$20k saved & 810 Credit Score but I live in LA-what would you do?

Question

Hi everyone! I'm brand new to both the site and the concept of Real Estate Investing, so apologies if this is awkward in any way, but I wanted a little starting out advice for my specific situation, and everyone seems really nice and helpful on the forums, so I thought I'd give it a shot!

* My goals: I'd like to generate some supplemental passive income through investing in real estate rentals in cheaper markets, with the end goal being to assist me in saving to buy a home of my own here in Los Angeles (in the $750k range), and maybe eventually replace my current work.

* My job: I currently work from home running my own online fashion brand (it's an LLC). We grossed $275k last year, I kept around $50k -- I'm definitely not rich, but it's pretty chill and I like what I do.

* My living situation: I live in a 3 bedroom home (I rent) in a very trendy neighborhood in Los Angeles. One bedroom is my home office for the fashion brand, the other is mine, and the third I Air BNB, bringing in between $1000-$1500 of extra income per month, which goes straight into a savings account.

* My budget: I have $10k currently set aside to use towards investing in real estate, and I have another $10k safety net available. I also have an 810 credit score, and my only current debt is around $13k of student loans. I save around $8,800/year from my current income, as well as the roughly $12k per year from my Air BNB room.

* My skills: I am pretty good at online marketing (my company's instagram has around 230,000 followers, my own has 65,000). I'm also pretty skilled at all areas of design (I have my BFA in fashion design, part of the draw of my current home for Air BNB is how it's decorated, and I worked as a graphic designer to pay part of my way through college). I'm also a bit of an overachiever (graduated from high school Valedictorian as a Junior) so I have a go-getter and highly social personality. I'm 2/3 of the way through getting my real estate license just for fun. I am a spreadsheet and math queen (youngest person in my school district to take Calculus in high school). I also grew up pretty poor in a town run by a major gang (shout out Fresno, California), so I have a strong functioning understanding of "rough" sides of town -- I know when a street is run by a gang, or when it's just a bunch of poor but wholesome families trying to get through their day, and how that can change from block to block.

*Here are my starting out questions:

1) If you have great credit, is it better to finance your first rental purchase or pay with cash?

2) Is the $10-$20k I currently have saved enough to get me started, or should I be looking to save more money before diving in, to purchase a higher-priced property?

3) Should my first buy be turn-key ready for renters, or should I be looking into fixer-uppers if I have a knack for design?

4) Are there higher maintenance costs associated with buying the midwest or south than, for example, Arizona due to the damage caused by snow and heavy rainfall/storms?

5) Should I form an LLC just for real estate buys prior to purchasing my first rental?

6) I was originally thinking of purchasing an apartment to rent for my first buy, since I imagine there are lower maintenance fees associated with that than a whole building (even taking into account the HOA fees). Is it better to buy a single apartment, or something like a duplex that is a whole building on its own?

7) Any other advice anyone out there has? I don't know what I don't know at this point.

Account Closed · Answer

@Caleb Heimsoth Caleb, thank you so much for all of the info! This is amazing to get me started, and helps point me in the right direction re: financing, funds, and location; I'll definitely search for some LLC threads, too, to see about that.And lol at the high school stuff. I think sometimes I feel like such a failure in my day-to-day, it's my own little reminder that I'm capable of accomplishing something by someone's standards, but yeah upon reflection definitely more of a "hey buddy" pat on my own back to remind myself maybe I can get SOMETHING going in this real estate world. I appreciate your candor, as well as your feedback and information! Thank you again.

