Step Two of Real Estate Investing

[Jared Ryan]

Quick introduction: I'm coming off my first investment, a deal where I'm househacking a 4 bedroom, 2.5 bathroom townhome in San Jose, CA. I purchased for $715,000, live in the master, and rent out the other 3 bedrooms. I still lose $1000 a month to taxes, insurance, and utilities, but the $1000 in costs beats the $2000 in rent I was paying, I now use OPM to pay down the mortgage and HELOC payments totaling $2550 a month, and my home has already appreciated $30000. Real estate investing is amazing!

With that win under my belt and 6 months to build up reserves, I now have both the confidence and money to select my next real estate investment (not that I really know what I'm doing, but it's not that scary anymore, and I'm ready to try and figure things out as I go along).

My goal is to achieve financial independence as quickly as possible. I want to build a portfolio that will generate $100,000 in passive income. I know that California sucks when it comes to passive income, so I'm ready to try to figure it out in a different state. I got about $50k at my disposal, but looking to hold on to $10-20k as a reserve (and I have a net $4k coming in each month to rebuild my reserves, and a 401K to draw from if I really had to). I've been pre-approved for a property up to $200k. And I'm ready to take action.

My first instinct is to search for cash-flowing properties, and I've landed on Indianapolis, IN and Cleveland, OH. I'm looking at properties anywhere from $50k-$150k, mostly searching around $100k (SFH or duplexes seems be the homes in this range), with total upfront investment of $40k max (down payment / fees / minor touchup / cosmetic rehab, if needed). It seems like a positive $500 seems like a completely realistic net cashflow per property, which really just boggles my mind. Anyways, the plan is to continue to accumulate properties around this range until I have enough equity that I can 1031 exchange into larger properties with more units to supercharge the process (or I have to do this because I hit my mortgage number limit). Rinse and repeat until $100k is coming in every year. According to my projections with the boring typical 20-25% down mortgages, that should be possible in 5 years for me if hold on to my 9-5 job; quicker, if I find good partnerships, seller financing, etc (and I know I'll need that or portfolio loans once I hit 4 properties, so that may be another hurdle to overcome when I get there).

So, two questions, then:
1. Does this seem like a solid plan? To focus on cashflow first while I grow my portfolio to escape the 9-5? Or, is $100,000 a year a large enough number that I should try to mix appreciation with cashflow as my focus? 
2. If cashflow is the right approach to take, what are your thoughts on the best cashflow markets? I'm thinking Cleveland, OH and Indianapolis, IN right now, based off the research online and here on the forums, but open to other markets.

And I'd be more than happy to connect with any like-minded investors, or anyone who can be a part of my team in those markets :)

[Darius Ogloza]

@Jared Ryan.  We all have our prejudices based on past experience.  That's my disclaimer for what I am about to say.  As someone who has been at this for more than 25 years now and having lived in 6 states (equally mixed between Red and Blue) and having invested in California (Bay Area, principally), Florida, Las Vegas, upstate New York, Ohio and Illinois I can tell you that what helped me achieve financial independence like no other were my California real estate investments.  Not even close.

The past is no guarantee of the future, sure, but what I think you will find in Indy or Cleveland is that in some months and years you will actually be cash flow negative due to maintenance, capital expenditures, vacancies and other mischief.  Houses in markets like these do not cash flow like bonds, where each month your coupon is guaranteed.  Roofs and furnaces fail.  Municipalities with shrinking tax bases decide that out of state landlords are an easy mark for taxes and fees.  Vicious tenants decide to take out their frustrations on your property. I can go on and on.  

To paraphrase the Wizard of Oz, sometimes the answer is in your own back yard.   

Just my two cents.

Good luck to you whether you take my advice and stay close to home or start scooping up C class properties in the rust belt.