Starting out questions

[Cody Hall]

My names Cody, I'm 20 years old and I plan on getting into real estate. I'd like to start with a duplex on an FHA loan. I will live in one side since it's an FHA. I've been snooping on this website for years and now I'm finally about to get started (excited!). All of the wealthy people I know started in real estate. I'm in school right now and frankly it's not doing too much for me. It's more of a bill than an education. I currently have 5K in the bank. I have a truck payment of $223 a month. The truck is valued at $24,000 and my balance is $12,000. I just put the truck up for sale. So shortly I'll have about 16-17K in the bank for a house.

Since it's FHA I only need 3.5-5% down. I have to live in the house for 2 years. And the nice thing about it being a duplex is I can use projected rent as income in buying the house. Ie, if one side would rent for 600 then I could apply 75% of that (450) to my gross income. Since they only use your fulltime 40 hours a week gross income that really helps. None of my overtime or 2nd job helps. My gross is 1600 a month. But I am headed to a new fulltime job in the neck week or so. It won't be a huge jump. But my gross will hit 2000 a month. Plus I get full dental and medical as well as a work truck. Raises come a lot quicker at this company as well. Although switching to a new job will slow me down because I have to wait for 2 paychecks to verify income, I feel the raise is worth it.

My credit is about 710-715. I’ve talked with 4 or 5 lenders. The most recent said that with 17K in the bank and with my credit getting approved for 160,000 duplex shouldn’t be a problem at all. All of my work experience is in construction. I work 50 hours a week doing construction and an additional 20 hours selling guns and working on archery stuff. I only plan on using about 10-12K maximum and keeping the rest as an emergency fund.

The lender said I would get a 3.75% interest rate on 30 years.

I don’t understand the ratios and such that you guys are using. There are about 3 properties I’m interested in.

The first one is http://www.windermeretricities.com/property/10983189/1352_S_Washington_St._Kennewick_WA_99337

They’re asking 115,000. The neighborhood is okay. I saw one side of it for rent on craigslist at 595 a month. If I put 5% down (5750) with a 3.75% interest rate on a 30 year note my payments should be about 672 a month. I put 1000 in property taxes and 1000 in insurance per year. I know that’s right in the ball park for property taxes, but I am unsure about the insurance and how it’s calculated. Can anybody help me here?

I could rent one side at 595 while I renovate my side. My Dad owns a multi-million dollar construction company. So a big perk will be getting deals from him on materials and equipment. And no, I don’t work for him. I plan on renovating Side A while renting out Side B. After Side A is renovated I’ll switch and renovate Side B. I have to stay in the place for 2 years. So I figure a year per side. A lot of sweat equity should equate to higher rents and a higher value.

The 2nd one is a triplex
http://www.windermeretricities.com/property/14508317/208_S_DAWES_Kennewick_WA_99336

With 5% down (8000) and at 3.75% with 1000 for insurance and 1000 for property taxes my payments will be 870 a month. This triplex has two 2bd/1bath units and one 1bd/1bath. The two bigger units rent at about 600 a piece, and the smaller unit is closer to 450. Instantly I can see I have a lot more cash coming in from a triplex than a duplex. The house is in good shape it seems. It’s in an awesome location right across from a school. I feel like it’s a very safe neighborhood and in a good part of town. It’s been on the market about 2 months.

The 3rd one is much larger than all the others
http://www.windermeretricities.com/property/14223762/1103/1105_Marshall_Richland_WA_99352

Big floor plans in a central location. These rent for about 800 a month. With 5% down my payments would be 912 a month. Negative cash flow just like my first duplex. Should I be okay with a negative cash flow for the first two years? After two years of owning it I plan on jumping into another duplex/triplex and renting out all of my original purchase. Should I even put 5% down? Or should I go as low as possible with 3.75%? Then again should I throw as much money as I can at my down payment (6-10%)?

When I plan on renovating whatever I buy I will be doing a full-run through. Kitchens, bathrooms, fixtures, appliances, etc. Is this the best method on a duplex? I’ve heard a lot of horror stories of landlords just patching problems. Do you typically try and renovate the house to be “idiot proof” somewhat? Rounded corners, easy to clean laminate and commercial hardwood. Neutral colors, simple landscaping.

