All in with only $40k, is it still possible?

Question

Hello everyone my name is Scott and I have been interested in real estate investing for probably the last 15 years or so. I live in Southern California and so for the amount I’m looking to invest, I’ll definitely need to do something long distance. I’ve been following a few different markets; Fayetteville, Killeen, Memphis, Cleveland, and Indianapolis to name a few. I know a few years ago I definitely could have got a deal done for $40k all in but not sure that’s entirely possible now.

One of the main reasons for not investing before was not having the funding(bad money decisions) and also my wife was very terrified of it due to what happened to some of he family members in 2008. Fortunately now, I have the funds and my wife is on board, sort of. My wife is up for getting a rental, but with no debt.

So this is why I am trying to find an area where I can get something and be all in at $40k. I’m open to section 8 and actually I’d probably be more comfortable with it because of the guaranteed rent payments. Any help or advice would be great, thank you all.

Tucker Cummings · Answer

Wondering if you're talking about Fayetteville, NC or Fayetteville, AR. I invest in Fayetteville, NC and 40k will get you a crack house and side of fries.

However, if you leverage it and get two 20% down deals on a 100k house, you can get a decent B/B- house, rent by room to soldiers from Ft. Bragg and cash flow a healthy $500+/month. If the market downturns, soldiers still have government funded jobs (basically same as Section 8), it comes directly out of their paycheck, and you have a nice buffer between your mortgage and the rent collection, in the event market demands lower rent. Speaking from experience.

Anastasia Gamino · Answer

Hello Scott-

I have purchased 40k properties in Indianapolis that needed an additional 20-25k in rehab, and this was almost 2 years ago. In our current market, this would be very difficult. That same property now has the ARV of 130k, I just recently refinanced. I would think about using the 40k to take out a conventional loan that might be an easier approach.  If you purchase a property that is around 100k with 25 percent down, this would still give you some money left over for some reserves.  Just something to think about.

Good Luck!

Jaron Walling · Answer

@Scott Gaspar More market research and running numbers on deals isn't going to fix the mindset. You said you have been interested in REI for over 15 years. That's enough time to have a few PAID OFF properties. I'd focus on WHY you want invest and have a serious talk about SACRAFICES to make it happen. Don't continue down the path your on unless your happy.

I'm in the Indy market and I'll tell you $40K will get you C-/D class neighborhood with terrible crime. You don't want a high risk OOS investment.

Steve W. · Answer

@Scott Gaspar First things first is to check your "Why." What are your goals with real estate? We should use that to drive our investment decisions forward, and you may find out that your risk aversion is steering you the wrong way. It is possible when trying to be too risk averse you end up doing something more risky. For example, like @Tucker Cummings said, $40k purchased for cash may give the illusion of fools gold, with the reality being lower quality tenants and financial loss due to cap ex, than if you put $40k/20% down on a $200k house that is in a better neighborhood with better tenants and still cashflows.

To this regard here are a few BP posts that illuminated this issue for me.

Investing in Cheap Real Estate: Is a $30k House Always a Pig? (biggerpockets.com)- This also has good follow on discussion comments. For an against low priced housing.

CapEx: How to Estimate Real Estate Capital Expenditures | Blog (biggerpockets.com)

The Math Proves: You Can't Make Money on $30,000 Houses. (biggerpockets.com)

Ryan Blackstone · Answer

@Tucker Cummings a side of fries? Man that seems like a great deal!

Ryan Blackstone · Answer

We are not seeing those deals here in Fayetteville, AR. You would have to take out debt. If you bought something like that, it would have major issues, and be a headache. Honestly, it helped with my wife when I started talking about investing as a "safety net" and not "freedom." That rang more true to her. She also started to see the difference between good debt and bad debt.

Brian Kantor · Answer

@Scott Gaspar, for my first rental in Detroit, I was all-in for  about $45k including closing costs and a $2500 bonus to my agent for helping me on a property with such a low commission. You can read the details on that here.

It is doable in Detroit for sure, but as previous @Jaron Walling mentioned, you do need to be careful of the micro-market you are in. My property is in a solid C neighborhood, and I was comfortable with that because I found a property manager with many properties in that area and a ton of experience. For example, we did not install the hot water heater until after a lease was signed and then just a few days before the tenant moved in. And after it was installed, we paid someone $100/day to live in the property on an air mattress from the day of the installation until the day the tenant moved in (to prevent theft).

Net-net, you can do it, if you take the necessary precautions.

And, yes, I am a proponent of Section 8. I only offered my property to Section 8 tenants for the exact reason you mentioned. My tenant only pays 5% of the rent with the government covering the remaining 95%, so even if she misses a payment (she hasn't), the effects are small. Every state has different Section 8 guidelines, so be sure to Google your state's affordable housing office, and contact them for information before you go that route. You'll also want to ensure that your PM has experience with Section 8 tenants because there is a decent amount of paperwork that needs to be processed and inspections that need to be scheduled and paid for by the owner.

Good luck, and feel free to DM me with any specific questions.

Linda S. · Answer

@Scott Gaspar,

Why not use the $40K as a down payment on 2- 100K houses in nicer C-type areas?

Out of state investing in D/warzone areas is a horrible idea, if a house is cheap-- it's cheap for a reason, likely huge deferred maintenance!   Remember, you aren't the only one with $40K, so if other local investors are passing it up, there is  a reason!

Tom Mills · Answer

@Tucker Cummings Hahaha, that was funny. I actually have a couple of those in that area. Minus the crack, I think. Anyway it does make things interesting but you can still manage the tenant. There is good cash flow but as you said more headaches  and probably more risk.

Andrew Zannotti · Answer

@Scott Gaspar I'm in the Killeen market and being all in at 40K would be tough to say the least. Using 40K to leverage here is definitely doable. I'm working on a duplex I purchased off market at 51K now with about 30K in renovations that will pull around $1400 a month but I had to go into specific neighborhoods to be able to go direct to seller to make those numbers. Wish you the best of luck in your journey, if you have any questions about the Killeen market shoot me a message.

All in with only $40k, is it still possible?

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