What is a good newbie investing strategy?

Question

I've recently been bitten by the real estate bug and I can't stop reading. In the past week alone I've gone through 5 books, some broad, some very specific. All the books were by well accomplished investors and not "get rich quick gurus". And each had their own strategies that worked for them. Now I'm trying to decide what will work for me.

I have a credit score in the upper 600's, around $10K saved up and am looking to invest within an hours drive from my house (Newton, MA 02461). Obviously this is very little to start with, but we all need to begin somewhere. I also don't plan to buy for the next year, but out of pure curiosity, where would you all begin given my situation?

Should I go for quick flips or try and sit on a cheap duplex or triplex in a rough neighborhood? Or maybe I should try to partner with a silent investor?

Would love to hear any thoughts or suggestions.

-Sage

Jon Holdman · Answer

Read the sticky thread in the Rental Property Forum.  You don't need a complex form because you can't accurately split out all those expenses.  The simple rule is to assume that 50% of your gross scheduled income will go to operating expenses, capital items and vacancy.  What's left is NOI. Subtract your P&I payment from NOI and you get pre-tax cash flow.
          
          Now, because I self manage and am willing to do that for free, I use 40% rather than 50%.  Its really no more complex than that.  You don't need any tool more than excel or a financial calculator.
          
          The way to do the analysis is to start with the rent, which is set by the market.  You can find that by calling "for rent" signs, looking on craigslist, or looking at whatever other resource is used in your area.   Subtract off the estimated expenses.  Subtract off your desired cash flow ($100 is pretty typical) and what's left is your maximum payment.  Use the present value function on Excel or a financial calculator to determine the maximum loan amount.  Use that for your price.  Find deals like that and you'll achieve your goals.

Jose R. · Answer

I m sure you could fill a book with this question .  If you ask 100 seasoned pro's this answer you'll probably get 100 different answers.  Here a just a few points that I would recommend, whether you follow this advice is totally up to you.

The first thing you need to do is to stop going around telling everyone you're a newbie and most definitely stop telling people you have $10K!!!
          
          Stick to the library for your education, stay away from the Gurus (I'm serious about this), if you have to buy an RE course buy it from ebay (much cheaper).
          
          Most importantly take action! and if you don't know something you can find the answer you looking for on this forum (for FREE).

Jon Holdman · Answer

That sounds like you want an approach that uses income producing rental properties to both generate current income and to generate long term wealth.

Read the Rental Property forum and learn about the true ins and outs of rental property.  Especially the true expenses.  If you want the current income, you MUST find deals with number that work assuming realistic expenses.  Otherwise, you'll set yourself up for failure with marginal deals that only work when things go well.

You may have to look in a bigger radius.  I know nothing about your area, but you'll need to learn it inside and out.  You'll need to see if there is any area that actually works.  There may well not be.

You need to realize that supporting yourself off rentals requires a bunch of them.  Unless you're an incredibly frugal family, you will need a dozen, or more likely dozens, of rental units to provide for your needs.

Peter Giardini · Answer

the first question that should be answered is...

What are my goals... and how will real estate help me acheive them?

For instance... if you want to start a retirement plan by purchasing income producing properties then to support that goal you would focus on income producing properties.

If however, you are looking for more immediate cash in bigger chunks the wholesaling or rehabbing would be the way to go.

Also, once you decide on a strategy... stick with it until you become an expert.  Too many investors get started in one area and jump around from one thing to the next... never getting good at any of them and often times failing and leaving the business.

Good Luck!

Jose R. · Answer

Awesome post Jon!

Curt Davis · Answer

You should buy investment property for yourself first to gain the experience.  Then you should consider flipping a few.

Your credit score should be a bit higher as well.  How are investors going to feel comfortable buying from someone who can not even buy and hold for themselves? Just my thoughts.

Sage Jankowitz · Answer

To Jon: That brings me to another question. Do you know of any solid cash flow analysis software or forms where I can simply plug in all my expenses?

From my readings it seems like the #1 mistake newbies make is underestimating expenses and overestimating income. So my question then is, where can I go for a list that will clearly spell out EVERYTHING that I should take into consideration?

I would think with software that covers all potential expenses, I could run the numbers changing variables like vacancy rate, repairs, cash reserves, etc. so I could have some realistic expectations here.

Jose: Thanks for advice as well. I'm not looking for a get rich quick scheme and I'm certainly not interested in any of these real estate gurus. I've been reading a ton of books and focusing on reputable names only. No shortcuts here...

Sage Jankowitz · Answer

Hmmm...thanks for the good advice. It seems to me that I'm looking for a situation somewhere in the middle.

Ideally I would have some positive cash flow coming in each month to support my basic needs. At the same time, I ultimately plan on building up in the future, both in the size of each property and number of properties.

What is a good newbie investing strategy?

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