Wanting first cash-flow property; should I go for a 4-unit or duplex?

Question

I'm wanting to "break into investing" by getting an investment property that I can somehow put under contract, and collect the cash flow. I have people who can do various maintenance needs if things need to be fixed.

How would I go about doing this, and what would I need to have/do?

Any advice?

Jason A. · Answer

I agree with Ken and Jon. Rental units will not put money in your pocket each month. In fact ,you will be just as likely to lose money based on your lack of property management experience. Once you close on a property you will have to find QUALITY tenants. This could take weeks or months. I've placed what I thought were good tenants in my rentals only to have them make a mess and leave me with utility bills. So if you purchase a property could you afford to pay the mortgage until you find good tenants?? Could you afford to pay $1800 if a furnace needs replaced?? Could you afford to fix-up a unit that tenants trashed after not paying you for a month or two?? These are all very real scenarios. Many people do not relize the risk involved and buy properties because the numbers say cashflow. These investors often turn into very motivated sellers, or worse.

Jon Holdman · Answer

To be honest, no. Generating a hundred or two per month from a rental unit is doing well. I doubt $1000-$2000 a year is what you're looking for. Plus, you will need some cash to get into this business. While its not impossible to buy something with minimal cash out of pocket, you still need money to cover the big expenses that crop up when you own rentals. A sudden, $1000 expense is, unfortunately, not uncommon with rentals. Ranae, I can tell you have enthusiasm for real estate, but what you really need is just a job. Unemployment in Milwaukee is consistent with the national levels. I thought you were getting a job at the start of the month with an agency? Even that is shaky. Almost every aspect of real estate involves some form of commissioned sales. You only get paid when deals close. You just need some job that has a steady paycheck. There's nothing you can get? Not McDonalds or something?

Harry M. · Answer

Some really good advice in this thread. I'm a newbie myself, though not a complete newbie. I have two properties, a duplex and a SFH - so three units, and I've been doing it for about 18 months. What I've found so far - and admittedly it's a small sample size - is that there is usually some additional investment needed after buying the property in order to get it up and running. It could be deferred maintenance, filling vacancies, etc, or things that just happen to break and need to be addressed in the early months before the earnings have had a chance to accumulate and pay for the repairs by themselves. It is possible to buy a property that is already occupied, and just take over receiving the rent. From the experience I've had so far, I think you'd be pretty lucky for it to work out like that. I had existing tenants for both of my properties. For the duplex, the tenant on one side has indeed been a keeper. On the other side, they were, unbeknownst to me, in the process of buying their own place at the time I closed. They turned their notice in shortly afterwards. So I had to fill that vacancy and take care of a number of minor repairs right away. The tenant in the SFH was having financial difficulties, and after giving her several chances (probably too many to be honest), we eventually had to file for eviction. Then there were repairs, followed by a lengthy vacancy. So of the three units, I'm 1 of 3 so far in being able to "just take over receiving the rents". I'm sure it's possible, but now I view being able to do that as an unexpected bonus. I definitely wouldn't plan for it.

Kenneth LaVoie · Answer

I would say that 90% of your success in being a landlord is how you are as a property manager. Which means you will make many, many learning mistakes managing your first property(or properties). Which then means whatever cash flow you THOUGHT you were going to get may not materialize for a year or more. So instead of being out of work, now you're out of work and losing money.... I agree with John that you may want to start at another level (employment, savings, etc.) Jumping into RE is NOT something to be done as an alternative to work unless you have enough liquid funds to put 25-100% down on a number of properties. It is a wonderful thing and I'm so glad I jumped in, but I made so many mistakes (still making some after 3 years!) that if I hadn't had a substantial sum backing me up, I would've thrown in the towel at the end of the first year. Keep going, and DONT give up...just don't jump in simply because finding a job is difficult.

Nathan Emmert · Answer

As a licensed agent, aren't you able to do Property Management now? Why not check Craig's List for people renting out their properties themselves. Contact them and see if they might be interested in having you take over the Management responsibility. Understand that a big company will charge them 10% plus 1/2 a month's rent to fill a vacancy. You can opt to undercut those prices, maybe simply do an 8% fee. That will get you in the game... and put a little cash in your pocket. It will also get you networking with people who know investments, handymen, etc etc etc.

Renae Bliss · Answer

Offhand, I wouldn't know the first thing about Property Mgmt. Not that I"m not willing to LEARN... I've even applied to a couple Property Mgmt companies!

Renae Bliss · Answer

Unfortunately, because of the high unemployment rate in Milwaukee, finding a job for "temporary income" has been unsuccessful after over a year. I'm trying hard NOT to get desperate, but needing steady income... I thought about various ways to "break into" investing, and this was one of them!?

Jon Holdman · Answer

Getting a property under contract is the first step. Then you actually have to buy it. If you have good credit (660+), good income (DTI with the new loan < 50% or so), and cash for a down payment and for the required reserves, getting a bank loan is straightforward. Some lenders will let you consider the rental income, too. Private lenders require you find someone with the cash to lend you to buy the property. They often require a higher interest rate and shorter term. I'd be stunned if you could find a private lender who could match the terms currently available from banks. But a private lender might be more flexible on down payments and qualifications. Based on your other posts, I'm surprised you've decided to try to buy a rental property. The cash generated is usually not very much. And your lack of transportation will make both finding and managing this property a real challenge.

Renae Bliss · Answer

I'm asking in general... which one would be a better "attempt" for a newbie investor to make?

Chris Masons · Answer

hi renae, do you have a specific property in mind? do you have money to fund down payment and closong costs? Will you be getting a traditional bank loan or private money? If you can post more info on the property I am sure people van run a simple analysis and see if the numbers make sense. thx, chris