Help establish a newbie's strategy out of the gate? (100k to start with)

[Thomas Mc]

Hello all,

This is my first post on biggerpockets, nice to (e)meet you all! I'm excited to have finally found an online forum with such a vast collective knowledge. The purpose of this post is to gather as many viewpoints as I can regarding 2 possible strategies that I am considering implementing in my initial REI strategy. I appreciate any and all input you may have.

A bit of backstory; I'm a 29 year old design consultant in Los Angeles who has been very much into commodities and equities trading for the last 5 years. I have been successful in this and have wanted to diversify my portfolio to include REI, with a goal of moving a significant portion (>50%) of my portfolio into REI over the next 5 years. The main reason for this is because I don't think the current stock/bond/sovereign debt markets are sustainable for much longer and real estate has deflated just enough for me to become more comfortable with it. Although this will be my first rental property purchase, I have read voraciously about REI for the last 3 years. In some ways, I feel as if I've over-studied this industry on paper and have not engaged in enough "actual" situations. So, my goal for the next 12 months (hopefully by the time I'm 30) is to have my first rental property closed.

I have an odd advantage that a friend is just starting out as a real estate broker, so as she is getting started in her career, she is acting as somewhat of a birddog for me. She'll send me about 3 properties a week that look to have potential for free, which is a great advantage.

So, here's where I need some advice... I am looking to start with purchasing at least one duplex, triplex, or SFR in West Los Angeles near where I currently live. I figure that having a low-unit-count property that is close to home will make learning more easy, especially since I have a full-time job outside of RE. I have roughly $100k worth of liquid assets that I can convert to cash for these purposes. What I am undecided on is whether to sink this $100k into one property or whether to distribute the $100k into two properties (i.e. $50k into each).

In West L.A., these types of properties are typcially in the $400-550k range and may not turn a rental profit if I put much less than $100k down at the start (unless I find a killer deal or magic foreclosure or something). My initial hunch is to go this route so that I can focus on one property only, but I know that I'd be putting my eggs into one basket so to speak.

The other option is to look outside of west-LA and find cheaper properties inland. This would be difficult since I would be further from them, but would any of you recommend one situation over the other? I wouldn't be opposed to bringing in investors to help with the $ side of things, but I don't have any experience in that side of things yet. I'd obviously get more leverage this way, but I'm not sure that I'm comfortable with this type of situation on my first property.

If anyone can categorically recommend one over the other, can you please provide reasons why? Or, simply describing your experiences with both would be very helpful to a newbie. Thanks for all your help!

-T

[Jon Holdman]

What are your goals for owning rental real estate? Ultimately, there is only one goal - make money - but there are a number of ways to get there.

If you're looking for cash flow right out of the gate, you'll have to buy properties that are priced well vs. the rent you can get. You have little control over rents. The market sets that. You have some control over what you pay, though many areas, as you've found, are priced so high you will have to put money into the property rather than take it out.

You would do well to spend some time reading the Rental Property forum, and to understand the "50% rule" that says expenses plus vacancy plus capital will run 50% of gross scheduled rents. Now, if you manage them your self (for free), your ratio will be lower.

Don't think putting in cash improves the deal. Putting in cash, or paying all cash, improves the cash flow, but that extra is from your cash, not from the property. Compute your "cash on cash" return (total cash flow per year / cash invested) and make sure that's 1) high enough to meet your goals, and 2) higher than alternative investments.

If your goal is long term appreciation, buying in an area with better appreciation prospects may be a better approach.

Something to consider is that multi-units have a much smaller pool of buyers than SFRs. If you decide you don't like the landlord business, its harder to dump a duplex than two SFRs. Around here, it seems small multis tend to be higher priced relative to SFRs. A friend just sold his one and only duplex saying it was a pain because the tenants were always complaining about each other.

I do realize that buying an OO multi has advantages for financing. However, you're mixing your personal living situation with your investments and that may result in compromises on both sides. IMHO, a residence you live in is nothing but an expensive doo-dad, same as a car or boat. Maybe it appreciate and is worth a lot in the future, but once you realistically include all the costs (interest, taxes, insurance and maintenantce, just for starters), residences are rarely good investments. If you realistically do the math, you'll often find that living in the cheapest hovel you can stand and investing everything else will put more cash in your pocket 30 years from now. That said, many of us choose better living arrangements than "a hovel". Choose what you like and what you can afford. Then choose investments that maximize the return toward your goal.

Also be very cautious of publicly saying you have $100K to invest. You'll find a long line of people who will help you invest that, and the returns may be less than you desire. Learn any business you invest in inside and out before putting down anything.