How do I decide if I'm over extended or just think I am?

Question

Since I'm using this as a first and introductory post I'll warn you up front it may be a long one.  ;)

First some background. I'm a newb at the "investing" part of real estate. I've owned my own homes (and lost one in a divorce) for about 20 years in solidly appreciating markets. I was fortunate enough to find a REO deal after the divorce and shortly thereafter the market really took off where I live in FL so I have a fair amount of equity in the property even ater a home equity loan. As further incentive my mother passed away a little over a year ago and left me a small sum of money. Since I have a decent job and credit score and little secondary debt I've decided that it's time for me to start acquiring rental properties to help finance my puttering after retirement in about 10 years or so. After much reading, "observing" and researching the current inventory of possible rental properties I ended up writing a contract on a leapfrog house last week and the financing is pending as I write. I've also made another "acquisition", a real estate attorney that I think I can trust. My intention is to go ahead and rent my current house. I understand that being a landlord isn't the easiest thing in the world but  I *think* (remember I've never done this before) that the market will bear a rent ~$300/mo over the costs of mortgage, HE loan, maintenance and taxes and insurance. I also have enough cash left to possibly be able to purchase another low end property - a trailer on 2 lots in an area that I expect to join the "boom" within 5 years - without getting too creative with the financing.

Now for my problem - how to decide if I should just stick to taking the baby step of the leapfrog or go ahead and stick my neck out and buy the second property? I read where most of you have regrets about the deal you *didn't* do and the investor vs. observer thing but I'm still having trouble deciding how to convince myself to leave the relative safety of knowing I can make all my payments to letting other people make them for me and worrying about what happens if they don't later on. Commments and suggestions are appreciated....

Marvin Valencourt · Answer

I leapfrogged into another house with owner/occupant financing terms. Essentially I have two mortgages but the current one doesn't require me to live in the house so I went and bought a place I liked better to move into. The old place is on my way to and from work and the new place. Home Depot is too so the maintenance and "stopping by" to check on it shouldn't be a problem.

I plan to use the remaining equity in the soon to be rental as my emergency fund by refinancing with a first and a home equity line of credit to be tapped if/when I need it. This will reduce my cash flow some as I pay it back but should be workable. I plan to reinvest the "extra" cash flow by prepaying the mortgage. I've also lived in the house for 5 years and basically did a rehab on it after I bought it from the bank. I'm relatively comfortable with the condition of the plumbing, electrical and hvac systems since I've had my fingers or checkbook in all of them within the time I've lived in the house.

Just for info, I decided to "retreat" from the other purchase and see how things settle out for a while. I guess I just don't have the brass to jump all at once...   :chicken:

Jason Barnett · Answer

Agreed 100% !

The first rental is a great education for you.  For your first rental I suggest living very close by the unit so that you can check on it from time to time and/or do repairs.  It would be ok to buy a new property and rent out that property instead of the one you currently live in, but you would need to make sure that the monthly cash flows will at least cover all of your expenses.

Bryan Casteel · Answer

Well, that sounds like a decent cash flow on a single property if your numbers are correct.  You should expect that you may have to take a little less, but there seems to be some cushion room there.

What is a "leapfrog" property?

You need to make sure that you set aside money for maintenance and repairs on the property.  If the rent is $1000 per month (just a round number), you should probably set aside about 3X that amount for unexpected repairs or a long vacancy between tenants.  Plus, every time a tenant moves out you will have to do some painting and maybe carpet.

If you put aside the cash reserves and feel good about your numbers, you probably should jump in.  It will be a great education if nothing else.