Hello from Northern Virginia - looking for advice

[Matthew S.]

Hi Guys,

I found this site a few days ago and am very impressed.

I’d like to describe the small amount I’ve done so far with RE investing and get any feedback and advice you might have on my next steps.

About me, I’m a native of the northern part of Northern Virginia (Fairfax/Vienna/McLean/Arlington), just outside Washington DC. I’m 28 years old and first wanted to invest in real estate when I was about 25.

So far, I own one house myself and co-own a second rental house with a business partner. Here is how those investments look:

House 1 – Townhouse in Fairfax area I bought for approximately $430,000 one year ago. I live in it, and rent out other rooms to friends my age while managing the house. It brings in $2,100 a month in rental income, against $2,015 in monthly PITI costs (30 year fixed rate mortgage). So it's a good situation, in that I am living there while only paying utility and repair costs, which allows me to save up money for the next investment.

House 2 – Detached single family house in Falls Church area that an older friend and I bought this summer of 2013. We bought it for about $530,000, and each have a 50% interest in the property. I am the property manager for this house, since my friend lives in California. Right now we are bringing in $3,050 in rental income from renting to four young professionals. Rental demand is ridiculously strong in this area, and we could probably be renting it for significantly more, but I had to get it rented out on a very short timeframe in order to secure the loan (that's a long story). The PITI costs are $2900 a month (30 year fixed mortage).

This second house is not nearly as good an investment as we would like, but it is not terrible either. If there are any big repair costs, we may have to subsidize it, which is not good.

Questions –

1 - We had a incredibly difficult time securing financing for the second investment property (even though we put 25% down). We probably made the mistake of only looking to the big banks. Given the seemingly very stringent regulations on lending following the financial crisis (which look set to get even tighter in 2014), I am wondering how I will be able to secure additional loans to get financing for future properties. I am concerned about the restrictions concerning debt ratios, the discounting of rental income (only 75% counts), and wonder how these issues can be navigated – it seems like government and banks are making it hard for small investors to grow their portfolio via traditional financing. Surely some other threads on this site are discussing this – if you can point me to any useful discussions I would appreciate that.

2 - Also, if you are from the greater DC area, what’s your viewpoint or preference on investing locally (where it’s very expensive) versus investing in other cities or areas of the country? I am considering an investment in San Diego in the future, as well as in smaller college towns in Virginia and Maryland.

3 - Also, does anyone know about any multifamily properties in the NOVA area? I cannot find any and assume they only exist in DC. I would eventually like to have a multifamily property.

4 – How important do you think having an emergency fund / significant savings is? I have enough right now to cope for about 6 months if I lost my job. I think I should have more. Maybe I should patiently save for a significant period and build up a big reserve before doing my next property, rather than take undue risk. My time horizon is long given that I’m 28 years old.

As you might guess, I have a pretty good job in a technical field which has allowed me to save money to start buying houses at a young age. I have no debt apart from mortgages and try to save as much as possible every year for downpayments. My goal is to own at least 8-10 income-producing rental houses and to be able to retire if I want to in 12 years, at age 40 (even though I don't think I will want to, since I enjoy my regular job). I also want to accelerate the paydown of mortgages where I can and own several homes free and clear by age 40. However, the house prices in the NOVA area are ridiculous and I am not sure if I should continue investing here. Overall, my preference is strongly toward buy-and-hold to produce income (rentals), rather than flipping or wholesaling, which I regard as speculation rather than investing.

I look forward to any advice you have. If there are others on here that would be interested in discussing investing in houses in the Northern Virginia / greater DC area, please contact me. I am happy to talk over email, and perhaps eventually to meet in a public place in NOVA to discuss.

[Roger Lin]

Hi Matthew,

Welcome to BP. You asked some very good questions and that is indicative of your seriousness. Please see my comments below. I will try to answer them as well as I can.

