Question about my budget for an investment property...

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Question about my budget for an investment property...

Tyler Brown
New York City, NY · Member since 2015 · 125 posts · 48 votes

I'd like to get some input on how much I could/should be spending on an investment property, given the fact that my wife and I will be looking for a home of our own in the next 1-3 years.

We live in New York City, but I've been interested in purchasing a multi family investment property for a while now, and am getting the ball rolling on that.

Our household income is around $180k/year. We are currently renters, and have no debts of any kind. For our personal home (which would probably be a SFH on Long Island), we'll likely be spending somewhere around $450k-$550k, and property taxes range from about $6,000-$12,000 a year.

For the investment home, given our income and savings, we could simply purchase a duplex out in Long Island, which, in a lower class neighborhood, could be had for $300k-$400k, and rent out for $4-$5k a month total.

Or, on the much cheaper end of the spectrum, I've been looking MFHs in Northeastern Pennsylvania, that go for under $100k and rent out for about $1k-$1.5k total (the best of these properties that I've crunched the numbers on cashflow at about $500-$600 a month, after PITI and property mgmt fees, but before any CapEx).

Obviously I like the cash flow numbers on the more expensive homes here, but since we're looking at buying a home for ourselves in the next couple of years, I'm not wild about having that much capital tied up.  I'm not sure I'd be able to come up with a 20% downpayment for our personal home after the downpayment that the investment property will require.  It also may throw off our debt to income ratio, even if it's cashflowing nicely, because from what I've read, many lenders will not consider rental income until it has been established for two years, and we may be looking for a personal home in under two years.

Anywho, if anyone has any comments or suggestions about purchasing an investment property when you're < 3 years away from buying a home for yourself, I'm all ears!

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Justin K.
Investor · Saxonburg, PA · Member since 2016 · 68 posts · 53 votes
10y

There is some liability limit, but negligence will always come back to the person that was knowingly negligent.  

The other benefits that I consider are:

  • Anonymity - I am the 'Property Manager' for the company and not the owner when dealing with tenants.  This allows me to enforce the rules and the Lease evenly among all Tenants.  Brandon Turner talks about this quite a bit in the podcasts and his book on Landlording.  When you are the owner and ultimate decision maker Tenants seem to want you to bend the rules for them, and they always want a favor.  If you dont give it to them they tend to harbor bad feelings.  When you are just an employee trying to do your job they seem to be more understanding that you are just enforcing the rules because its your job.
  • The ability to separate my business assets from my personal assets. A level of protection that helps me (and my legal team) protect my assets, both business and personal. With the use of multiple LLC's we can really shield the assets from people that are willing to sue just because you have net worth. It would be a shame to have everything come crashing down because somebody made up an injury or something and sued you to steal your equity away. A stretch, maybe, but remember people have tried suing McDonald's for making them fat. Not because McDonalds truly made them fat, but because McDonalds had money and those that brought the suit thought they would just pay them to go away.
  • The personal credit 'protection' I mentioned in my previous post

Remember though, it isnt all gravy. I have to find better deals in order to use my LLC and get financing, or I have to put more money down so that I get better cashflow, but that severely hurts my cash-on-cash returns and my working capital. If you can be patient and work hard to find GREAT deals and not just good deals then it can be lucrative. I also have to pay more in insurance because my company carries liability insurance on top of the dwelling fire policies for all of my properties. So long story short it does cost more to use an LLC, but I like the benefits a lot so I use mine to achieve the benefits. I am sure many people would say just put them in your personal name (many of the old time investors around me have done that and continue to do that), but I would prefer to find better deals and use the LLC. After all I can't buy every house that comes on the market (at least not yet, haha), so why buy a mediocre deal if I can be patient for a great deal and get the added benefits of the LLC?

NOTE: I am not a lawyer and I am not recommending you start an LLC. I would recommend that you seek counsel from all of your team (tax accountant, business accountant, lawyer, insurance agent, etc.)

