How is this for a plan?

Question

Hello BiggerPockets family!

My name is Patrick and I'm in Birmingham, Alabama.

I am new to all of this so any input would be appreciated. I figure just asking for help as a newbie isn't sufficient; so I developed a plan and ask for ways to improve it so the questions are specific, not general. "Is this plan crap?" vs. "How do I get started in REI?"

Goal:

To create enough passive income to cover all my expenses.

I currently work as an Automation Engineer. Its a good job, with good benefits, I like what I do, and I'm good at it. But I'm making someone else money, and I have to remain there because it pays the most. I'm more passionate about teaching, so I'd rather take a position where I use my experience and teach it to the next generation, whether at a school/college/university, or if I start my own business teaching.  There are positions I've been offered to teach but I can't take that much of a pay cut right now. Creating passive income would relieve me of the need to remain at the highest paying job and let me pursue a doing I'd prefer. I state this to show I understand this is no a get rich quick scheme and that I'm not trying to just stop working, but rather to get to a place where I work when, where, and how I choose.

At this point, I'm not necessarily interested in making real estate investing my primary business, but rather a side business for investment. Once I get into it, that may change, and I realize that.

Plan:

To me, it seems the best way to generate passive income is through rental properties, and perhaps in the future note investing and owner financing. To get there, I thought of two different paths, and that is where I'd welcome some feedback.

Path 1:

Flip a couple houses, using the profit to build up enough money for a down payment and rehab costs for my first rental property, then start implementing the BRRRR strategy until I reach the passive income goal I've set. To accomplish this, I figured financing for the first flip (down payment and rehab costs) would come from either creating an LLC and obtaining a small business loan through it, or I can take a loan out against my 401K, and use a traditional loan for the rest of the amount. I have a great credit score but I just bought a house as my primary residence a couple months ago and don't have enough equity to pull money out of it.

Path 2:

Similar to above, but not flipping houses first, just going right into rental properties. My concern with this is that I wouldn't get the money back quick enough to pay back the initial down payment and rehab loan, depending on the termed required for payback. Also, I think it might be good to have a little bit available if expenses surface in the first several months before I've built anything up for maintenance or CapEx.

I realize an LLC isn't necessarily required for flipping houses but is highly recommended for rental properties. I figured a small business loan might be better going through an LLC rather than just taking out a personal loan. Feedback here is welcome too.

The other question I would have is if turnkey would be a viable option. In any case I don't see myself having the time or adequate knowledge to do my own property management so I would hire a property manager, if that has a contributing factor in the advice.

Thanks in advance for your input.

Andrea Weule · Answer

It's really an individual choice, but if you have a job that you don't mind (even like) that pays well...that's huge.  Personally, I like Plan 2.  It's what you're looking for in the long run.  A couple thoughts though...

1. You don't have to pay off your initial down payment and mortgage super fast.  Have your tenants slowly do that over time.  Just make sure you get a good enough deal that after all expenses you get quality cashflow and a return that you can be happy with.  I always shoot for 15+% ROI

2. I'd build a budget so you know where your money is currently going.  Track where all your money goes.  My family did this over 14 years ago and it changed everything for us.  We know how much money we bring in (from your job) and allocate that out in buckets and line items under that bucket.  For example: Necessities - Mortgage, Insurance, Gas, etc; Play - Dining Out, Entertainment, Concerts/Sporting Events, etc; Investments - Property Purchas Fund, Whole Life Policy, Stocks, etc.  I think most of the time when people think of budgets, they think restriction...Think Planning and Control instead.  This will allow you to better utilize your current job to save for more properties and then you'll get to your end goal faster.

Best of Success!

Mark Ainley · Answer

@Patrick Bunn There is a Proeprty Manager in your local market GK Homes...I will DM you their site but they have a local podcast and tons of content on their website for people exactly in your shoes.  Might want to check them out.

Chris Lahman · Answer

Hi, Patrick. If you're waiting until next year, there's another option available to you, and that is to turn your current primary residence into a rental, and then move into something else, i.e. "house-hacking." You'd need to stay in your current residence for at least a year due to the owner-occupied loan, but after that you could put your house up for rent and move into another primary residence, using a low down payment owner-occupied loan. This might be a more digestible route for your wife as well, and this would give you another 10 months to boost your savings and solidify your plan.

