Helping a Real Estate Investor Noob

[Alexander Araniba]

Dear BP members,

I found BP because I have been going crazy researching the internet--reading articles, watching videos, etc. I initially started researching more on real estate investing because I've been trying to find a 2nd source of income. The majority of people always said "Invest in real estate!" 

A little about me. I am a clinical database manager (we set up databases for Pharma companies that have their drugs/meds under clinical trials. Then, when the study is over, that data is sent to the FDA for approval). And I am located in CA--SF Bay Area. As many of you may know, the real estate in this area is ridiculous. The average home goes for about $950k or more. Ie my family purchased their home back in 2001 for $350k, then sold it last year for $1.5m. And homes here sell like hot cakes. 

I got married and had a little one about 2 years ago. And instead of renting, my wife and I decided to take the plunge in purchasing a home. We saved up enough, got approved for an FHA loan, and we purchased our first home for $605k. It's a ways from work (1.5hrs each way), but it was the only way we could afford a home. It's been hard because our mortgage is about $4k/mo--not including utilities and other misc. bills. Now, with a new job on the way (more income) and raises, we don't feel it as tight.

Okay, so the whole point of this post is that we've been interested in purchasing property, out of state, and renting it out. I have come to the conclusion that purchasing property in the "sun belt states" is the best way to generate positive cash flow. My eyes have been on TX, possibly the cities within Fort Worth. I see properties ranging from $60k-$200k. I just found out today that there is a difference in loans when it comes to investment properties. The down payment ranges from 15%-20%. The lowest percentage goes for those with 720+ FICO. Right now, I'm in the process of getting there. Transparency, my FICO ranges around 600-640. Which is why we had to apply for an FHA loan. And as some of you may know, the killer on FHA loans is the MIP. If it weren't for that, we'd be paying about $1k less on our monthly mortgage.

I am not sure what I should be saving? But all I can take from my research these past few weeks (and using my experience from our 1st home) is to continue paying off my personal debts to get my FICO up. The other unfortante circumstance of FHA loans is that they don't have an equity line that you can use. You have to find a 3rd party, and to do that, one of the criteria is to have a higher FICO. If that's the case, I'd rather re-finance to a conventional loan, but I'm afraid of the interest rate spiking up (right now we have it at 4%).

Sorry for this long post, but what would be your advice(s) from the pros or people that started in somewhat the same scenario as me? I'd really appreciate your time and advices/opinions. I want to be financially secure and have passive income in the next few years. I want to not worry about not having the money to pay bills, cases of emergencies, or worrying how I will pay for my son's college. Making a 6 figure salary here is like being low on the middle class bracket...

[Arlen Chou]

@Alexander Araniba first of all congrats in taking the first step toward financial independence.  Regarding your strategy, there are a ton of posts about IS vs OOS investing, so I won't go down that road.  Texas looks great to many people, but as a Californian you need to carefully look at the tax consequences of investing in that state.  They have high property taxes compared to our Prop 13 protected base.  On the other hand, we have high state income tax, Texas has none.  What this all means is that you will be taxed high on property taxes in Texas and then you will be taxed high on California state income tax if you invest in Texas.  CA taxes income earned in other states... so remember that fact as you decide on a market.  You might want to spend time looking at states that don't have property taxes or even other parts of our state.  I am not a tax professional so please consult with your own tax person regarding these issues.