A first time Home Investor. How to spend my money.

[Albert Vega]

 Hello folks. As a first time Home Investor in the Houston, TX area I’m looking for a little advice on how to dive into the rental market.  My goal is to buy 3-2-2 or 4-2-2 brick homes in good school districts. I’m thinking those are my best bets for attracting long-term rentals. 

I have $200,000 free to invest. I’ve found a few  homes that fit my criteria that range in price from $160-$199K. These homes are essentially turn key. My question is do I fully pay for one property or do I try to purchase two properties and owe on both? 

I’m getting into the game late in life. I’m 56 and currently debt free. Over the next 10 years I plan on putting an additional $30-50K annually towards buying more properties and paying down their debt. I want to use the rental income to pay for any home debt, repair expenses,  and taxes.  

I don’t plan on using any of the income generated to live on until I retire. I would like the properties to be self sustaining. So with these goals in mind do I buy one or two properties with my $200K? Thanks for your input. It’s appreciated!

[Clayton Mobley]

@Albert Vega if you don't need the income now, as you stated, and you are financially able to take on the inherent risk of financing, my advice is basically always to leverage your capital. 

Buying in cash is a better move for folks who are highly risk averse and want to maximize monthly income above all else. For folks who don't need the income, the best move is typically to leverage the purchase and let tenants pay for 75-80% of your property over time. Since you don't need the income, put all your cash flow toward paying down your loan faster. The more doors you have, the faster this snowball builds.

If it were me, personally, (and assuming you financially in a position to take on risk etc) I would take that $200k and use it as down payments on five props or so. You make your minimum payments every month as usual on props 1-4, but you take allll the net cash flow from all five props and put it towards the loan on #5. Using a ballpark figure for mid-range B-class turnkey props in Birmingham (let's say $270/month in net cash flow), that's an additional $1000+ toward your loan every month! I won't go into the nitty gritty math here, but suffice to say that loan gets paid off far sooner than 30 years. Then #5 is free and clear and your cash flow goes up, you put allll your cash flow toward #4, while maintaining your normal payments on 1-3. #4 gets paid off even faster since the cash flow from #5 is so much higher. You get the picture.

This is a strategy many of our clients use to great success. Of course, the more doors you have, the quicker each loan gets paid off, but even with just a handful, it can be really powerful. You can end up with a portfolio of free and clear tenant-paid properties in 10-15 years or so, instead of paying off one in 30 yrs. Then you can pull out equity, sell and execute a 1031, or just hold them for the rental income. 

Of course, this is predicated on your market and your research. If the properties aren't really turnkey (ie they look good but will need a new HVAC in five years) then the numbers get messier. Same is true if you struggle to keep long-term tenants (TX isn't my market, I'm sure someone else will pipe in with opinions on that). But, assuming you do your due diligence and run your numbers correctly before buying, you could potentially turn your $200k into $1M+ in equity (again, using Birmingham figures here) fairly quickly by plowing your income right back into the properties. 

So the long and short of it is: I would buy more than 2 properties with $200k, provided I could find solid rentals with a strong tenant base that are recently updated (big-ticket items like roof, flooring, HVAC, water heater, etc). In Birmingham, props like that go for $80-130k, with an average of about $100k, so $200k could buy you a decent sized portfolio of B-class rentals. Your market may have different values, so the numbers won't be exactly the same, but the process works regardless.

You've got a lot of opportunity here, good luck!!

Clayton