I currently have 50-60k to invest in my first rental property. There are many single family homes and condos for sale in my area listed anywhere from 40-70k. Here is where the question arises. I was discharged from a bankruptcy (chapter 7) over 2 years ago and have to wait the full 4 years before applying for a conventional loan. Should I be patient and wait another 21 months to get a mortgage or jump right in with cash and go for it. Currently very interested in a 3bed 2bth colonial with a huge lot and 2 car garage for 50k. Your opinions, comments and advice are greatly appreciated.
Just to make sure I understand the question...
You have cash now in hand collecting little to no return (I'm assuming)...
And you're asking if you should invest it now to get some return understanding that this return will be less than if you could fully leverage it...??
So basically you're deciding between no return and a less than optimal return? That's easy, something is better than nothing!
What's the opportunity cost of spending the money? If it's less than the return you get on that $50k property, pull the trigger.
In 2 years when the Bankruptcy is fully aged, you can look to finance that home to pull some cash out of it to achieve the leverage you desire. You'll have 2 years worth of landlord experience and income on your tax returns which will help. On the flip side your risk is that the $50k home will only be worth $30k in 2 years (or some lesser value) which would reduce the amount you could pull out and leverage.
One last thing to remember, getting financing (as I mentioned above in 2 years) on Condos can be challenging due to occupancy restrictions and HOA issues. That is one of the reasons condos are often so cheap, they are at times only available to cash buyers. Just an FYI.
Just to make sure I understand the question...
You have cash now in hand collecting little to no return (I'm assuming)...
And you're asking if you should invest it now to get some return understanding that this return will be less than if you could fully leverage it...??
So basically you're deciding between no return and a less than optimal return? That's easy, something is better than nothing!
What's the opportunity cost of spending the money? If it's less than the return you get on that $50k property, pull the trigger.
In 2 years when the Bankruptcy is fully aged, you can look to finance that home to pull some cash out of it to achieve the leverage you desire. You'll have 2 years worth of landlord experience and income on your tax returns which will help. On the flip side your risk is that the $50k home will only be worth $30k in 2 years (or some lesser value) which would reduce the amount you could pull out and leverage.
One last thing to remember, getting financing (as I mentioned above in 2 years) on Condos can be challenging due to occupancy restrictions and HOA issues. That is one of the reasons condos are often so cheap, they are at times only available to cash buyers. Just an FYI.
Many things to consider here. What is your own current living situation? After a bk and two years later with 50-60 available to invest to me means you may have learned how to save some cash which is great to see(no idea what caused the bk and none of our business but great to see you bounced back!). I would say to do something like a slow flip. Buy a decent home in a decent area and do some repairs to it, rent it out for more than a year or even two years. Then you have the income listed on two tax returns and you can then perhaps sell the property through a 1031 exchange(tax free profit) hopefully for more than you purchased it for. You would then use the proceeds from the home sale to put down onto more properties in two years. Just be sure to stay in nice areas and check out the site for the 50% rule and 2% rule and follow those as close as possible.
Best of luck. I think the smartest thing is to take your time and come up with as many options and weigh the pros and cons. You will hear a lot of good ideas but the persona who will treat your money the best is you.
Thanks for the sound advice and encouragement. And yes the cash is sitting there collecting little to no return. I have been surfing RE sites for years even when I didn't have money. RE investing has always been a dream of mine.
Not to sound too over confident but I don't see these prices dropping down too much further on these properties in my area. Some of these deals are 50% of the assessed value. I'm also aware that some of these properties will need some cosmetics and upgrades which will help me decide on what I'm willing to pay.
What should I offer on a home like this with a asking price of 50K?
I guess I already know the answer to my topic question. I just need that extra push from experienced professionals like yourself to guide me in the right direction and give me the confidence that I need.
My uncle used to always say "Scared money don't make money".
With a BK 2 years ago and 50-60k in cash, I'll assume you have taken care of all your personal financial obligations. Nothing worse than buying an investment, only to have it taken away due to a past debt obligation.
The advice given so far is spot on. Buy a home in a good area that has good bones but needs some cosmetics. Update it then rent it out for a couple of years. Stash the profits to help pad your reserves and provide a headstart on the next one. Once the BK is out of the picture, refi to pull out the equity and buy another. Just do your homework and make sure the property will cash flow. There are tons of posts on here that give great guidelines on how to evaluate a property both physically and financially to make sure that you are picking the right property. Read up and enjoy!!
Thanks Jeff. That is exactly what I plan to do with my first property.
Some of my peers tell me that a 1 family home is not a good investment but I see it differently. Someone looking to rent, especially if they have kids would much rather pay $1000/mt for there own home than to share a multi family and deal with other residents and their noise and several cars parked all over the property and pay $850. Not to mention I would only have to deal with one tenant.
What do guys think?
What do guys think?
SFH = less tenant hassles, less cash flow, more potential appreciation
MFH = more hassles, more cash flow, less potential appreciation
If you have a 10 or 15 year exit strategy to cash out completely, SFH may be the way to go. If you expect to live off the passive proceeds of your rentals while enjoying a VERY long retirement, go MFH.
