Newbie confusion - where do I go from here?

[Michelle VanDyken]

Hello all! I’ve recently joined bigger pockets and have been reading everything I can get my hands on.

I’ve found myself inadvertently in real estate investment. Although I may not have intended to get into it, my husband and I are in love with it.

We bought our first property to rent to my daughter. We bought it for $50k, put $42k into it (which is way more than we would put into it as a normal rental, but we knew it was for my daughter so we put in upgrades we wouldn’t normally do). we rent it to her at the cost of mortgage, insurance, and taxes-zero cash flow. But I figure we are still gaining the appreciation of the house while she pays the house off.

Obviously that one isn’t a true investment property but we did discover that we love buying run down homes and renewing them. My husband is a contractor and does the work and I love creating the vision of the new house and bargain hunting to do it the least expensive way possible.

When we were finishing my daughters house a bank-owned home became available in an auction. Because it was an auction we had to pay cash for it and have rehabbed it with cash. I came across the BRRRR book while rehabbing this house and thought perhaps we had accidentally stumbled into the perfect method of investing in real estate.

Fast forward to now, we are almost done rehabbing second house, about two weeks away, and had a realtor give us a market value because we have two interested parties that would like to purchase the house. The house would sell for approximately $100 k above our purchase price and rehab costs.

Our quandary is do we flip and use that profit to buy more rentals or stick with the brrrr method? If we take the full 75% out of the house I believe the rental market would only bare $150 cash flow above mortgage, taxes, and insurance. I have no idea what to calculate for vacancy expense as we are new to this rental thing and our market, north central Montana, is too small to show up on the online estimators. The problem with flipping would be the capital gains tax. Ultimately we are wanting to create passive income from rentals, just not sure if this place would be better left as a rental or flipped and use the profit to buy more rental property.

Any guidance? Thoughts? Suggestions? Book recommendations? Keep in mind I am new so many of the acronyms are a foreign language to me. Thank you in advance for your help!

[Alan Brown]

Wow you are rockin!  congrats on your new passion...

I used to play music up in Conrad and Shelby and Havre about 35 years ago (!), and love that area and especially the people!

My question is how Conrad is doing these days?  I have no idea, but  is it growing and does it have a good long term prognosis?  That would be a good thing to figure in... because if it's declining, and if the young folks are moveing to bigger towns cities, etc, sometimes it can be a gamble in the long term hold idea.  A lot of American small towns are dwindling...

 Whereas, if you've got buyers for the flips, you may want to cash in on that, and potentially look at other places that do have good long term economies and are attracting millenials or short term rental people for the buy and hold...

Also, there seem to be some very good advantages to being a 'real estate professional' I think it's called:  you have to work 750 hours per year on your real estate business (which you probably do, working on the houses--physically, and if you're managing them, marketing, leasing etc), and check with your accountant, but I think you get some pretty good tax advantages...

DEFINITELY go to the meet up in Havre...  you can learn so much, and it's much easier and faster to convey information verbally instead of typing!!  And listen to EVERY BP podcast!!  I"m not kidding, they cover everything at one point or another.  Ive been doing this a long time, and learn something new pretty much every podcast sometimes earthshattering stuff!... So while you're making those long montana drives, 0R PAINTING! listen to as much as you can

When you're figuring your cash flow, BE RUTHLESS!  I"m too optimistic, so my wife holds my feet to fire... Figure 10% of gross income for repairs and maintenance, and create that reserve account for that.  Talk to folks at meetups, other landlords in Conrad, shelby, and Havre and find out how long they're going between renters... and how much you spend in between renters on 'make ready'-- cleaning, painting, etc... That should be additional reserve;  I think I figurre 10% vacancy, that includes lease up fees, and 'make ready' costs...

I"ll bet one good thing about Conrad is tenants probably stay long in a nice place!!  that's good as Gold!

If there are any decent property managers there, Bug them for information, and find out how much they charge to manage properties (should be between 7% and 10%) and how much a lease up fee is... Figure this into your numbers, and if you manage it yourself, pay that to yourself, and THEN figure cashflow... because someday you may decide you don't want to manage them anymore, especially if they're not in your town.

 Do you pay any of the utilities?  You have to be crazy analytical on that stuff... I find that I pretty much spend 45% of my gross income on all the expenses, BEFORE mortgage payments... 

That $150 may go away quickly, when you figure all that in, but If the market is appreciating really well, like better than 5%- 8%, losing a little monthly is worth it in the long run, if your regular income can easily cover it.

Good luck!