Questions -

1 - We had a incredibly difficult time securing financing for the second investment property (even though we put 25% down). We probably made the mistake of only looking to the big banks. Given the seemingly very stringent regulations on lending following the financial crisis (which look set to get even tighter in 2014), I am wondering how I will be able to secure additional loans to get financing for future properties. I am concerned about the restrictions concerning debt ratios, the discounting of rental income (only 75% counts), and wonder how these issues can be navigated - it seems like government and banks are making it hard for small investors to grow their portfolio via traditional financing. Surely some other threads on this site are discussing this - if you can point me to any useful discussions I would appreciate that.

Securing financing through larger conventional banks continues to be a challenge. Smaller banks on the other hand are willing to be more flexible in their underwriting. This is because they don't not have the resources to compete by building more retail banking branches to grow deposits. They actually do what banks are supposed to do, i.e. lend money. I would look to building relationships with community banks such as First Virginia Community Bank, Chain Bridge Bank (right in your neck of the woods), John Marshall, etc. When it comes to banking with them relationship truly matter. So, go and tell them what you are looking to do and build relationships with their lenders.

Beyond banks, our region has an abundance of money. There are several groups of private lenders that may be help you achieve your goals. However, I think if your strategy is "buy and hold", bank financing is likely the way to go. This is simply considering the profit margin as well as the difference in rates different types of financing will charge you.

2 - Also, if you are from the greater DC area, what's your viewpoint or preference on investing locally (where it's very expensive) versus investing in other cities or areas of the country? I am considering an investment in San Diego in the future, as well as in smaller college towns in Virginia and Maryland.

I love investing in the D.C. region, especially VA. I think we have a great outlook as a region. Yes, it is expensive but after making some mistakes investing in places that I cannot easily drive to (2 hours max), I don't go out of the region anymore. Also keep in mind the Washington D.C. MSA (Metro. Statistical Area) is HUGE! Most importantly, real estate is extremely local, especially residential. So, be very very careful when considering going out of familiar locations.

3 - Also, does anyone know about any multifamily properties in the NOVA area? I cannot find any and assume they only exist in DC. I would eventually like to have a multifamily property.

There are some. They do not come up very often and usually, they are gone before they get on MRIS. Why? Well, multifamily is the hottest asset class in commercial real estate right now. People are willing to pay 4-5% cap for them. I think it's getting a little foamy but in the long-term, the outlook is good. According to the Center for Regional Analysis, between 2010 and 2030, we need 700,000+ net new units of housing, more than 60% of which will likely be multifamily.

4 - How important do you think having an emergency fund / significant savings is? I have enough right now to cope for about 6 months if I lost my job. I think I should have more. Maybe I should patiently save for a significant period and build up a big reserve before doing my next property, rather than take undue risk. My time horizon is long given that I'm 28 years old.

I think you are doing great to have 6 mo reserve. I tend to think about my real estate as my savings plans. I understand it may be difficult to consider them that way, if they don't currently cash flow enough. But isn't the whole point of investing in real estate to build a stream of passive income to support you whether you are working or not? I would consider very carefully about what you invest next. It needs to more than "pay for itself". Many buy & hold investors think that breaking even is good enough, time is on their side. As long as they can keep the properties up, they can count on that appreciation years down the line. This notion is not wrong, especially for our region. I used to be exactly the same way. However, having lived through the Great Recession, we need to all understand that drastic losses in value is possible and real estate prices don't always go up.

It's very important that you refine your cash flow pro-forma analysis and consider other properties other than SFHs/THs. In this region, you can get commercial (office and industrial) for about the same price as some of the houses. In my opinion, commercial offers many more financing options and mechanisms that you can protect your stream of income (i.e. much longer lease terms).

I'll shut up now and let someone else chime in. If you are interested, the newly formed Capital BP group just met for the first time last week in Fairfax. We plan to meet monthly. Send me an email and I can add you to the invite list.

I hope you find my responses helpful.

Roger