When I started, I was sure I wanted a duplex. But then it was pointed out to me that the buyer's market for duplexes was a lot smaller than that for SFHs. So if I wanted out, it would be a lot harder to sell the duplex. That, and the fact that the duplexes didn't really cash flow any better per dollar (in most cases in my price range and geographic area) pretty much changed my mind.
I think your question is valid considering you have no credit. Let's assume you have 60K. If you want to buy a house with a lot of equity, chances are that it will need a good 10-15K to rehab. Let's assume 15K. Plus, since you have relatively no credit, you will need to have a healthy cash reserve. I would say 5K would be sufficient as long as you add to that with your rents and continue to improve your credit. So that leaves you with forty thousand (my four key is stuck) to find a decent boned house in a decent area that rents for enough to be worth your time. That may or may not be hard to do depending on your area.
That being said, I bought a house for 12K, invested 12K and it makes 550/month gross. Its actually a decent place in an OK neighborhood and works well for me, but there are certainly investors out there that would not touch my house with a ten foot pole.
Good luck!
Joey, I have owned many single-family residences and also many multi family units in my career. Most of the thoughts you have received in this thread I completely agree with. I do have one other thought for you that hasn't been mentioned yet.
I think you can widen your search somewhat. You should also add seller financing into the equation. You might very well find an investor, or an older couple, or a person that simply does not want their property any longer. Any of these owners might be very receptive to an offer from you of $20,000 down and carrying the financing with a short timeframe for a balloon payment being due. This might allow you to purchase multiple properties currently with the intent of refinancing them as soon as you are able to qualify.
Brian – as I've mentioned and posted before on BP my very first property purchased was a duplex. I would recommend that scenario to anyone just starting out in real estate. Rich
I don't think that duplexes are a bad first investment. Just throwing out a thinking point that influenced my choices. I would buy a duplex today if I had the money and the deal was right.
Just out of curiosity, if you had 60K to invest and no credit, what are the odds of finding a duplex that would be as profitable and overall as good or better investment as a SFH? I know there are a lot of variablitities to be considered, but still curious what your thoughts are on that.
Brian,
I think it depends on how you determine a better investment. Any investment will return you different benefits. Are you talking potential appreciation, or are you considering the current cash flow, or are you considering the tax benefits, or are you planning on living in one of these units. All of these would skew the difference in the investment return in my opinion.
My first duplex was purchased when I was approximately 22 years old. It provided me a lot of the benefits that I'm talking about above. I moved into one of the units, I minimize the amount of monthly cost for housing, and I actually sold it for a substantial profit in less than one year.
Being somewhat familiar with the Texas market place owning apartments in Garland and single-family residences in Rio Grande Valley, I would not think it would be extremely difficult to find a duplex in the area that you live in that would provide you a lot of the benefits that I've mentioned in this post. Good luck. Rich
I agree with Rich that widening your search and considering owner financed properties will widen your set of investment opportunities. Make sure you disclose your lack of ability to refinance properties for a while to the sellers though so they understand the risks involved.
If you can't widen your search or are uncomfortable disclosing the risks to the owner finance sellers then I would err on the side of buying. This, of course, assumes that you won't need this liquidity of other items in the near term. Nathan correctly points out that there is an opportunity cost associated with tying this cash up until you are creditworthy to pull it out. You will also have "cash out money" instead of "purchase money," which will be more expensive. I would talk with a knowledgeable broker to make sure your BK won't impact your ability to get cash out money too. It will also be helpful to know what your loan products will likely look like in a few years given your personal circumstances.
This will also give you great information to think about.
I don't think you should wait, but you should approach this with as much education as you can get. I'm not sure condos are the right choice since SFHs typically are more "liquid" and probably a safer bet for a newbie.
BTW, welcome to BP! As you have already seen, there are people here to give you unbiased information for free!
Joey,
Here are a few links from this site about being a landlord:
http://www.biggerpockets.com/forums/52-rental-property-questions-landlording-issues
http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule
Also, in Ct., try to purchase a home with at least 3 b/r.
Stay away form Condos. Not worth the aggravation.
Are you familiar with the reia in Ct?
They meet once a month in Cromwell.
The next meeting is this coming Monday, January 16, 2012
Here is a link: www.ctreia.com
Raymond
Thanks for all the helpful advice. I realized that joining BP is the best and first thing a person wanting to get into this business should do to get on the right track. The responses have been very informative.
I'm currently working with a realtor whom I've known for several years and have done business with her in the past. I'm on her list for daily alerts but they seem to only come about once every few weeks or so .
I plan on being more assertive with my searches and put the idea of condominiums on hold for now. I also don't like the asking prices for these units as I feel they're too high. I also will be looking into owner financing. Even with the past chapter 7 bankruptcy which I am free and clear of all debt owed since 09/01/2010 I've managed to open two credit cards that I keep a zero balance and have a credit score of 663. Hopefully this will help.
Looking forward to the day when I can post my 1st deal.
Make sure you understand the 50% rule and exactly how much the repairs will be. This is very important in your situation.
50%/2% is not a rule. It is just a formula used by SOME members on BP. Others use other methods in their endeavors.... There are other conditions to consider- which MANY have posted out here on BP. They will also be important for you to consider. Rich