Starting in this economic climate

[Dan T.]

Hello all!

I posted this in the member introduction forum but didn't get much traction as it doesn't seem too lively over there.

Long time reader and real-estate obsessor; first-time poster. I'm 30 years old living in Orange County, CA. The wife and i started early and purchased our condo 5 years ago, did very well on it and rolled it into a house 3 years ago (2 years and 2 days later to avoid capital gains). Well, this house has appreciated as well and we're now sitting like all others in SoCal in a 1974 Build 1,250sqft house on a 4,000sqft lot between a train track and river trail in an amazing zip code/school district that's valued at $700,000 of which about $360K is equity. After turning 30 and having our first daughter, I flipped my mental state 180° and began obsessing over my health and future.

I've been scouring these forums and listening to the Bigger Pockets podcast. My interests:

• Turn-key, out-of-state investing: I've followed the Morris invest disasters, been following Memphis Invest and Norada, namely.
• House Hacking locally: Being in a prominent SoCal zip code, the only way I am getting in here is to sell my house and use the equity to finance a multi-unit and live in it. Struggling to get the wife on board as no-one likes a lifestyle change.
• Wholesale: I would love to link up with these wholesalers everyone's chatting about on here to be on blast lists for available deals in areas in which I am interested - Namely to start my "BRRRR" portfolio.

As with most investors, I am all over the map and scared to make the first move as everyone wants a sure thing. Well, our situation facilitates a few potential investment opportunities. Should we decide to keep our house and not invest locally, we have about $100,000 in cash I would be willing to use for real estate investment. Now the hard part, figuring out if i want to use that to snipe a great deal on our first property, attempt multiple properties at once, or save more and attempt to stay local in SoCal. I looked into renting our house and using the 100K as a down on a new house but it makes no financial sense. House being worth $700,000 would rent for $3,200/month (est.) and all in expenses are $2,300/month. For the $900 we’d gross, it doesn’t make sense to tie up the $360K in equity.

Frankly, this economy has me questioning if I want to wait for the next downturn to invest as interest rates are nearing 5% and property values are beginning to stagnate as we approach our 10th year of economic growth. Perhaps it's because I am searching the forums more than browsing but the current state of the housing market and concerns purchasing because of it don’t seem to be discussed. In my area, we’re seeing massively inflated housing prices due to domestic and foreign cash buyers and creeping interest rates but I don’t know any other market.

I need to make sure our first move is a good one and have a lot to learn. Thanks to all who contribute to the site and I look forward to chatting with you all now that I’ve entered the posting world.

[Cody L.]

What *I'D* do (not suggesting it's what you do) in 5 steps:

1. Refi the $700k house.  YOu should be able to get a ~$560k loan.  if you said it's worth $700k and you have $360k equity I assume you have a $340k loan..  So that's $220k right there.   So now you have that and your $100k to play with.
   
2. In an area with good cash flow and strong urban core (I like Houston, but whatever), you can easily buy something that's in the $50k/door range that rents for ~$750/month (used to be $30k/door for $700/month so the ratios have gotten worse).
   
3. With your $320k you could go close to $1.3m in price (which is 80% LTV. You'll get prorated rent, deposit, taxes. I used to buy more towards end of the year when I had no $ so I'd get more prorated prop tax. And start of month for more prorated rent off closing $. What happens come Jan when tax are do? Hell if I know, that's a "Future Cody" problem as I use to say.
   
4. Realistically I'd look for places around $1m - 1.1m.  That way you have buffer to buy something that's value add.  It shouldn't be hard to find something for ~$1.1m, (~$220k down) that you put about $100k into.  Clean it up, push up rents a bit, fix some low hanging operational fruit, get it appraised again in 6 months.  Should be $1.5m.  New loan will be $1.2m.  Giving you 100% of your down payment back (you'll still be in it for your $100k improvements.  But now you're mid 90% leveraged.  Good job.
   
5. Enjoy that cash flow.  Rinse wash repeat. 

Is this easier said then done?   YES!  But that's why not everyone is doing it.  If it were simple, everyone would do it, thus erasing the gains, thus driving people away from doing it (which would then increase the returns again, till people piled back in.  This is a solid economic law)