Would this be a crazy plan?

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Would this be a crazy plan?

Gwen Fyfe
Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes

I moved to Cleveland about 10 months ago. Previously, I lived in the UK for 9 years. So in the USA, I have very little credit history and very little employment history - but what I do have for both of these is good.

I want to get into multi-family investing through an FHA loan. I might squeak past the qualification requirements and I have a mortgage broker who wants to help me out, but realistically, it would be better to apply in 6-8 months when I'll be able to demonstrate a year of stable employment. (I have a good job with a small accounting firm here.) In the meantime, I'm renting an apartment, and my lease is up in June.

There are a couple of blue collar suburbs of Cleveland that I've been exploring and would be perfectly happy to live in. In some of these areas single family homes come onto the market every couple weeks beat up but livable for 20-30k... which I could scrape together in cash right now, if I needed to.

So what I'm thinking is...

-Scrape together as much cash as I can and just buy a fixer-upper SFH outright before June. Cut both my commute and housing expenses by two thirds.

-Move in (with a sleeping bag and hotplate if necessary!), start fixing it up, and save up another $8,000-$10,000 for an FHA down payment and closing expenses - something I've already done, and it'll be even easier once I'm not paying rent.

-In another 6 months or so, buy a nearby multi-family home with an FHA mortgage. Move into that and rent out the newly fixed-up SFH.

-Live in the cruddiest unit while I do more live-in fixing up, rent out the other units ASAP. Suddenly, 3-4 doors cash flowing within a year.

This seems to make so much sense that I think there must be something obvious I'm missing. What are the downsides? What are the risks? What should I do to protect myself? Am I being stupid? (If it's stupid and it works, it's not stupid, right?)

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Kyle McCorkel
Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
9y
Gwen Fyfe it might sound crazy to most people but probably not to most people on BP! I think the big picture of your plan is definitely doable, although I would say financing might be your biggest obstacle. Meet with multiple lenders ahead of time, tell them your plan, and ask for their advice on how to make it doable. A good lender will partner with you and help guide you. Also, make sure you do your diligence on the analysis side to make sure you are getting good deals at the right side. Know your ARV and rehab numbers! Good luck.
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  • Rolanda Eldridge
    Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes
    9y

    The only way you will know if it's a Great plan is to take Action.  RE is risky business, but with a Plan you can minimize risk.  You will make mistakes, but keep it moving...GL!

    3Reply
  • Kyle McCorkel
    Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
    9y
    Gwen Fyfe it might sound crazy to most people but probably not to most people on BP! I think the big picture of your plan is definitely doable, although I would say financing might be your biggest obstacle. Meet with multiple lenders ahead of time, tell them your plan, and ask for their advice on how to make it doable. A good lender will partner with you and help guide you. Also, make sure you do your diligence on the analysis side to make sure you are getting good deals at the right side. Know your ARV and rehab numbers! Good luck.
    7Reply
  • David TerbeekPro Member
    Property Manager · Cleveland, OH · Member since 2016 · 260 posts · 162 votes
    9y

    I know several local investors that started out their careers by buying, renovating then selling their personal residences every 12-24 months for their first 3,4-5 deals before they really started to get into real estate.  The biggest issue they had was the spouse grumbling about the living conditions in each of the new houses.  Sweat equity is incredibly powerful.  

    Two things to consider:  1) Make sure you can get that financing or you end up dead in the water.  2)  Most of the inner ring suburbs have a Point of Sale that requires an escrow hold.  The $20-30,000 house might take $25-40,000 to close.  Then you have to pay for the work before they will refund the escrow to you.  I can give you more information if you specify which suburbs, and/or contact the building department.

    216-926-2900
    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @David Terbeek That's really interesting. I don't know much about the Point of Sale stuff, it wouldn't have occurred to me. Is that when a city inspector comes out and says x, y and z need to be fixed before the house can be transferred? Can I ask you for a "explain like I'm five years old" overview? :)

    Right now I'm interested in Bedford, as it's right near work for me. Some googling suggests that maybe they've stopped doing POS.

    I'm not super worried about getting the financing - it's really just a matter of time. If I wait around for another year, I'll be a great candidate for an FHA mortgage. But I didn't want to wait a year!

    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @Kyle McCorkel Thanks, that's solid advice. :)

    I haven't paid any attention at all to rehab costs and ARV up until now. The properties I was looking at all needed just cosmetic work, and I wouldn't be looking to sell them. If I'm going to be buying in cash and rehabbing, though, maybe I can refinance afterwards and pull my money back out?

    Sounds like I need to pick up some kind of book on estimating rehab costs.

    0Reply
  • David TerbeekPro Member
    Property Manager · Cleveland, OH · Member since 2016 · 260 posts · 162 votes
    9y

    @Gwen Fyfe  Sure.  Each city differs slightly but here is the gist.  The inspector says you have violations 1-25, or whatever.  You have to get a contractor to estimate (Cleveland Hts and S Euclid give you the amounts) the repairs.  At closing you pay $25,000 for the property PLUS you put the money for the repairs into escrow.  So if the estimate to repair was $10,000, you would need $35,000 to come to the closing table.  Some cities want you to put 150% of the repairs (15k in this example for Shaker Heights) and some are under 100% (Euclid at 50% or 5,000 in this example) or just signature (Garfield Heights for a limited time).  Once you prove that the repairs are done, ie you paid someone to do them or you bought materials and did them, you can get your money released from escrow.

