Complicated "Get Started" Scenario - Newbie

[Kimberlee Lorenz]

Hello Everyone,

I am a newbie REI, having taken some time to lick my wounds after making some grave mistakes a few years back. I've been enjoying my BP education so far -- so much quality advice! Hopefully someone will tackle my dilemma and possibly point me in the right direction. Any and all advice is greatly appreciated.

I am trying to figure out the best place to start, as my family (active-duty USAF husband, and 3-yr old son) and I are relocating to San Antonio (SA), TX this May after 3 years living overseas in Germany.

My goal is to create a $5,000/month (or close to it) cash flow during the minimum 4 years we will be living in San Antonio, then recreate the same scenario to our next duty location. I realize these are big goals, but I figure you gotta start somewhere!

Here is a breakdown of our scenario:

(1) Cash = $160,000; $60,000 of which is spread over various investment accounts (TSP, Roths, & Trad. IRA).

(2) Credit - since I have a ch. 7 which cleared in 2009 and have not worked in 3 years, my husband will be the only borrower. However, he had an FHA short sale from WFB that closed in 2010, which limits us on the type of loan we can procure (VA - 2 yrs from short sale; FHA - 3yrs; conventional - 4yrs).

Max. VA loan approval at 0% financing through USAA = $408,600.

We have tried to obtain preapprovals through 2 other brokers without success. One broker said that his banks treat FHA short sales the same as VA, so we would need a full three years before they would consider lending to us (Oct. 2013).

(3) Property type - we have been considering duplexes or 4-plexes, but the cash flow and Cap. Rates just don't seem to work out. I'm wondering if I'm calculating it wrong, because it seems unlikely that anyone would invest in these properties in SA with numbers like these.

(4) Location - as is commonplace everywhere, the best deals are in "less" desirable areas that we would not be willing to live -- in the case of buying an MFR and living in one unit. Our son has special needs, so schools are important. Additionally, we just learned the "hard" way about the expansive soils so prevalent throughout most of SA.

Thank you all in advance for taking the time to read my post and consider any advice you may decide to give me.

~ K. Lorenz

[Jon Holdman]

$5000 a month in true cash flow from rentals is a VERY HIGH bar.

Investing in rentals is a cash on cash return game. Making 10% cash on cash return is a pretty good return. Making 20% is an excellent return. Your goal of $5000 a month is $60,000 a year. If you can achieve 20% cash on cash return, you would need to have $300,000 of your own cash invested. More realistically, if you assume 10% cash on cash return, you need $600,000. So, the place to start toward is this goal is to find $600,000 to invest. Even if you cash out your qualified plans (which will involves taxes and penalties), you would need to achieve a 40% cash on cash return to turn that $160,000 into an income of $60,000 a year. I don't think that's realistic.

As you're finding, profitable rentals and a place you want to live are often different things. A residence you live in is just an expensive doo-dad, IMHO. Same as a car or boat. We often have a series of criteria for our residence than don't include "being a profitable rental". So, if you're wanting to leverage your residence as a rental, you'll probably have to give on your criteria for your residence and focus on the "profitable rental" side of the equation. Now, lots of folks do go down the road of buying a multi-unit property and living in one unit in order to get better lending terms. So, if you're willing to make that sacrifice, go for it.

Once you move on to your next duty station, you're going to be stuck paying for a property manager in San Antonio. So, you should assume this in your calculations. My dead simple formula's for estimating income and returns for rentals are:

cash flow = (rent * 50%) - P&I payment
cash on cash return = annual cash flow / cash invested.

Low down situations can produce a higher cash on cash return number, because of the small amount invested. You might actually hit that 40% number with the right deal. Trouble is that's not a sustainable model. You're not going to be able to build a portfolio with those terms. Even conventional loans become a limiting factor at some point. Fannie Mae and Freddie Mac limit you to 10 mortgaged properties. If you want to build a large portfolio, as your income goal suggests, at some point you will be limited to portfolio lenders who keep their loans in house rather than selling them to the secondary market. Even the conventional loans will likely require 20% down payments on investment properties.

Something you can consider is to look for owner financed deals. You might be able to find deals with a lower down payment than conventional loans. But these often come with a price - a higher price, higher interest, shorter term, balloon payments or some combination of all of these.