Help! How Does this Investing Strategy Sound?

Question

Hi BP!

I am a newbie to real estate investing, and could use any advice that I can get. I currently do not own any properties but have been looking to purchase for some time now and believe I am now ready. I've read numerous books but do not know many investors nor wealthy people firsthand so maybe I can get some expertise here. The people around me have no idea about real estate investing and leave it to my parents they think I need to put the money away in a CD and call it a day.

But I have other dreams in mind..

Im a 25 year old female who works and lives for free in NYC making 43,000 a year with zero debt and  a 680 credit score. I don't necessarily hate or love my job but I want to be in a place where I don't feel as though I have to get up everyday just to maintain. My immediate goal in real estate investing is to finance a home in my hometown of Atlanta between 150k-200k but when I do I do not want to have to pay my mortgage on it. I want to purchase rentals now, set tenants in place so that when I buy my home, my tenants can pay my mortgage later.

I have 65k to spend now and I save 1k a month. 
I'm looking to invest in 2-3 rental properties between 40k and 70k spending about half of my capital (35k) to finance the rentals. The remainder of my capital 30k will be used for the downpayment on my home (150k) after i purchase the rentals.

Ex scenario:

1. 45k property
9,000 cash down payment
rents for 800-850 minimum
taxes under 1000/mo
mortgage: roughly 300/month
cash flow: at least 300/month after everything (numbers compute to about 450 so 300 is safe to say)

2. 50k property
10,000 cash down payment
cash flow: at least 300/month after everything

3. 60k property
12,000 cash down payment 
cash flow: at least 300/month after everything

Total down payments = 31,000
900/month cash flow after taxes, hoa, repair reserve

Of course the numbers here can vary, im considering section 8 which i've seen on 70k properties bring in rents as high as 1295/month. These numbers are on the minimum safe sides.

But my questions to you...

Does this sound like a legitimate plan?
What type of financing should I look for? Do i use conventional or buy cash and then refinance (to be more competitive)?
Is it odd for me to look to purchase rentals BEFORE purchasing my own home?
How will these rentals effect me when going to purchase my own home? Will it help or hinder me in qualifying for my own mortgage later.
Should I look for single-family or townhomes only.

I have a million and one questions, let me know if you can help with any.
Thanks :)

David Beard · Answer

Danielle Prendergast -

* Keep calling lenders.  Call some local ATL banks, not just the big national lenders.  They all originate the 30-year conventional loans.  Try to identify the local banks that are considered investor friendly.  Chances are that as you buy more properties down the road, the local bank is who you will have to work with anyway, since the 30-year loans are limited.  There are plenty that will do loans down to 25-30K, and hopefully the rate will be closer to 4.00%.  Also track down some investor-friendly agents, and ask them which lenders are good at investor loans.
* Are your target properties already rehabbed and rented?  If not, you will be spending some of that capital to get them rent-ready.
* Beware the two-year experience rule.  Until you have owned rentals for parts of at least two tax years, then the lender won't let you count rental income in your debt ratios.  So the full PITI + HOA will go into the top of your debt ratio.  So if you're planning to buy the primary before you have the two years experience (early 2015), then it could create a qualifying issue.
* Don't buy cash with the intention of doing a cash-out refinance in the near future.  You won't get this done in 90 days, it'll take more like one year of ownership "seasoning".
* Start screening property managers ASAP, assuming you're buying in ATL while you still live up north.  
* Have the properties inspected during your contingency period.

Danielle Prendergast · Answer

Hi Ali Boone thank you for the help! I am looking in Atlanta. What's the best way to reach out to you, would love some additional insight. Thanks!

Danielle Prendergast · Answer

Hi @Ali Boone thank you for the help! I am looking in Atlanta. What's the best way to reach out to you, would love some additional insight. Thanks!

Steve Babiak · Answer

Your expense numbers are based on what you "know", but you don't factor anything for the "unknown" expenses - attorney fees, accounting fees, vacancy, advertising, reserves, capital expenses, + others.  YOU have to maintain and keep the property in good repair - Section 8 will do an annual inspection to make sure that you are doing so, and they won't be making the repairs.

Sorry for the reality check, but you have to check the fantasy-land projections at the door before entering the BP forums ...

Ali Boone · Answer

Are these rentals in or around Atlanta? I'm from Atlanta, have properties there, work with numerous sellers there, and can give you all sorts of low down about buying there if you want. I've had good experiences, bad ones, etc.

