I need advice on my first Real estate investement.

[Michael Ndjondo makadi]

Good afternoon to all investors on here. I need a good advice on my first deals in REI. I live in San Diego, a very expensive market and I am just about to get started to invest in RE. The decision that I made is to invest in Wichita, KS since I know the city and I already have an agent and a friend contractor for possible renovation. I need to decide how to start off. By the end of his year, my wife and I want to buy a house here in SD and will have 120k saved for that by December. I also have some other money that I put aside for REI but it's only around 40K at this moment. we have bee looking on new constructions in Chula Vista and one in particular that has 5-7 BD from which 3 of them are on the third floor. But it has this Melo Roos tax of 1%. I have been wondering what will be the better approach between: 1. Put 20% down on our house here, rent out 3 BD on the third floor and start investing only with 40k in Wichita, KS. 2. Put 10% down, still rent out the third floor and add the remaining in the investiment money. 3. Keep renting and paying 1600$ a month and use the entire dowpayement toward the investement. FYI the rent for the three BD will be arounf 2400$ minimum.

Also I was wondering between flipping and just buying and holding in Wichita, KS. From I have seen so far ROI on rentals in Wichita, KS have been not so great unless you uncover a really great deal. Thus my consideration for flipping. But then again we already pay way too much tax and flipping would only make it worse. As for the flipping, my friend contractor is the one who'll be handling the work. We have been dsicussing the possiblity to form a partnership in which I will bring the $$ and he will provide his time and work on reonvations. That discussion is still open as I am stil not sure how to structure the partenership so I benefit from teh tax perspective.

Your advices will be much appreciated.

[Dan H.]

Originally posted by @Michael Ndjondo makadi:

Thanks for your replies and advices.  @Henri Meli, my goal is long term and I want to build a stream of passive income. The only reason I'm looking for flipping at the moment is that it would add more to my fund that I can use to scale on my rentals faster.  @Dan H., That's a very good point, because every time, I'm ready to pull the trigger on that house, I think about having to share it with strangers. If I can't find better alternatives I can always swallow my concerns and live with it at least for the first 3-5 years. The reason I cannot start investing here is the cost and poor ROI on rentals. @Thomas S. I think about this option, but the only reason about us wanting to buy a house is to rent some BD, hence to reduce our mortgage expenses to rent levels. That way, we are building equity while benefiting from tax reliefs from renting. I can always leverage that equity for future investments.

There are statistics on RE ROI by major cities. I do not know if Wichita is large enough to be on those lists. However, for any duration more than a few years San Diego beats every Midwestern city for RE ROI for any duration. 100% verifiable.

So of your two concerns one is historically inaccurate.  That leaves one concern, the cost or RE. 

I agree it is high but assuming you are house hacking a detached duplex you can qualify with a 5% FHA loan (95% LTV). Versus OOS maybe a 20% investor loan (80% LTV); note my last investor loan was at 75% LTV so required even more capital to purchase than the scenario I present to you. This implies you can purchase a property in San Diego for ~4 times the cost of the OOS property for about the same purchase capital. To put example numbers to these values, if you purchase a $500K owner occupied detached duplex in San Diego at 95% LTV the purchase cost not including closing and purchasing costs (inspections, etc.) is $25K. This same $25k at 80% LV will purchase a $125K property (a fine property in a fine area) in the Midwest (again not including closing costs and purchasing costs).

Now why do you think the property in the Midwest is able to be purchased at $125K?  Do you think it has experienced appreciation significantly faster than inflation?  Do you think it has a historical appreciation like San Diego?  If there has not been significant property appreciation what sort of rent appreciation do you think the Midwest properties have had? 

Historically San Diego is almost a sure thing at producing outstanding ROI. If you purchased via financing 5 years ago, 15 years ago, 20 years ago, 30 years ago, 40 years ago, 50 years ago one of the worst over priced San Diego RE you still would have netted a very good ROI. Again not opinion, you can verify this statement.

Good luck.