Buying My First Rental Property??

Question

Hello. So I'm new to this site, this forum, and the world of real estate investing in general. But just from browsing the discussions here I definitely think I'm in the right place to get started.

I've been interested in purchasing a rental property for some time now and I feel like I'm finally ready to take the plunge. The house directly next door/attached to me(I live in a twin) is going on the market and I think what better opportunity to become a landlord! I have the convenience of being literally a few steps away in the event of an emergency, not to mention the added bonus of being able to choose my neighbors.

I'm just not certain what my best bet is going to be when it comes to securing financing. I have some money in savings but would rather not touch that unless I absolutely need to. I do have quite a bit of equity built up in my home however so thinking a HELOC or cash out refinance would be my best options to cover the down payment at least. I have 10 years left and $92k owed on a 15 year 3.375% conventional mortgage for my primary residence. According to Zillow my house is worth somewhere in the neighborhood of $190k. The house I'm looking to buy next door is estimated at $156k. I anticipate being able to rent it for around $1200 to $1300 per month.

What do you guys think I should do? Is it a bad idea to tap into my equity to purchase a rental property? Between a HELOC or a cash out refinance, which would make the most sense in my situation? Is there anything else that I'm not thinking about or considering that I should be? I'm open to any advice or suggestions you may have. Thanks!

Stephen J Davis · Answer

If you are going to go in debt to buy rental property, you have to know what you are doing. You first investment should be in yourself. Take a course on real estate investing that includes property management. Neither are intuitive. You need to know the best practices and the entire business model before you start. Then, I would refinance my home and buy 3 or 4 more rental properties. I use hard money to purchase and then refinance into FNMA within two months. This keeps your down payment as low as possible and gives you the money you need to rehab the house and get it ready to rent. Good luck.

Nathan Gesner · Answer

The best thing you could do is get a little more education. You don't need to know all the numbers and terms to get started, but you should know enough to avoid the most common mistakes.

One of the biggest mistakes people make is failing to understand "cash flow" and what makes a "good" investment. Let's say you buy a house that has a mortgage of $800 but you rent it for $1,400. That's $600 a month in cash flow, right? WRONG! Cash flow is the money you have left over after identified expenses (mortgage, taxes, insurance) and projected expenses (maintenance, vacancy, capital expenditures, etc.).

As a general rule of thumb, you can assess a property by taking the projected rent income and deducting 50% off the top to cover expenses. Then use the remaining 50% to pay the principal and interest. What's left over is your "cash flow". That's what people on BP mean when they say they want their rentals to cash flow $100 a month.

In your example, the house would rent for $1,200 a month. If you have a mortgage of $125,000 on it, your payment will be almost $600 a month. Set aside 50% ($600) for projected expenses, pay your mortgage, and you don't have a dime of cash flow.

Watch some of Brandon's videos on how to evaluate properties. Once you have the basics, start looking at properties in your market to evaluate whether they are good investments or not. After a couple weeks, you'll probably be able to spot a good deal in your head, then you can dig deeper when something appears to cash flow.

Evan Polaski · Answer

@Matt Coombe, I agree with @Mike McCarthy.  The numbers, at very high level, seem fairly thin with conventional mortgage and cash in the deal.  When you are financing your down payment it makes it even slimmer.  I would be very cautious when running the numbers.  It is only a good deal if it makes money.

Your rate from a refi will be lower than the HELOC rate, but you will have much higher closing costs on a refi.  For my HELOCs I was only ever able to get to 80% LTV, and it is floating rate.

Lastly, Mike's point on not being a neighbor to your tenant is good.  While it may seem convenient for fixes that might come up, it is also very convenient for your tenant to knock on your door for every little thing.

Mike McCarthy · Answer

With a mortgage at 3.375% I wouldn't refinance.  You'll end up paying a few thousand $$ in closing costs, and best case is you'll end up with a similar rate.  Instead, I would look into a HELOC.  If you go to the same bank as your mortgage, they'll probably let you take out 89.9% of the value of your house (mortgage + HELOC combined).  Plus, the HELOC will be close to $0 to close (mine was $99 application/closing fee).

But I probably wouldn't buy the neighboring property just because it's neighboring.  There's something to be said about keeping your tenants at arms length (or a drive away).  Some will be knocking on your door at all hours with problems, and the wrong tenant could become a nightmare.  If it's a great deal - sure, but I'm not sure this one is.

I'd start looking around and seeing what other options you have.  Run the numbers using BP's calculator.  See what your cashflow actually looks like.  Then make a decision based on what else is available in your area.

Robert Biggerstaff · Answer

Personally those numbers don’t seem real good to me. Make sure all your expenses are covered and you are profitable.....so many are clueless on what they are expecting and what is reality

Buying My First Rental Property??

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