Here's My Plan - What am I missing?

Question

I'm new to real estate investing and have been reading and listening to podcasts to learn more. I definitely want to get into it, and wanted to share my thoughts and my plan and get some feedback from those with experience.

My financial situation is good (well-funded retirement accounts, no debt except our house which has equity, 529s set up for the kids, emergency fund set up, mutual fund savings). We live in a nice suburb of Cleveland and want to invest locally.

I'm interested in starting on the smaller side - finding either a $100,000 or less condo or townhome in good shape with a good rental margin, or possibly a multi-family unit for $150,000 or less. I have enough for a 20% down payment for these options.

I plan to use a property management firm as I have a full-time job and a family.

I'm aiming to set aside 5% of rent for vacancy, 10% for property management, and another 10% for fixes and capex. I'm also figuring in taxes and insurance.

My goal is to purchase to buy-and-hold, so that I'm receiving a little bit of rental income each month (after all expenses), building some equity in the property over time, and taking advantage of the tax benefits.

What am I missing? What else should I consider? What are the next steps?

Samir Shahani · Answer

Congratulations on making the decision  to get into REI!!  What you are describing sounds like a great start!

I would suggest creating  a  spreadsheet like the one I made below.  Be realistic (or even pessimistic) when filling it in. I'll repeat that. Be pessimistic when determining all of the inputs (price of home, mortgage terms, down  payment,  rental price, etc.).  That way, when it turns out better than expected, you will be delighted!

Compare properties and determine what is the best  for you and your family.

I would  then suggest not taking  too much time in the famous "analysis paralysis", if you found a property that meets your criteria chance are that another investor did too.  Beat him or her to it!

Jump in and keep us informed!

**Hypothetical properties and figures !! **

David Faulkner · Answer

Something to consider is that if you can regularly find properties on the open market for $78,000, that is way below replacement cost and likely means that property values and likely rents as well do NOT keep up with inflation in that market. As you hold the property, you will incur CapEx, which is really nothing more than replacing the property one system at a time at replacement cost, which absolutely will keep up with inflation even if rents and prices do not. Another reason why using 10% rents for CapEx is bogus ... when the roof goes out, home depot and the contractor will not ask you what the place rents for before computing the bill to replace it, and neither should you. I'm not saying this necessarily means you can't make money, but it is something you should absolutely not ignore and want to factor into you financial projections. Cash flow needs to be considered over the lifetime of the investment, not just the first year. Other profit centers (mortgage paydown, appreciation which may be negative in your case, cash flow over the full life, and tax benefits) ... project them all out using long term average historic appreciation rates (CAGR over decades spanning multiple RE cycles, for both rents and prices) for that hood and compute IRR ... this will give you a much more complete and realistic picture of how the investment is most likely to perform.

This is the analytical framework for how to assess the financials ... the important underlying question though is why are prices so depressed and not keeping up with inflation? What is wrong with the market demand and/or supply of housing that is causing this? Are the causes temporary or persistent? What effects (good and bad) will this have on my investment, my tenants, and in turn me and how can I position myself to at least hedge from risks or even profit from this? If I am unable to hedge or profit from it, do I want to invest here or look for a differenttype of local sub market?

James Wise · Answer

Welcome to the site @Ryan Morgan sounds like you have a pretty good grasp on the situation. Buying rental properties is a pretty "simple" business, especially if you are hiring out the PM. Stick with nicer assets and areas that you are comfortable with and you should do fine.

your next steps are to get pre approved with a lender and then start looking at properties with an agent.

Chris T. · Answer

@Ryan Morgan

Search for experienced investors in your area (use the search function) and network with them. And find your local REI meetups as well.

You need to build your team, and this is the best way to find them (realtor, attorney, contractors etc)

Good luck !

Timothy Murphy III · Answer

@Ryan Morgan

It sounds like you've done your homework and have a solid grasp of where the expenses are. Next steps would 1) be narrowing down your focus for areas you want to invest (in a general level, B grade neighborhood, etc. and more specifically, cities or neighborhoods where you want to target deals) and 2) Finding your team (agents, property managers, maintenance and renovation contractors, lawyers / CPAs / etc).

Attending BP meetups or other investor associations meetups is a great way to find these people.

Scott Hamilton · Answer

Great post @Ryan Morgan, I am in a similar stage of learning/prep.....ready to step into it! Best of luck.

Brian Garrett · Answer

Would you be willing to PM me and send me your spreadsheet template?

Daniel O. · Answer

@Ryan Morgan I don't know whether condos and town homes are more often rentals or not. Probably depends on where you are located. You are right that there is more to maintain in a SFR, but they also command higher rents in many areas. As for things like yard work, snow plowing, etc, you can make the tenant responsible for those things in the lease, leaving it up to them whether to mow and shovel or pay someone else to do those things. You can cover the landscaping and long-term capex, you just need to make sure you are building those costs into your model and setting the funds aside to take care of them.

But maybe a town home with a postage stamp for a yard and a small driveway leading to a garage is a good solution? If you buy a newer property that is in good shape, your capex should be pretty limited for the first several years. Why would you pay a condo fee on a place like that? Depending on where you are looking, it is not uncommon to see condo fees that are much higher than the cost of the mortgage. Crazy.

Daniel O. · Answer

@Ryan Morgan Welcome to BP!  I agree with the others here, it sounds like you are in good shape and have a good plan. I suggest you think long and hard before investing in a condo. You have a lot less control over things if you are dealing with a HOA, and condo fees can really cut into your cash flow. If the owner-occupant level dips too low, it can be much harder to sell them than to sell a town home. You will notice that many of the successful investors here are successful because they structure every aspect of investing to give them as much control as possible. Buying a condo takes a lot of that control out of your hands.  Best of luck.

Here's My Plan - What am I missing?

Most Popular Reply