in the Romeoville area. I live in a two bedroom apartment and my rent is 1200. Homes rent out here for around 1400.

Kenneth Garrett · Answer

Juan,

A friend of mine invests in Romeoville with single family homes. Its a great buy n hold area. Rents 1300 and up for a 3/1. I think you should try some smaller investments to get your feet wet and see if its what you think it is. I invest in the northwest suburbs and things are still good.

Good Luck.

Juan Mendoza · Answer

Thank You,

I'm with you guys, I'm not sure if I was not clear enough, but yeah I totally agree that starting small is the way to go especially because I can always buy later. What I need to focus on is finding a good deal that has potential and fits my budget.

Linda S. · Answer

You're just starting out, get a duplex or a triplex and househack to make sure you like it! Sure, the numbers are appealing, and no doubt, money can be made.. however you need to crawl before you run. Do you know how to fix plumbing issues, install new locks, install ceiling fans, stuff like that? Depending on the condition, the multifamily housing unit you buy, will likely need at least $15-30K in improvements, just imagine that x16! Start with something manageable, and realize you need access to A LOT of capital in order to do bigger stuff, work hard to establish good credit and do as much hands on stuff as you can now.

Tom Cafarella · Answer

Hi Juan,

Owning a 16 unit building right out of the gate for you is probably not a great idea. First of all, you won't be able to use FHA financing. If you use FHA financing, you will only have to put down 3% whereas if you buy a 16 unit building right out of the gate, you are looking at 20-30 percent down and it will be a much harder loan to get.

There is no such thing as starting too small, although my personal opinion is to do the maximum amount of units that FHA will allow(4, or a 3 if you can't find a 4).

I know many successful investors(including myself) who only started with 1 unit.

Steve Milford · Answer

The answer to your question... How much risk is too much?

Whatever you are not comfortable losing and owing to someone else when they come to collect.

House hacking works, but it takes tenacity and the willingness to turn a few properties if needed before you get where you need to be.

Here are my questions:

If you buy a 5-plex now that costs you $125k, that you swing for with fha, you can't refi right away. If you go with hard money, can you refi quickly to keep your carrying costs lower?

Can you stand to lose your any money you put in AND the property if it goes south?

What are worst case rents? With even a 1-month vacancy, is this built into your numbers?

If asking these questions, ask yourself, is the risk still worth it? Only you know the answer. Go with your gut is my advice.

Steve

Juan Mendoza · Answer

Alexander, Thank you! I think that your method is the same method that I would like to implement myself. Edward Thanks to you too! Yes it is true duplexes are not common here in Romeoville, but I have seen a few they may not be on sale but I've seen a few I can't remember the name of the street, but that neighborhood is along Weber and Airport street also on Shannon Dr., but I might need to look elsewhere for a deal.

Edward Wodziak · Answer

Unfortunately there isn't any 5 units or even any even duplexes in Romeoville. If you are able to find a great deal like 5 units or more you have to put 20% and its a lot work if you got the time where a SFH would be easier. It depends how much time you got or if you are getting a property manager.

Alexander Ramos · Answer

I believe I know which famous investor you are talking about! Anyhow that famous investor did it his way and there's no one way. I am currently looking to get into a 3-4 units through fha and then build upon that. "House hack" method and live close to free and go on to next. That is one way to. Many ways,but keep listening to podcast and pulling out what resonates with you and apply to your specific situation.

Autry Smith Jr · Answer

I am extremely new to Real Estate Investing as well. From what I'm learning so far, its best to come out the gate wholesaling. It has little to no risk and you need little to no money to get into it. Then once you sell a few assignments you'll have the money saved up to put money down and rent out property.

How much risk is too much?

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