Diving Into Rental Properties - Am I Ready Financially?

Question

BP Team,

I am a newbie who has combed forums for answers to my questions regarding readiness to dive into buy & hold rentals, but since everyone has a unique situation & this is an ever-changing market, I’m hoping to get some advice from you.

I think it’s important to be fully transparent about my current financial situation in order to get the most accurate feedback, so I’ll be throwing some numbers out to you all for reference.

A little background on myself: I am 27 years old, live in Columbus, OH, married w/o kids, work a full-time job and make roughly $85k per year ($150k total household). I have about $20k in savings, $30k in equity on my house, student loan debt of $10k, car debt of $10k, and $140k left to pay down on the house over the next 27 years.

I have been educating myself on buy & hold rental properties, and will be making the leap in the near future.

My question to you all:

Given my current financial situation and the current market at all time highs, do you feel now would be a good time to make the jump?

I have been bouncing the idea around with family & friends & mentors, and a lot feel that I should wait for a market downtrend to start building a portfolio. Are they right? I would tend to agree with them if I were flipping, but rentals feel like a much safer play.

P.S. I plan to invest in small-town Ohio single family B-C class homes to start, with the goal of building to B class multi-unit apartments within the next 5 years.

Really grateful to be a part of the BP community as there’s so much valuable information shared. Any insight you could provide would be much appreciated.

- Brad Fisher

Remington Lyman · Answer

@Bradley Fisher I would recommend house hacking if you can. It produces the best cash on cash return you can find. I like house hacking multifamily properties because it allows me to rent the other units and cover most of my, if not all, of my monthly payments.

Chris Levarek · Answer

@Bradley Fisher I think @Kyle Mccaw nailed it. In my opinion, the only voices you should be listening to, with regards to goals, are those mentors or people who've done what you want to do. Those who care most for you will often give advice which is more protective, as they care about you, instead of beneficial to your financial future or goals.

As far as, are you ready, I'd say you are more then ready. I can only speak from my experience though as I invested with far less in 2018 and am now far ahead of all those who stayed on the sideline waiting for the correction. Action is much more important as you won't get experience waiting and truly the only finite resource is time.

I like Joe Fairless's three rules of thumb for smart investing especially now in the cycle. Invest for Cash flow, Have Reserves and use Secure-long Term Financing.

Account Closed · Answer

@Bradley Fisher I think you are in a great spot to invest. My advice, do it now before you take on more responsibilities (kids, etc.). A lot of my friends would love to jump into this but they have tried to jump in a little too late and have way too much to lose and the risk isn't worth the jump for most. I also would caution you against waiting for a downturn in the economy (dependent upon where you are looking to invest) as that might not happen and you might end up on the outside looking in. I agree with @Chris Levarek above--I would encourage you to take the advice of those mentors of yours who have, not just an opinion, but experience in the investing world. Best of luck!

Brendon Burke · Answer

Bradley

185k household income and 20k savings! I would pay off that 10k car and 10k student loan tomorrow and waiting on having kids will pay off too. Have a little nest egg, but with that income you could pay off that evil credit card quickly in the short term if something crazy happens. Sounds like your house mortgage/tax/insur is around $1400/month so that is leaving around 14k monthly household income minus "must have" cost of living. I would try to save at least 10k (hopefully much more) a month keeping living costs as low as possible (eat cheap, no goin out). 20k back in savings in 2 months, 40k in 4 months, 100k by the end of the year. Ask your bosses for a raise as all they can say is NO. Sounds like your house is worth 170k, buy what you know and your area is not very expensive compared to the coasts, by your numbers. Make sure you have good credit, talk to banks tomorrow (local) and closely watch/understand your market for next few months, then you will be setup for at least a 20% down on a cash flowing property. Hopefully a 2-4 plex primary res. loan to lock that 30 year fixed. Talk with your banks and see how long you would have to live in a multi unit before you could move back into your house if that's where you want to call home. Repeat a few times when you're young and no kids. I agree that you can't time the market, get in young as time is your principal friend. Lots of routes and adventures ahead, stick with it.

Kyle Mccaw · Answer

@Bradley Fisher You should not try and time the market. Just buy with equity and have the ability to lower the rent if you need to in bad times. Most of the people they are telling you to wait for a down market most likely don't own rentals. For example: If you keep waiting for the market to drop and it goes up 15% before it drops 15%....you are better off buying now. It's rentals are a long term investment. It is like when is the best time to plant a tree? 30 years ago. The next best is today.

Only take advice from people that are successful real estate investors. Too many people give advice from the sideline.

Brad M. · Answer

@Bradley Fisher

Very similar numbers to when I bought my first rental, but I bought at the bottom end of the market (but didn’t know that at the time). Given you’re investing in small towns you will likely be less affected by any downturn. I wouldn’t wait if that’s your plan. It has to start with one and who knows what the future economy looks like.

Daniel Judge · Answer

@Bradley Fisher sounds to me like you're set up and I wouldn't worry too much about timing, just buy right (which includes trying to buy at a discount which should be more doable in smaller/rural areas of Ohio). If you're holding for the long term,  the numbers work, and you buy at a discount I think you should do fine. The alternative (waiting for a downturn) could leave you on the sidelines indefinitely.

Bradley Fisher · Answer

Gents,

Thanks for all the great advice and positive feedback. I’ve identified my first multi-unit buy & hold property and plan to make an offer this week, fingers crossed everything goes well.

With this multi-unit I’m required to put $40k down (25%), so going to have to take a $15k loan from a family member, paid back at 5% interest over 3 years.

I’ll cash flow $200 total after mortgage and personal loan pay down, which will bump up to $600 after 3 years. Gross income of all units is $1600/month with room to be increased by $50-$100 after basic improvements (paint, laminate)

Just want to confirm with you all that the numbers make sense and I’m not crazy for taking this leap!

Brad

Bradley Fisher · Answer

Thank you all for the feedback!

Diving Into Rental Properties - Am I Ready Financially?

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