When bankable buy big?

Question

What would you guys do if you were making good money (100K) but hated your job and were planning on quitting sometimes soon (may be anywhere from 2-5years down the road). While you are working and making 100K you are bankable, banks love to lend you money. Once you quit your job then it wont be the same, banks will stop lending to you...

Lets say you  cant buy multifamily (dont have so much downpayment)

2 options are left:

1) Would you buy a bunch of duplexes/triplexes/single family in Midwest that cash flow. But those  house will be old, so even if they cash flow, the upkeep and repairs may eat up the cashflow.

or

2) Would you buy a couple of houses that will  break even (or may even have some negative cash flow) in a cyclical market (Phoenix, Florida)?  Because right now? while you are working for Corporate America and making 100K you can qualify for a loan.  So may be go big and buy a property or two that banks wont lend you on when you quit your job? Because once you quit your Corporate America job you wont qualify for a big loan. So may be after you quit your job and banks wont lend you on big stuff, may be then you should be buying Midwest 50K properties? When banks wont lend  on bigger purchases like they do now...?

Mary Jay · Answer

Thank you guys, so much!

Wes Blackwell · Answer

@Mary Jay

As Milton said above, it's going to depend on your overall plan / strategy. What's the goal? To replace your current income? If so, you'll need $8k/month in cashflow. That's going to be real hard to do if you don't even have the cash for a downpayment.

Are you looking to get some income from rental properties, and then switch careers to something you enjoy more? Or maybe even take a paycut? That might be more feasible.

If you're going to buy something where there's little cashflow, you're banking on one or two things: (1) The property appreciating in value, or (2) a long term hold / retirement play. I do a lot of these in Sacramento in Stockton where there isn't as much cashflow as the midwest but the properties appreciate well in value and are viable for long-term strategies (10-30 years). The Phoenix area has this potential too (5th largest city in America afterall), but I wouldn't plan on living off your cashflow in 3-5 years... especially if we encounter a recession. Timing may be bad to quit your job.

What you may want to consider doing is buying something in the midwest that does cashflow, and then spending the money when you buy it to fix it up, get max rents, etc. Then rinse and repeat once or twice more over the next few years. Then you'll get the cashflow without the repairs (because in a sense you made the repairs up front).

Ultimately, it sounds like you have a lot of life planning to do, and lots of options to weigh. There can be a win in here somewhere for you, but you'll need to really plan carefully as to what's going to happen after you quit your job.

Stephanie P. · Answer

In your scenarios, you have one set of properties that cash flow, but may require some capital expenditures down the road and you have another set of properties that may cash flow, but won't require too much maintenance; but they're in cyclical markets.

Then you're going to quit your job where you would have been able to absorb those capital expenditures or they would have paid for themselves over time because the properties were cash flowing (and continue to cash flow) where if something happened in the newer properties in the cyclical markets and you had already quit your job, you would be stuck.

Not much of a choice, but I say go midwest.

Stephanie

Milton Rivera · Answer

@Mary Jay

This will depend on your overall strategy.   If you are planning on quitting your job in the next few years, it sounds like you may need some of the cash flow to replace the current income.

Option #1 will most likely meet that criteria, you can price for any major repairs/cap x improvements and negotiate those during the acquisition, this will help you hedge against major items breaking down once you acquired.

Option #2 sounds like a long-term play where you may be betting on appreciation in those markets.  If you were to actually acquire a cash flow negative property, where will the money to fund that shortfall come from after you quit the W-2 job?  From a lender perspective, you may become a riskier borrower, at that point, you would not have a steady income and you would not have shown that the other investments are panning out.  They will be looking at your debt to income ratio and debt service vs rent income on the other "investments".

Good luck