Newbie looking for advice on how to start my REI journey!!!

[Hector Valles]

We have been reading, listening and studying on Bigger Pockets for months. So excited to start investing, just need some advice to point me in the right direction. Current situation:

We live in So Cal and our Home is currently worth about $560k-$580k. Owe $390k. We both have stable jobs with credit scores of about 700. Had a bankruptcy in 2010.  Only other debt is $10k vehicle loan and $1,500 credit card debt.

Our goal is to start investing in buy and hold rental properties. We prefer to buy something in our area but we are open to out of state properties. Also, should we sell our home and use the equity for our first investment, or get a HELOC out? We were even considering getting a HELOC out, then renting our house out.

Any and all advice are welcome!!!

THANKS BP COMMUNITY!!!

[Dan H.]

I have an ex residence in San Diego as one of my rental.  It is by far my worse performing rental.  Homes are purchased to be a nice home for your family which is not the same criteria as makes a good buy n hold property. I have a reason that I keep my ex-residence and that is that I expect to give it to my son when he graduates from college ((he just turned 14 but starts college in 3 years).  If he goes to college in San Diego he can live in the unit as he goes to school.   My point is I suspect you can find a better buy n hold than your current residence.  

I am very pro San Diego investing. Historically it has had outstanding ROI on financed buy n hold property. Historically better than the markets that rely primarily on cash flow. Run the numbers and it will be apparent that appreciation will result in better ROI than just cash flow. Ideally you find a market that has both good appreciation and cash flow but there is a reason why this is difficult. Investors price expected appreciation into what they are willing to purchase a property for. So if a market will have good appreciation while having good cash flow then it is out performing the expectations as conveyed in the purchase price. There are markets were this does happen but they typically do not have the long term appreciation of San Diego.

Unfortunately the recent interest rate hikes have hurt cash flow in marginal cash flow areas like San Diego. I suspect there may be a slight dip of rates in the new year but then I expect further increase.  Traditionally I have little problem finding cash flow multiplexes using my cap expense numbers (~$250 unit/month attached, ~$300 unit/month detached for small typical size rentals (2/2 or 3/1)) but the numbers are tighter than any time since I have been a fairly active RE investor (I have been fairly active since 2010 but my first unit was the ex-resident and was a rental since 2003). 

Research cap expense when you purchase.  Do not look at a full rehabbed unit and think that the cap expenses are small because there are not any near term cap expenditures expected.  In reality they are simply further duration away.  The best plan is to calculate the monthly theoretical cap expense and use it to determine cash flow.  This levels the cap expense rather than making it back heavy when the rehab has gotten old and needs a new rehab.  I have a unit in need of a $30k foundation cap expense.  If I used actual cap expense cost as my cap expense I would have shown little cap expense for many months then a $30k hit.  How would I deal with that in terms of calculated cash flow.  Would I revise going backwards or show no cash flow for the next many months to when the cap expense has been covered? Ditto kitchen rehab, new windows, new plumbing, near roof, new HVAC, new stucco/siding, etc.

I suggest you attend some REI meet ups. There is an almost monthly one in San Diego put on by some BP members that is educational and a good opportunity to network.

Final suggestion is in my market area there is large difference on small multi family properties between asking price and selling price. Do not use listings as the comps. Used sold properties only even if you must go back further in time than desired. There is a huge price difference in listing prices versus where the multiplexes sell. This difference is not as substantial in SFR because those are purchased as homes which do not need to be a decent investments because they not an investment but primarily a home.

Good luck