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  • Justin K.
    Investor · Saxonburg, PA · Member since 2016 · 68 posts · 53 votes
    10y

    In my area if I use my LLC it never shows up on my credit reports. I have to 'personally guarantee' the loan, but as long as it is never in default it will never appear on my credit reports. Now with that luxury you will end up paying a higher interest rate (about 6% right now with GOOD credit scores) and have to be pigeon holed into a shorter term (15 years max), but it wont throw off your debt to income and it wont even appear on your report when you go to buy your own home.

    Now the trick is finding a property that has good cash flow (after all the expenses you mentioned) with those more strict lending guidelines.  If it was easy everyone would do it!  Best of luck to you, and great question!

    NOTE: This is how a bank that I deal with in Western PA does things, and its working good for me, but it much more work to find the GREAT deals that flow what I need to make it worth my time while also meeting those lending guidelines.

    0Reply
  • Will Vera
    Elmhurst, NY · Member since 2016 · 9 posts · 2 votes
    10y
    Tyler Brown I'm in a similar situation as well. Prices for a multi here in nyc is up there. I haven't been able to get good feedback yet. What part of Long Island were you planning on buying the rental property?
    0Reply
  • Robert Niessen
    Furlong, PA · Member since 2016 · 22 posts · 3 votes
    10y

    @justin kovatch, what other benefits do you achieve through the LLC beyond the credit reporting you mention? Imagine liability limit as well.

    0Reply
  • Tyler Brown
    OP
    New York City, NY · Member since 2015 · 125 posts · 48 votes
    10y

    @Will Vera, probably Nassau County.  This would be my first investment property, so I don't want to go crazy, but there are some MFHs for $300k or so in areas like Hempstead or Freeport.  Not the nicest of neighborhoods, but they still command a hefty rental price.

    Then again, since this would be my first property, Pennsylvania is attractive as well, because although the cashflow will be lower, I'd likely be spending under $100k.

    0Reply
  • Justin K.
    Investor · Saxonburg, PA · Member since 2016 · 68 posts · 53 votes
    10y

    There is some liability limit, but negligence will always come back to the person that was knowingly negligent.  

    The other benefits that I consider are:

    • Anonymity - I am the 'Property Manager' for the company and not the owner when dealing with tenants.  This allows me to enforce the rules and the Lease evenly among all Tenants.  Brandon Turner talks about this quite a bit in the podcasts and his book on Landlording.  When you are the owner and ultimate decision maker Tenants seem to want you to bend the rules for them, and they always want a favor.  If you dont give it to them they tend to harbor bad feelings.  When you are just an employee trying to do your job they seem to be more understanding that you are just enforcing the rules because its your job.
    • The ability to separate my business assets from my personal assets. A level of protection that helps me (and my legal team) protect my assets, both business and personal. With the use of multiple LLC's we can really shield the assets from people that are willing to sue just because you have net worth. It would be a shame to have everything come crashing down because somebody made up an injury or something and sued you to steal your equity away. A stretch, maybe, but remember people have tried suing McDonald's for making them fat. Not because McDonalds truly made them fat, but because McDonalds had money and those that brought the suit thought they would just pay them to go away.
    • The personal credit 'protection' I mentioned in my previous post

    Remember though, it isnt all gravy. I have to find better deals in order to use my LLC and get financing, or I have to put more money down so that I get better cashflow, but that severely hurts my cash-on-cash returns and my working capital. If you can be patient and work hard to find GREAT deals and not just good deals then it can be lucrative. I also have to pay more in insurance because my company carries liability insurance on top of the dwelling fire policies for all of my properties. So long story short it does cost more to use an LLC, but I like the benefits a lot so I use mine to achieve the benefits. I am sure many people would say just put them in your personal name (many of the old time investors around me have done that and continue to do that), but I would prefer to find better deals and use the LLC. After all I can't buy every house that comes on the market (at least not yet, haha), so why buy a mediocre deal if I can be patient for a great deal and get the added benefits of the LLC?

    NOTE: I am not a lawyer and I am not recommending you start an LLC. I would recommend that you seek counsel from all of your team (tax accountant, business accountant, lawyer, insurance agent, etc.)

    1Reply
  • Robert Niessen
    Furlong, PA · Member since 2016 · 22 posts · 3 votes
    10y

    @Justin K. thank you so much for the detailed response.  Lots of good food for thought.

    0Reply
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