Starting Out!?!?

Question

Hi, just signed up with BP yesterday. All I can say is WOW! I'm so impressed with the wealth of information and depth of knowledge I have already found. I'm 27 years old and already fed up with the rat race. I want to create income so I can enjoy more time with my two sons and beautiful wife. I've spent my last 5 years working 6-7 days a week 10-13 hr shifts as quality control in the oil industry. Great job for someone my age no doubt but there has to be something more! 
   I'm wanting to give rentals a try. I thought I knew what I wanted but after reading through multiple posts the purchasing arrangements and creative financing possibilities have my head spinning! I'm hoping to get some feedback from people who have already failed their way to success! 
   Where I'm at currently....I purchased a very nice foreclosure nearly two years ago in N.W. Indiana that needed some work. I have most of the work completed and the property just appraised for 296k, I currently owe 192k. I can put this property on the market this fall, without paying capital gains tax. 
     Should I find another home and pay cash for it and then finance a 4 plex? Should I buy 3 or 4 small SFR by the lake with cash (there's some really decent ones from 40-55k). My original goal was 6 4 plexes in 5 years but it sounds like getting funding for that many properties may be difficult and not happen in 5 years.  I'm here for solid advice and expertise please help!!! What would be my best direction starting out?

Marco Santarelli · Answer

Nick Martin:  Property management is central and key to your success - especially if you are not in the local area.  I spend time screening and getting to know the property managers before hiring them.  If you have a good management company then you reduce or eliminate any headaches.

Buck B. · Answer

Hey Nick, Welcome to the site!

Nick Martin · Answer

Hi Taylor!
             I think that's a great point you bring up. I know several people myself that got out of rentals just because of headaches dealing with the tenants, my neighbor is one of them. I think a property management company might be a Godsend, especially for those who plan to do a lot of traveling!

Taylor Jennings · Answer

Welcome Nick Martin! Always nice to see another Hoosier join the site =)

Nice work on the foreclosure rehab! I'm sure your wife is on board after you sell your current project.

You have plenty of options in Indy for SFR/MFR.

In my research, landlording is something many people do, but very few actually enjoy.

My wife and I plan on purchasing turn key properties downtown Indy and having a property management company take care of the rental for 10% of the monthly rate.

I personally would prefer to give up 1/3 of my cashflow on a property to dodge the headaches and focus my time on more important things.

I know a handful of people here with plenty of SFR and duplexes in their inventory which range from $30k-$100k.

Brandon Turner · Answer

Hey Nick Martin welcome to the site!

Ciprian L. · Answer

Welcome Nick Martin!

I think is great that you have a plan for the next 5 years, but if it doesn't happen you can  always extend the terms. 
Better than taking some rush decisions is to start slowly with one SFR or 4-plex and see how it works.

Joel Owens · Answer

Meet up with another husband and wife locally who are investors and talk to them about their landlord experience.

Everything sounds great in the beginning. I have owned 20 units before with apartment buildings. Thinking about it an doing it day in and day out is totally different.

I would start off with something small in case you find out you don't like it and sell of OR you can save money and go the other route and buy a larger size commercial apartment building with a full time manager and repair person. You can also use management on a smaller property but will not have the scale for a full time repair person.

Nick Martin · Answer

I guess my biggest question would be this, what's the smartest way to go about acquiring multiple properties in a reasonably short amount of time (5 years) with my available resources? Is a 4 plex the best property to start with or should I start with cheaper SFR's? I do have good credit.

Nick Martin · Answer

Hi Joel and Aaron, thanks for the replies! I am currently living in the home. I have 25k in savings and 102k in a retirement account being managed by vanguard, I really don't want to touch this one. The refi was done by a bank because I was looking into pulling out some equity for down payment. My wife's onboard with rentals 100 %!!!

Joel Owens · Answer

Hi Nick,

So the foreclosure you bought you are currently living in correct?? If not then the 2 year rule to wipe out capital gains wouldn't apply. You would still pay long term capital gains predicated on your income level or you would 1031 the proceeds into another property or properties.

Do you have any other cash saved up?? The perceived equity in your property is great but what was the appraisal done for?? If it was one to just get a value on your property it could be worthless. Many times appraisers will want to hit a number close to what the owner tells them because if the number Is bad they stiff the appraiser. If the appraiser has to do an appraisal for a bank and funding they are much more conservative.

Either way even if the number is valid you will not really be able to tap that much because the banks only lend up to about 75% equity or so.

The other part of this is your wife and kids. The wife may not want to be  landlord, live next to tenants, etc. With you working all the time guess who will be stuck with it??

The saying "Happy wife, Happy life!" holds true. So define as a family what your wife is comfortable with and make sure she is included and in agreement and play out all the things that can go wrong with renting out properties. Some people are just not made out to do land lording as it can be a grind and affect your life having to hound tenants for payment and evict and make repairs etc.

Also find out how much houses like yours are rising in price each month in the area. You might want to wait a few months for the peak to hit and then sell off. It depends if your target is an investor or a homebuyer.