First Investment with 200k Down Payment - Any Tips for a Newbie?

Question

I have 200k cash for a down payment. I live in Los Angeles where the housing market is insanely HOT right now. Single family homes are getting multiple offers and going for above asking price. I want to get my first property. I was first looking into buying a live in flip to buy, rehab and sell but comfortable enough to live in. Then, I started looking at B and C class neighborhoods where small multi family properties are under 800k. Not bad. I am very new to the world of real estate investing so I am not sure what direction to take. I've heard that it is a terrible time to buy or to not buy an income property especially in lower income properties because we are in a recession and values drop a lot more in lower income areas where I'm currently looking to buy. However, I cannot afford the 1M and up properties in the nice areas. Cash flow is not good in these ares and I am not looking to buy, hold and hope it appreciates...although it will and maybe I should work towards this? I like the idea of quitting my job and eventually just having a portfolio of rental properties. That's the goal. I wish I lived in another area where housing cost a LOT less. And should I use the entire 200k as a down payment to keep my monthlies low or no?

Any thoughts for a newbie? Just need some guidance on how to start.

Any thoughts for a newbie? Just need some guidance on how to start.

Brian Garrett · Answer

You should never disclose having $200k cash on a public forum especially when you mention that you are completely new. Be prepared to get a lot of colleague requests and inbox messages from people looking to sell you what they specialize in or people telling you how to spend your money on what's best for them rather than how to invest it in what's best for you. With that being said my advice would be to first ignore those colleague requests and messages and second to listen to all of the podcasts here on BP, read through all of the forum posts, attend some of the webinars and really learn about the various ways to invest in real estate. There is a wealth of knowledge here and virtually anything you can think of has already been addressed and discussed. Regarding what you should do with the money the best thing would be a small multifamily that you can house-hack and utilize low owner occupant financing for. A live-in flip is also another avenue that could be beneficial particularly living in LA where there's significant appreciation. It all depends on your goals. I suggested a multifamily house-hack because you mentioned wanting a portfolio of rental property so that's a great place to start.

Jon Schwartz · Answer

Bridget,

Welcome to the coolest real estate market in America!

First question: do you have a job? If you have income from outside of real estate, you should definitely pursue a househack in Los Angeles. Folks on this website love to poopoo Los Angeles because it's an appreciation market that doesn't offer cashflow as easily, but the truth is, wealth is built in equity! You're far better off buying a nice asset in an appreciating LA submarket than you are buying duplexes in some podunk Midwestern market. That's not a popular opinion on this site, but most investors on this site A) don't live in Los Angeles and B) aren't financially capable of entering a market like ours.

So if you don't require additional cashflow right now, don't buy for cashflow. Buy for equity growth. Down the road, you can convert your LA assets into out-of-state assets that cashflow (but don't appreciate well) and quit your job. That's my strategy.

I'm currently househacking a duplex in Hancock Park. I love it. On net, I pay less to live here than my tenant downstairs, and the principal paydown is supercharged over owning a regular house. So I'm not only paying less each month to live here, but my net worth climbs $2000 each month because of the principal paydown.

And I haven't even gotten to appreciation! Appreciation is something you hope for in St. Louis or Cleveland or Plymouth. In an international gateway city with a severe housing shortage, appreciation is real. The longterm average for LA is 6.7% annually; that's going back to 1975, meaning we're counting the five recessions that have occurred since then. Obviously, actual appreciation isn't a constant and value does decline at times, but in the long run, appreciation has built an incredible amount of wealth in this city.

As far as your specific numbers go, it's really just a math problem. Putting 20% down will reduce your monthly mortgage cost and produce cashflow more quickly. However, if a more expensive building produces more rental income, it might be worth the added monthly cost of putting just 10% down. I'm sure there are scenarios where your net out-of-pocket each month at 10% down in a nicer neighborhood is in line with 20% down in a worse neighborhood.

And as for timing, I wouldn't be in a rush to buy this year. The single family housing market is crazy hot; I don't like that at all. The multifamily market is pretty hot, too, though there's soooo much uncertainty right now. The eviction moratorium, high unemployment, federal stimulus up in the air... I don't think you should buy a house now, and I would only buy a multifamily to househack if it was perfectly located and net cheaper than you current rent or mortgage. Otherwise, bide your time, no rush.

I'm curious about where you've been looking. I spent January, February, and March driving through South LA to understand the neighborhoods and scope out properties. I was looking for a fourplex as a straight investment property. Cashflow in that part of the city isn't hard to find. But, that said, my duplex in Hancock Park is ideal: we can move out at any time and the property will cashflow -- not a lot, but it'll cover it's own expenses while my equity builds and builds. So where do you want to live and what are the B/C neighborhoods you've checked out?

All the best,

Jon

Chris Collins · Answer

I may be biased, but house hacking in a multi-family seems to be the best intro strategy in Los Angeles.  The risk with a live in SFR flip is that you don't have a secondary exit strategy if the market does take a dive (although the markets still look strong with such low interest rates). Unless you find a KILLER deal the property won't cash flow in this market if you decide to rent the property out.  On the other hand, you can find a 2-4 house hack deal where you benefit from tenant loan pay-down, and a good deal will cash flow if you move out.

My wife and I got into a duplex in City Terrace last year with an FHA loan, made some repairs, placed tenants, and refinanced into a conventional loan 6 months later.  It has been a great learning experience!  Feel free to reach out if you'd like to chat.  We plan on upgrading to a 4 unit property in a nicer neighborhood in the next couple years, so we may be looking at your new neighborhood!

Rudy Vazquez · Answer

@Bridget A. If, I had to do it all over again. I would start in a Duplex, live in one and rent the other. And I would try not to use all your cash, unless absolutely necessary. First step is, get a good local lender, and find out your budget or your comfort monthly budget on a purchase. Also, ask the lender how soon can they close, once an accepted offer is made. The sooner the better. Anything over 31 days is slow, and will make your offer weaker to the Seller. And 100% agree with you, always look for properties that you'll like to live in. Anyhow, there's a lot of pockets here in L.A., hope this helps a bit.

Stephanie P. · Answer

Smartest post of the thread.  Well done @Joe Villeneuve

Stephanie

Clarence Johnson · Answer

House hack a multi, the lower price points are safer than the higher price points and have higher rental demand.  I would not stress, worry or suggest selling even if prices do dip as your rent will stay the same.  You can spend less than $50k doing a house hack and purchase again in 12 months, wait and watch the mkt, or look into other mkts.  Don't buy high to protect yourself, just buy right and make sure your monthly mtg contribution is at or below mkt rent so you will cashflow when you rent it and move.

Joe Villeneuve · Answer

Invest in a different market.

First Investment with 200k Down Payment - Any Tips for a Newbie?

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