The overlap of getting your place rented and moving into something new in 10 months might be dicey, so you could also consider temporarily renting something cheap for a few months after you move out and before buying your second property. Ideally you'd be saving money on living expenses, but you'd also allow yourself to take things one step at a time.

This is the method I'm currently using, and the reason I used it was because it is simple and it made sense to me based on my situation. It's a baby step in the grand scheme of REI, but it it can and should have an immediate impact on your situation, and this will get the hardest step out of the way; the first one. Scott Trench's explanation of this throughout various podcasts is what really stuck with me, so I'd look those up if this is of interest. Brandon Turner's book also discusses this.

Good luck with things!

-Chris

Patrick Bunn · Answer

@Andrea Weule Thanks for the advice!

I guess i was thinking paying back the initial down payment and rehab cost loan might be expedient depending on the interest rate and terms. I asked if I could borrow against an IRA and I was told that I could, but it needed to be paid back in full in 90 days. That's where I was coming from on the quick pay-back part. I have a 401k from my previous employer that I can pick the why the funds are allocated, but I can't take out loans against it or anything. I can roll it into another 401k or into an IRA. My current employer won't offer me access to their 401k until January 2021 and I'm not sure if they offer loans, and if so, if there is a stipulation on what its used for.

A budget is definitely necessary! We got on a budget and once we got all of our high-interest debt (and really all debt that isn't mortgage and student loan) we finally had money to save. I realize quickly simply "saving" money probably wasn't the best idea, but investing would be better. That got me searching different ways of investment and that's what brought me to REI.

@Michael Porche Thanks for your feedback! Although I don't have a problem having a second job (I actually had one but got laid off because of the effects of covid), I'm really trying to see if it would be beneficial to flip first just to build capital. I don't really have a passion for flipping and it's only factor into the equation would be capital building. It may not be necessary for my specific situation. That's kind of what I was trying to see what people thought about it. It would also be a whole other path I'd have to learn and study and develop.

Full disclosure, I may not be pulling the trigger on this until next year unfortunately. Something Brandon Turner said hit home; "If your spouse is not on board with REI, don't start until they are." There is something specific we are saving for and once that is paid for she might be more agreeable to REI. I'm trying to develop a goal, a plan, and a specific pathway to get there so I can present it to her to get her buy-in. I have to convince her I know what I'm doing before she'll be on board.

Is there a recommendation on the amount of capital one should have before venturing into rentals? I guess I kind of thought I would secure enough in the initial loan to cover down payment and rehab and a little more for incidentals, but maybe that isn't realistic or maybe I won't get a loan big enough to cover all that. Is there like a percentage recommended to have available for maintenance and CapEx going into your first rental property?

Michael Porche · Answer

Hey Patrick,

You mentioned you wish to keep real estate investing as a side hustle, and flipping houses is not a passive business. It will take up a lot of you time and feel like a second job.

Based on what you're saying, I recommend BRRRRing light rehabs until you cash flow enough to cover your expenses.

And while turnkey properties are very little work, you're buying a property at a retail price that will barely appreciate.

How much capital do you have to invest?

Arturo Matamoros · Answer

@Patrick Bunn Mark beat me to the punch! I second his recommendation. The team at gkhouses knows the ins and outs of property management and have great resources for education on the subject in your area. Wishing you the best on your journey :)

Patrick Bunn · Answer

@Mark Ainley Awesome! Thank you!

Ian Walsh · Answer

Plans are where everyone should start and then work backwards on how to get there.

Johnny Wolff · Answer

For sure man!  Glad it landed right.  If you have any questions don't hesitate to reach out.  Do think starting with your first investment as soon as possible is the right move.  You'll only really learn after you start owning.

Scott Mac · Answer

Re Teaching:

1. Cash is KING! Don't take a lower paying job in exchange for a higher paying job.

2. Get an after work job (a second job) teaching at a community college..not all require a phd...or a masters.

3. Get a coaching job (after work) HS. football, girls soccer, Boy Scouts, etc...

4. Make a YouTube channel to teach (Alabama Pit Master BBQ-ing skills, Computer X stuff for Newbies, etc...).

Just my 2 cents.

How is this for a plan?

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