How to start out with $100k in equity

Question

Hey guys, this site seems to be a great resource for newbies in SFRs such as myself to get started in residential real estate investing.

I have a background in commercial real estate debt and CMBS bond trading but new to investing for my own account in SFR. I have about $100k in equity and looking to invest in single family rentals. Had a few questions so thought would write this community and seek advice:

My criteria: Cash flow positive, at least 10% yield (NOI less interest / Equity), low/ no crime areas, geographically anywhere in the US works

a) Is it better to start out with 5 100k homes in class B, C neighborhoods or 2 $250k homes or 1 $500k home for a SFR. I've realized that cap rates tend to get lower as one goes up in size but I'm also a little skeptic about the tenant quality in $100k homes. I'll be hiring a property manager for any investment.

b) Any suggestions on markets with good cash yield? Ohio, Texas, Florida, Illinois are four markets I've narrowed down so far but definitely open to more.

c) What's the best way to source such investments? I found homeunion.com and have been chatting with those guys for the past few weeks. They seems good and make it easy for a passive investor such as myself. Any other suggestions welcome, including directly reaching out to brokers and then finding a property manager in that market.

d) How easy / common is it to get a 75-80% IO financing for SFR for a term as long as possible? I'm very yield focused and want to cash out of the property as soon as possible. Principal paydown reduces yield very significantly.

Thanks for your time in advance.

Matt Motil · Answer

This is a true statement. There is a law of diminishing returns (yield) and homes will only get a certain price point in rents. The general rule is 0.08 - 0.10% of the value of the home in rent, but this starts to fall apart the higher the home's value. The bigger homes are much harder to rent as the pool of available clientele that can qualify to rent is much, much smaller, and the amount you can command in rent starts to wind down as well. Additionally, the larger the home, the larger the reserves as there is more of everything that can break and wear out. There is a point where if you were to graph the returns it would peak and then start to decline. In my opinion, it's around the 135-140k price point in the Cleveland market where the rents peak as a function of home value as it pertains to yield. My statements reflect my own personal experience owning and managing high-end rentals in the Cleveland market with single family homes ranging from 60k-250k. Multi-family and smart apartments do not follow this same trend and are more tied to the location and size rather than value.

Jerry Padilla · Answer

a.) It really depends on what return you are looking to get. $100k homes are typically decent. b.) Cleveland is a great market with great returns and lower priced homes. I would be more worried about $30k homes than $100k.c.) They will probably charge you are premium. Reach out to Account ClosedThey have a great set up.d.) If the property is a SFR you can go up to 85% LTV with conventional financing if bought in your personal name. I see you are a lender, are you a conventional lender?

Reese Thompson · Answer

I think you'd be surprised at the quality of a place you can find for $100k. Of course there are exceptions.To expand on Matt's point about rentability, if you have a more expensive home that is harder to rent, your vacancy rate will be higher. Also, spreading out your investment over 5 homes won't hurt as bad when you have a vacant unit compared to only have one very expensive home with a vacant unit. It's the difference between losing 20% of your income and 100%. Even only 50% would be better than 100%. (I'm sure you know this, I'm just saying for sake of discussion.) It'll probably take longer to get to the point of having 5 units though.Whatever market you decide to get into, it'll be important to have some boots on the ground. I think BP will be a good opportunity to help you find someone.

Zach Evanish · Answer

@Karan Malhotra Welcome to Bigger Pockets! This a great source for both new and experienced investors. After reading your about your background and the type of property you are looking for I thought I would reach out to you. I work for a company called Roofstock (www.roofstock.com) and we are a marketplace for cash flowing single family rentals. Based on your profile (experience with CRE and CMBS) and the type of properties you are looking for I think our site would be a great fit. Happy to answer any questions you might have.

Karan Malhotra · Answer

That makes perfect sense. I just wanted to confirm before taking the plunge. Interesting that I was talking to a couple of homeunion lenders today and they conveyed that interest only loans would not be available for investment properties. That's a little disheartening for me because I'd rather cash out of the property sooner than refinance every 5 years or so (if the value doesn't plunge). But I guess there are still good deals to be had with 7-8%+ cash on cash (after amortization of principal).

Karan Malhotra · Answer

Great, thanks Jerry. I work at an alternative asset manager that participates in the CRE market in a variety of ways including development, value-add equity, transitional lending, CMBS bond trading etc. I work on the debt side (CRE transitional lending and CMBS bonds)Just a follow up question I had:But it is true in general though right, that bigger homes ($300k+) tend to have less yield than smaller homes. Of course there'd be exceptions, but just trying to figure if there's a general trend.Thanks so much for your help again.