    Now to Bedford.  They were sued in federal court over this process from someone because it is a violation of their constitutional rights.  Consequently, they have temporarily stopped the process.  HOWEVER, the word on the street is that they have become even more difficult (if that is possible) on their rental inspections should you decide to later rent the property as you plan.

    216-926-2900
    0Reply
  • Ben S.
    Investor · Tampa, FL · Member since 2017 · 122 posts · 87 votes
    9y
    Sounds like a crazy awesome plan! You are single right? If so, definitely take advantage of being able to live very simply and in the midst of a rehab. I would suggest getting a house with the most bedrooms in your area, fix it up, and then rent out the other bedrooms. That will give you immediate income and rental history. You will probably need to do that for 6-12 months before getting a multi family property (though there are always creative alternatives). It can also be really helpful to get an unsecured personal line of credit to pull cash when needed for deals (I have two right now and was able to buy a multi family property quickly because I could pay cash). Start a diary on the forum and keep us all up to date on your progress!
    3Reply
  • Jayson Lesyk
    Moreland Hills, OH · Member since 2016 · 50 posts · 47 votes
    9y

    Someone correct me if I'm wrong but you can only have one FHA loan at a time. That's not to say you couldn't get just as good of terms on conventional financing but you won't have access to more than one 203k loan at a time.

    Bedford did freeze their POS back in May, but I was unaware they were becoming more strict on rental inspections. That could definitely be a deal breaker. Might want to look into that.

    0Reply
  • Geoffrey Schnake
    Property Manager · Saint Petersburg, FL · Member since 2016 · 113 posts · 87 votes
    9y

    If you are sure you have the energy and the commitment to follow through,  it's virtually foolproof.  Might have to swerve here and there. If you're sure you have those 2 things,  do it. Do it tomorrow,  Saturday deals are lucky. 

    1Reply
  • Percy N.
    Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
    9y
    Also remember that if the property value appreciates greatly, the first 250k(?) for single people is tax free if it was your primary residence for 2 of the past 5 yrs. So, you could rehab while making it your primary residence for 2 yrs, rent it out for slightly under 3 and sell it and get tax free money. I know you are an accountant, but consult with your CPA
    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @David Terbeek This is so, so helpful, thank you. This is a huge thing I had missed. Are there any rules around the contractor? Could I get a couple guys in, and submit the lowest estimate? Would I then be obliged to have the guy who did that estimate do the repairs?

    What is "just signature"? In Garfield Heights they want you to just confirm you'll do it? Garfield Heights is another area I had looked at for this. (Although I work in Solon, so it's not as attractive to me as Bedford!)

    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @Percy N. One of the benefits of working with a couple CPAs is definitely free tax advice! 

    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @Jayson Lesyk Yeah, that's true, now that I think of it. You can have more than one at a time, but only for reasons like growth in your family or having to move. Hmmm, have to figure that part out.

    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @Ben S. Awesome man, super encouraging. I'm not single, but none of the men in my life have convinced me to move in yet... real estate seems like another great way to put off big relationship questions, ha! ("I'll order pizza and we can wash some walls" sounds like a nice date night, right?)

    Seriously, yes, I think that makes a lot of sense. Roommates are great. Definitely going to start a progress diary.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Get pre-qualified, do all the prep work, and if everything lines up then start looking for a great deal ... if you find one, pull the trigger ... if you don't, don't. Do NOT let the fact that your lease ends in June pressure you into buying a place. If you have not found a great deal as June approaches, then explain to your landlord that you would like to go month-to-month ... you can explain that you are looking to purchase a home if you like, though this would not be necessary. If you have been a good tenant and the landlord has half a brain then they will extend you on a month-to-month basis. The best time to buy is when you find a great deal that you can afford, and the worst time to buy is any other time besides that.

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Gwen Fyfe:

    @Jayson Lesyk Yeah, that's true, now that I think of it. You can have more than one at a time, but only for reasons like growth in your family or having to move. Hmmm, have to figure that part out.

    Your opening "thinking" was only for ONE FHA-approved loan anyway, right? (Which you hinted could be for your SECOND (and subsequent) (up to) 4-plex purchases, which you would move into each time, as required by FHA. Tip 1: Buy "forced" equity (ie. bargains) each time. After a few of these added-equity buys/moves, you'd be able to skip FHA altogether for investing! All the best...

    0Reply
  • Korie Apgar
    Real Estate Investor · Coopersburg, PA · Member since 2017 · 120 posts · 61 votes
    9y

    @Gwen Fyfe

    Hi,

    You must know your ARV and what you should pay for the property. If you buy low but then the rehab brings you up to ARV you didn't buy at a discount, and that's crucial. Watch the BRRRR webinar. You've got the right thinking but buying low enough is crucial or you'll have a major setback in scaling your portfolio. Enjoy the learning curve as I can see you are passionate about investing.

