Play it safe and slow or take a risk?

Question

Hi guys,

I'm planning on getting started in real estate investing next year, on track to make my first move in June 2018.  Currently I'm living in a 1900 sq. ft. 3 bedroom 2 bathroom house in a quiet rural neighborhood that I'm paying $650 a month for not including utilities with a $350/year HOA fee.  Rental rates for single family houses with the same specs in my area run between $1000-1500/month and I plan to start out advertising for about $1100/month rent.

The current plan is to save up between $30 and $40k and buy a manufactured home for cash.  This will allow me to rent out the home that I'm currently in, as well as have a property of my own to live in that is completely paid off save for utilities.  I'm also working a 40 hour/week job, so if I manage to get tenants in the house for rent I'll be able to bankroll all of the rental profits along with all of the income I get from my day job, which will speed up the process of buying and renting out properties while minimizing the amount of risk that I am taking on.  Worst case scenario is that I would end up with a vacant house for several months while I'm trying to find someone to rent it; or the market tanks and I won't be able to get my desired rental price met.  In either of those cases I will still be able to cover the mortgage cost with my own paycheck.

My question is, instead of taking this course of action, would I be better off taking the money that I save up and putting it into a second property to rent out?  With all of the talk about the market being at its peak and being primed to fall I'm hesitant to put myself into a situation where I'll be stuck with two house payments and no way of making them with my current income, although with my current plan of action I may end up with more houses than I can pay for anyways if I end up with two or three under my belt instead of just one.  Any thoughts?

Adam Johnson · Answer

Well guys, just a quick update.  Went out to look at some prefab homes to get an idea of how much it would really cost me to set one up to get my master plan rolling.  Turns out it costs way, waaayyyyy more all together to buy and set up one of those things than I initially thought.  So it looks like the money I save up will be going directly into my first investment property after all!  Gonna have to find an awesome investment to use as my first one, I'll probably look into either student housing or some kind of multifamily property out of my area unless I can find a really awesome single family home to pick up close to my primary residence.  Thanks for all of the feedback, looking forward to the journey!

Adam Johnson · Answer

I'll check out some prospects outside of my area; I just listened to the podcast on investing in out of state properties and David Greene has an excellent strategy going for him.  The main concern overall is cash flow; by going the manufactured home route it would allow me to live debt free while still making money from my home rental and day job, if for some reason the house I'm renting out becomes vacant, I can still afford to make the mortgage payment without any difficulty on my end.  If I were to invest in a four plex property out of state while staying in my current home, I would prefer to be making enough to cover both my home mortgage and the mortgage on the four plex, plus be able to profit.  That means that I would need to be clearing $700/month profit PLUS whatever the cost is on the mortgage on the four plex, plus any necessary savings set aside for property management/unexpected maintenance fees etc.

James Blalock · Answer

Adam - if there are no good prospects in your area look outside of your current location. I’m investing in the Cleveland area and live in Virginia. I’d recommend using your money for a down payment vice buying a manufactured home. Take a look around Euclid ( suburb of Cleveland) for opportunities. Amazon is setting up shop there. $40k would be a nice DP for a property in that area.

Thomas S. · Answer

What is the value of the property. Do you have dead equity.

Your HOAs fees are a concern since they can rise plus there is always the threat of special assessments.

You should do the BP assessment to evaluate the potential in your property as a rental.

Adam Johnson · Answer

Thomas, thanks for the response.  The total monthly cost of the mortgage and the HOA is $680, so if I were to rent the property out at $1100 per month I would be clearing $420 a month before setting aside money for maintenance/repairs/vacancy coverage etc.  I've looked around the area that I live in for multifamily properties that I can house hack but Spartanburg doesn't have many if any around.  The closest options are student housing in Clemson that is 1.5 hours away.  I'll look harder in the Greenville area which is closer but the prices in Greenville are ridiculously high; I can stick with it and find a deal somewhere I'm sure.

Thomas S. · Answer

If the property you have is costing you $1000/month between debt repayment and HOA you will be deep into negative cash flow if all you can get is $1100/month in rent. You will need a minimum $1500 (probably more) if you want positive cash flow.

As for buying a manufactured home with cash that is not a good use of money. You need to leverage your money to produce cash flow. Use the 40K as a DP on a multi unit to live in and rent out.