I plan on paying for lawn upkeep, gutter cleaning and stuff like that.

I really appreciate any help. I can see I didn’t ask many questions. Unfortunately there isn’t any RE groups where I live. The closest one is an hour and a half away. I’m really looking for experienced opinions on what the smartest option is. I think real estate is a lucrative business to get into. If you work hard enough the possibilities are endless. Where I live is expanding and developing at a rapid rate. Hanford nuclear facility is here. There are tons of renters looking. Just looking to get my foot in the door and start as strong as I can. Thank you!

Cody

[James H.]

One drawback to acquiring a property that needs extensive renovation (more than carpet and paint) is that the property may not qualify for conventional financing. As far as outsourcing the renovation, yes, I think you are too busy to do it yourself unless you put something down that is on your plate, but that's just me. I could easily be wrong about what you can do - but you do have to sleep sometime.

I don't think I could do all you are doing and add a rehab to it. I work about 50 hours a week as an engineer and am working on my master's part time and was able to rehab a house over the second half of last summer when I didn't have any classes. It took up every weekend, a couple of vacation days and a handful of evenings for about 2.5 months. I did hire out the HVAC and the painting, though. To me, painting is more work than gutting and replacing a bathroom - but I just don't really like painting.

I don't know what your market is like, but here I can find a better deal on a SFH than a duplex. So, two SFH's costing, say, 60K each will cash flow much better than a duplex in a comparable neighborhood costing 120K. This is not necessarily the same for all markets, though, I suppose.

You seem like a guy who needs space for tools and other stuff, so remember to only look for properties with a garage if this is so. Another thing to lean toward would be 3/2 or higher type properties. What sets a house or even a duplex apart from an apartment is that it has a yard. The main people who are interested in yards tend to be families and pet owners (and scumbag tenants who thing your screening processes are less rigorous than apartments). Often families with pets. So if you have a 2/1, you make it very difficult to target that demographic and find yourself in competition with apartments to some extent. It's pretty hard to beat rental rates that apartments offer around here. Plus resale is much more difficult with less than 3 bedrooms and 2 bathrooms. This advice is coming from a guy who owns two 2/1's! So although I am advising to stick with 3/2's, my experience has shown that you can still make it work with 2/1's - maybe with just a little more work.

But for the reasons stated above, if you do a flip, I would definitely stay with a 3/2 or higher. There are options for hard money lending that can work for a flip, and even long term hold through refinancing. I am not expert on this subject but understand how it works. I recommend doing a search on this forum for "hard money lending/loans" to get an idea of how you could get into properties that need rehabs even if they don't qualify for conventional financing - yet.

Then there comes the actual land lording. That is a huge part of owning rental units. I recommend searching up threads with comments from "Mike Oh" here on BP. He does not appear to be very active on this site any more, but he does have a book (which I bought) and his real name is Michael Rossi. The title of the book is "1 Minute to Real Estate Riches" or something like that. Ultimately everything in his book, he has shared on BP for free, but it takes time to find it all. I do not regret buying the book.

Also, no criticism here. Just sharing my limited experience with you. A lot of real estate is just keeping it "real". The good thing about this site is that when you put your stuff out there, you will get unfettered advice. And, by the way, I don't think going for a duplex is the wrong direction. I am contemplating getting one myself, just need to price to be right. The main thing I dislike about duplexes, is that they are almost always on a street with nothing but duplexes. So if you live in it, you will be surrounded by ALL renters. I love all my homeowner neighbors and absolutely hate the renters near my house. I would hate to have them on all sides. I attribute a lot of the issues to the landlord who is a slumlord as I would love to live next door to people like the tenants who rent my rental. I will sell my properties someday, and I don't want to be limited to other investors or people like you (or me) for my buyer's pool. Therefore, SFH have an advantage for resale also.

I can't stress enough that everyone has their own path and as long as you come out even or ahead in the long run, there is no wrong way. I like the freedom to do it my way. There are plenty on BP that would not do as I do and far more successful in real estate than I may ever be. Part of that is because I am not looking to quit my day job. I am just looking to build wealth on the side. I think if you apply the 50% rule, and a grain of salt, you will be able to best determine what type of property has the most profitability in your area for long term hold.

Also, as @Michael Power said, take your time. Real estate is a get rich slowly business for 98% of us out there.