Landlord Starting Out Need Advice

[Charles Cackler]

Hello BiggerPockets forums.

As a bit of background, I'm in Memphis, TN, and while I have well over a decade's experience in investing, I have never done any real estate investments other than some REITs.

I have about $12k to invest and excellent credit, and am looking into investing in rental properties.

My thoughts are that I should start with multi-family units with existing tenants, as I'd ideally like to keep some of that money left over in case of unforeseen expenses, and I really don't want to dip into my backup funds unless I have little other choice.

My questions are 1: Is this a workable strategy? 2: What pitfalls should I keep in mind? 3: What sort of financing should I be looking into? Owner-financed, traditional mortgage, or what?

Any other comments are appreciated as well. Thank you for any help you can provide.

[Alex Craig]

@Charles Cackler 1 to 4 units you can get Fannie Mae financing with 25% down, fixed rate, 30 yr mortgage. Probably around 4.75%.  With only $12,000, that would not get you any MF in Memphis where you would not need the National Guard to escort you in and out. :) Pay close attention to the neighborhood when evaluating Memphis MF. I have said many times on Bigger Pockets that I am not a fan of MF unless you are in select parts of 38107, U of M area or Midtown (38104).  We do not manage many MF units in Memphis because we had such a bad experience with the few that we did manage, that we let them all go back to the owner.  The tenant applications were terrible and the drama was over the top. While not a big fan of section 8, this is probably the scenario where section 8 makes sense.  I would interview some property managers who specialize in this space as there is going to be a learning curve with MF, even as small as a duplex.  I would shadow a PM for 2 to 3 years and then once you feel comfortable, then maybe look at self management.  I am not trying to be a Negative Nancy or Debbie Downer, but I am sharing my experience.

As for financing, you could look at purchasing cash then refinancing using equity. Some banks will do that, including Bank TN and Simmons Bank. This is referred to as the BRRRR method and may work better on SF homes instead of MF homes. Owner financing is always a possibility too. The pitfalls you want to look at in the BRRRR method is to make it work, most of the time you have to go lean on the rehab, which could mean large capital expenses sooner then later. A Roof and HVAC replacement will kill a lot of cash flow for multiple years. Also, you will likely have to keep what is in the house so long as it is functionable. By that I mean, keeping counter tops because they are presentable, even though they are dated. Or putting in carpet instead of vinyl plank flooring in the high traffic areas which will need to be replaced every 2 to 3 tenant turns. All of this leads to higher maintenance cost and if the house does not look as good as others in the neighborhood, you may have to drop rents below market price to get a tenant. There is a saying in landlording, "your tenant will look like your house." That is 100% true as I learned this over my 10 years in the biz. My first few rentals I did the lipstick on the pig approach and my vacancies were longer and eventually settled on borderline tenants. As I evolved in the biz, I started updating these homes to ceramic tile, vinyl plank flooring, ceiling fans, brush nickel faucets, new counter tops, etc etc and my tenants started staying longer, when they do go vacant, they get rented quickly and I received better applicants.

Bottom line, is your plan feasible, yes. I would learn more about the BRRRR strategy. Dean Harris on this site is a good source for that. There are also great property managers on this site for MF homes in lower income areas such as James Martin and Douglas Skipworth.