Caleb Heimsoth · Answer

@Madeline Hansen congrats on getting started and finding BP.. I will tell you this site has changed my life since I joined almost 3 years ago. If you’re active and provide helpful comments, it’ll open all sorts of opportunities.Now that aside, my first point of criticism, is I wouldn’t recommend mentioning accomplishments from HS, it’s not really relevant and most people won’t be impressed with that, just my opinion anyways.I’ll take a crack at your questions:1. Great credit only matters if you’re financing, so if you have an 800 plus credit score, you should finance. That being said, interest rates don’t change at all after you’re above a 740-760 score I believe (or somewhere in that range)2. 10-20k is likely enough to get started but to be safe I would recommend saving more. Lots of stuff can and will go wrong. I got hit with a 4K unexpected turnover/rehab about 6 months in. So having reserves is important 3. I started with turnkey, it’s not perfect but it got me started. Having a knack for design is really only useful for flips. With 10-20k the types of rentals you’d be buying, tenants won’t really care much for a super specific interior design. They’ll just want functional and basic. 4. I’ve owned in the Midwest and the south. I prefer the south. Biggest reasons are 1. No snow and 2. No basements. Basements and snow cause a lot of issues. Of course where I invest now we have hurricanes, so it all sorts of boils down to preference. 5. There are a billion threads on if you need a LLC or not. You can search those if you want more information, but in my opinion, no you don’t need an LLC for a while when starting out.6. When you say purchase an apartment are you talking about a condo or something like that? I would advise against this as they tend to be harder to finance, harder to sell, first to get hit by a recession, and HOAs are a nightmare to deal with for landlords (or can be). Some have restrictions on having tenants and so forth7. I read 3-5 books and listened to 200 plus podcasts on BP before I did anything. I recommend a similar level of education. Tag me if you have any other questions

Account Closed · Answer

Account Closed I wouldn't bother investing in real estate. Reinvest in your business. You have the good fortune of being self employed, and if your business model is viable and capable of scaling that 10k reinvesting in marketing, sales, or other growth initiatives will yield you way more than it would investing in RE, unless you start a real estate investing business of some sorts with it.If you're hell bent on investing in RE, I would say don't do it until you've got more cash. 20k puts 20% down on a cheap duplex out of state. Nice, but still not my preferred route as a business owner. When my business was really small (it's still small), 10k invested in intelligent targeted marketing made me almost 500k in less than 6 months.

Caleb Heimsoth · Answer

If you’re a millennial like me and need a pick me up about if you’re “successful” or not just read this: https://www.businessinsider.com/average-american-millennial-net-worth-student-loan-debt-savings-habits-2019-6From what you posted above I am guessing you’re ahead of the curve (again assuming you’re a millennial).

Account Closed · Answer

@Caleb Heimsoth ha, thank you for the reassurance that I’m at least on an okay path here! I think to be a millennial means to vacillate wildly by the minute between feeling fairly competent and utterly lost. At any rate, I’m excited to deep dive more into the forums as I feel my way around here, and hopefully figure out how to be as informed as possible without going into analysis paralysis.

Steven Warner · Answer

Hi MadelineWow!... I don't usually answer the "where do I start" posts but yours is pretty complete and besides you sound like can do person which I applaud! OK, so here I go...1) If you have great credit, is it better to finance your first rental purchase or pay with cash?I would say leverage is always good - I prefer the other people's money position, but there are times when cash is king. Here is an example - I refinanced some of my rentals and along comes a deal for a rental at 66% of the appraised value - my friend who was looking to sell it needed cash and was willing to let it go for $100K but the sale had to be completed in days. So cash is king and we picked it up at the end of last year and now are going to refi it to get our cash back out.. Others may disagree but I still prefer leverage with a fat wallet to back it up... make sense?2) Is the $10-$20k I currently have saved enough to get me started, or should I be looking to save more money before diving in, to purchase a higher-priced property?The answer to this is the age old - "If the numbers make sense- what are you waiting for?" I understand the apprehension but for me if the cash is flowing and all the other factors work- then why would you not? 3) Should my first buy be turn-key ready for renters, or should I be looking into fixer-uppers if I have a knack for design?I personally am not afraid of cosmetic work if the bones of the place are good. Having a knack for design does not replace the work or effort required to gut and rebuild a kitchen. Again, you tell me the numbers and then we can decide which is the best route. - if one exists at all. 4) Are there higher maintenance costs associated with buying the midwest or south than, for example, Arizona due to the damage caused by snow and heavy rainfall/storms? Simply put -yes. I own in AZ and Vegas as well as a some Midwest homes. I have lost a home to a tornado and had a roof torn off due to Katrina, FYI, the insurance for the NV homes is a third of the Gulf homes. I prefer the sunshine states but again, if the numbers are right, I will buy where it makes me the cash$$$. 5) Should I form an LLC just for real estate buys prior to purchasing my first rental?I say no but there again you might consider speaking with an attorney considering you have another business to protect. An LLC in California costs you $800 every year, even if you do not make any money so I am not in favor of it personally. Further, California does not care if the LLC is out of state, the fact that you live here and are benefiting from it is enough for them to tax you the $800 out of the gate. 6) I was originally thinking of purchasing an apartment to rent for my first buy, since I imagine there are lower maintenance fees associated with that than a whole building (even taking into account the HOA fees). Is it better to buy a single apartment, or something like a duplex that is a whole building on its own?Personally I like straight SFRs or the whole apartment building. I am not sure where in LA you are but if you ever go to the valley there are a bunch of duplex set ups, usually a home with an added legal unit. That would be a great start up for someone to get their feet wet. 7) Any other advice anyone out there has? I don't know what I don't know at this point. I would suggest that you look to attend meetings, read this board as well as others and just keep learning. I have been doing this a while and I still learn stuff from others all the time. Good luck to you.. Steve