As far as weird to buy rentals before your own house? No way! It's the best thing you can do. People will argue it, but buying a house for yourself is a liability, not an investment (unless you are a flipper and get a killer deal and do all the work yourself). I only buy rentals, I won't buy myself a house. I did buy one in the past, long before I was in real estate, but looking back I know now it was the dumbest thing possible. Luckily I've turned that one into a rental though.

Single family or townhomes don't matter, but areas and neighborhoods do. I'd say stay in the higher end of purchase prices as long as you can help it if you are still showing good returns on those. The cheaper the property, the more risk (exponentially more risk).

Your plan sounds good, but watch out for the cheap properties. Some people love them, but they are nothing but headaches for me. I can elaborate about Atlanta if you want to contact me later.

You're going down a good road! You'll have a blast with it!

Danielle Prendergast · Answer

Hey guys,

Thanks for the input so far. Here are some specifics. These are actual properties I'm looking to put an offer on. The neighborhoods are not the absolute best but are not the worst either. One of them is actually in a great neighborhood with great schools.

I do see your point in going the Section 8 route. If this is an endeavor meant to take off stress I don't want to put more on but then again Section 8 rent is the most reliable rent, as the money rolls in automatically, right? Coming from NYC maybe Im underestimating my power to deal with these tenants? Also can someone confirm that Section 8 will make repairs (as long as you document everything).

All estimates are made with a 4.625 interest rate. I'm using a mortgage calucator to get the numbers but not sure if this monthly payment amount incldues property taxes (it asked me to put in the amount in the calculator before it spit out the monthly payment so Im guessing it did include, but to be safe I will add the taxes in again into my monthly expense). If they were already added, the cashflow would be around 70-133 more per month depending on the property.

57k 
65/hoa
1500/yr taxes
Downpayment - 11,400
Monthly payment - 359
total expenses = 549 (359+65+125) 
900/month rent
cashflow = 351/month

61,5k
25/hoa
1600 taxes
Downpayment - 12,300
Monthly payment - 386
total expenses = 544 (386+25+133) 
90/month rent 
cashflow = 356/month

40k
66/hoa
1300 taxes
Downpayment - 8,000
Monthly payment - 272 
total expenses = 446 (272+66+108)
800/month rent
cashflow = 354/month

40k 
700 tax
35/hoa
Downpayment - 8,000
Monthly payment - 222
total expenses = 315 (222+35+58)
800/month rent
cashflow - 485/month

About getting loans under 50k. I have noticed this is going to be a problem. I've spoken to some lenders that do this, and waiting on another today to let me know if they will do. In the event I cannot get a loan this small what do you all think of the idea of buying one rental as a start cash and then re-financing after 90 days to recoup 75%? This also may get me a better deal if I offer cash.

Also anyone have lenders in mind? I've tried AimLoan and Quicken and I'm waiting on Bank of America. Some people say the limit is 45k-50 but I've heard some as low as 25k.

Thanks again!

Steven Hamilton II · Answer

I'll tag Jon Holdman here, because It is too late for me to run those numbers.  This accountant is going to sleep.  First appointment at 9AM Tomorrow.

Danielle Prendergast,  We need the rent for each property and the approximate payment.  By the way, have you looked into how difficult it is to get a loan below 50k?

-Steven

Manuel A. · Answer

*I Am A Newbie*

Congrats on your choice to at least look into this! That's pretty amazing that you can save $1k a month (to me anyway)! ... Here's my general critique:

1. Cashflowing $300/month on each property is... dare I say, too ambitious. I'd say plan for around $100/month per property. But hey, maybe someone more qualified can say otherwise.

2. Maybe I'm wrong and you can plan for $300/month. But with properties being worth only ~$40K, it sounds like your looking to buy in the rougher neighborhoods. I'd plan, and look into the experiences of other landlords who have done this. If you're trying to relieve financial/general stress by investing in RE, I'd say investing in rough neighborhoods isn't the best path to go down.

3. Is it odd for you to purchase rentals before your own home? Odd as in unconventional/ out of the ordinary... Yes. But it's definitely not a bad thing.

4. How will these rentals effect you in qualifying for your own mortgage later. If you're still have mortgages on them, and you have three, I think it negatively effects your chances. But ask someone else to be sure.

5. Should you look for single-family or townhomes only? I think everyone would agree with single-family over town homes or condos. I think they're easier to sell and appreciate more. Also, people just in general like single-family detached housing more, so it increases your marketability...

Hope the general answers at least satisfy you while waiting for a better answer from a more experienced person :)

Welcome to BP!
-Manuel

Help! How Does this Investing Strategy Sound?

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