    0Reply
  • Ellie Hanson
    Investor · Portland, OR · Member since 2015 · 119 posts · 78 votes
    9y
    Any worry about being chucked out of the country due to immigration crack downs? Best to be careful of changing tides.
    0Reply
  • David TerbeekPro Member
    Property Manager · Cleveland, OH · Member since 2016 · 260 posts · 162 votes
    9y

    @Gwen Fyfe  Yes, you may have multiple contractors bid and use the lowest for the POS estimates.  The only requirement is the contractor to be registered in the city in which they are providing the estimate.  You do not necessarily need to use the contractor that provided the bid.  Garfield Hts just wants you to sign an affidavit that you will complete the repairs without actually holding any money.

    216-926-2900
    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    9y
    Originally posted by @Gwen Fyfe:

    I moved to Cleveland about 10 months ago. Previously, I lived in the UK for 9 years. So in the USA, I have very little credit history and very little employment history - but what I do have for both of these is good.

    I want to get into multi-family investing through an FHA loan. I might squeak past the qualification requirements and I have a mortgage broker who wants to help me out, but realistically, it would be better to apply in 6-8 months when I'll be able to demonstrate a year of stable employment. (I have a good job with a small accounting firm here.) In the meantime, I'm renting an apartment, and my lease is up in June.

    There are a couple of blue collar suburbs of Cleveland that I've been exploring and would be perfectly happy to live in. In some of these areas single family homes come onto the market every couple weeks beat up but livable for 20-30k... which I could scrape together in cash right now, if I needed to.

    So what I'm thinking is...

    -Scrape together as much cash as I can and just buy a fixer-upper SFH outright before June. Cut both my commute and housing expenses by two thirds.

    -Move in (with a sleeping bag and hotplate if necessary!), start fixing it up, and save up another $8,000-$10,000 for an FHA down payment and closing expenses - something I've already done, and it'll be even easier once I'm not paying rent.

    -In another 6 months or so, buy a nearby multi-family home with an FHA mortgage. Move into that and rent out the newly fixed-up SFH.

    -Live in the cruddiest unit while I do more live-in fixing up, rent out the other units ASAP. Suddenly, 3-4 doors cash flowing within a year.

    This seems to make so much sense that I think there must be something obvious I'm missing. What are the downsides? What are the risks? What should I do to protect myself? Am I being stupid? (If it's stupid and it works, it's not stupid, right?)

    If right now you would just squeak by to get the FHA loan I think stretching to buy a 30k home in cash will probably disqualify you from qualifing for the loan.

    Beat to hell 30K SFR are here now and will still be here next year, the year after next, and the year after that year etc....Save up, get the FHA loan 1st then go from there.

    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @Ellie Hanson Oh man, I had to laugh. Nope, no worries on getting chucked out - I'm American, born and bred. My problem was that tides are changing everywhere and I got chucked out of the UK! Scary times.

    @David Terbeek Fantastic. It sounds like it's really lucky that Bedford and Garfield Heights were the two areas I was really looking at, in terms of the POS stuff!

    @James Wise Interesting, why would that disqualify me? I don't think I've seen anything about that.

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    9y
    Originally posted by @Gwen Fyfe:

    @Ellie Hanson Oh man, I had to laugh. Nope, no worries on getting chucked out - I'm American, born and bred. My problem was that tides are changing everywhere and I got chucked out of the UK! Scary times.

    @David Terbeek Fantastic. It sounds like it's really lucky that Bedford and Garfield Heights were the two areas I was really looking at, in terms of the POS stuff!

    @James Wise Interesting, why would that disqualify me? I don't think I've seen anything about that.

     Bank wants to see money in your accounts and low debt. If you don't think you will qualify now or it will be a stretch at best spending all of your money and or taking out more debt is not the solution.

    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @James Wise Oh, I see! No, the reason I don't think I would qualify right now is because I've just moved back to the country. All my credit and employment history is in the UK, and while some lenders are willing to work with me on that, pretty much everyone has said that it would be better to apply when I have a solid year (or more) of credit reporting and employment in the USA.

    I'd need to stretch a little to get together 20-30k within the next few months, but in general getting cash together and staying out of debt isn't a problem for me. My savings rate would go even higher if I was just paying the taxes and bills on a little house instead of handing $750 to someone else every month.

    0Reply
  • Todd Douglas
    Realtor · Detroit, MI · Member since 2017 · 184 posts · 33 votes
    9y

    You have the right mind when it comes to no wasting money renting. @Gwen Fyfe, Maybe we could chat and figure out some things in the areas that you research

    0Reply
  • Gwen Fyfe
    OP
    Rental Property Investor · Cleveland, OH · Member since 2016 · 227 posts · 287 votes
    9y

    @David Faulkner I'm currently leasing in a large-ish complex (maybe 100 units?) owned by a local bank. In my lease it sets out that after the first year, I can go month to month if I notify them, but they'll put the rent up to 10% above market! So, I'm going to try and avoid using that, but it's definitely an option and one I'd take over rushing into a house purchase.

    0Reply
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