Junior Soares · Answer

@Madeline Hansen Hi Madeline, I think you're in a great position. If I were starting over again and in your current position. I would try to save a little bit more and go purchase a 4 plex utilizing an FHA loan. Live in one of the units and rent the other 3. This should cover your mortgage and all other home expenses. I'd live in the unit until I've saved enough money to buy another one. Now you're in another 2-4 plex and collecting cash flow from your last unit thats now a rental. Rinse and repeat and before you know it you're a millionaire. Becoming wealthy Is slow and boring. If a deal sounds too good to be true out there its because it is. Theres a reason why no one has purchased it already as most good deals happen off market. You've got a great start with your own online business so with that you're on your way to greatness. Best of luck! Junior

Mark B. · Answer

These perspectives are interesting. About the return with a business vs real estate investing. I remember on the BP podcast with Noah Kagan, he had similar views. Mentioned that he could yield way more by reinvesting in his businesses over real estate investing, so he couldn't justify focusing his time with RE.

Account Closed · Answer

@Mark Boudreaux it's a simple truth. I just so happen to own a real estate business, that sells high cash flow rental properties. Some customers ask me this silly question:"If your properties really can make me a 25% return, why wouldn't you keep all of them?"My answer is simple:"Because I happen to have a sales business. And my marketing dollar reinvested nets me a 1000% return."This doesn't mean everyone should forego investing and start a business lol. High yield rental properties are awesome. It just means that if you want to, and have the ability to invest money into a business that can absorb those funds and produce a high yield on them- then you're often better off doing so.

Ann North · Answer

Account Closed Hello, I sent you a PM! Since we have a gorgeous Turnkey property we are either going to be exiting or renting out up near Cal Arts. (5 bedroom 4 bath with a main level 2nd master full bath or home office) in a gated community with a pool. Anyway, I wanted to touch on your question:3) Should my first buy be turn-key ready for renters, or should I be looking into fixer-uppers if I have a knack for design?I think in your case it's much better to get something turn-key because a knack for design doesn't translate to "fixer-upper". I was a licensed RE Agent for my family's new home business - we built custom homes. Our home in California is a newly built townhome (but it's large, almost 2600 square feet). The skillset for fixer-upper is construction manager skillset, rehabbing, knowing what needs to be fixed, scoping and estimating costs -- the cute "design" part of arranging pillows that draw the eye -- comes at the VERY VERY END and doesn't translate to your bottom line. Fixer-Upper means knowing what work *must* be done (to pass code, safety issues etc,) knowing *how* to get it done and estimating costs -- scope of work. That is learnable but it's a very serious learning curve.Turnkey or close to it (paint touch up) seems to be much better for your situation. Plus, running your own business you probably wouldn't have the time to put into managing a fixer upper. It just doesn't seem to fit in with your lifestyle and goals. Think about what you want - you want to keep cash flowing and grow your income, living in something that is a bit bigger and you're able to rent it out right away seems to be ideal.