Investor from CA, Stress test my plan!!!

[Rollan Dizon]

BiggerPockets experts!

I want to get your thoughts and 2 cents from a philosophical and risk perspective.  I am 42 years old and my wife is 39, we have 2 kids, age 9 and 5. 

GOAL: Insulate my mid-long (5-10 years) term strategy (have income producing real estate to pay for fixed living costs + 5K month cash flow for investing) even during a 2008 housing meltdown.

I know debt can magnify the creation of wealth, but it can also magnify potential destruction.  Investor psychology is unique to each individual, whether they are more aggressive or conservative; I find myself in the moderate-conservative camp throughout my investing career (yes, I have listened to Dave Ramsey since 2000).  I have invested in REITs with my paper assets, but this is the first time I am investing in real property for the purpose of cash flow. Here is my situation, and would love to hear from you as to the risks I need to be aware of that may take me away from my goals. Since this is rental income, I will not lose sleep at night for temporary declines of real estate value.

Real Estate Owned (Assets, income, debt):

1. Tracy, CA Home, value is 400K, rental income is 2100-2400/month range (signing property agreement next month, converting this to rental from prior primary residence); no debt, no mortgage.

2. Birmingham, AL (in contract), Purchase Price 115K (fully rehabbed turnkey), value is 137K, rental income range is Gross 1200/month, 90K mortgage.  This is in a B+ to A neighborhood, 3300 square feet home

3. Birmingham, AL (in contract), purchase price ("all in" rehabbed), 60K, ARV 87K, gross rent 850/month, B neighborhood, Cash buy, no mortgage

4. SOMA Condo, Global City, Philippines Vacation rental (via Airbnb), 2014 average per month 600/month, 150K value, no mortgage

Liabilities:

1. Primary Home in San Jose, B Neighborhood, 700K value, 510K mortgage, 3300/month PITI

2. Lifestyle expenses 3000/month (our enjoyment)

Paper Assets:

1. Investment assets 1.4M (Yearly contribution of 48K)

2. Checking/Liquid Investments: 100K

Income:

1. Earned income (Net, highest tax bracket), $18,000/month (this is also net of  annual monthly investments to my paper assets)

Based on this information, what risks should I be aware of adding real property to my investments? In context of 2008 collapse? Based on my numbers, would you be more conservative? Aggressive? How so?

Thank you for your input!!!

Rollan

[Joe Bertolino]

Sell the house in Tracy, 1031 into a small apartment in one of the several Central Valley towns that provide cash flow that rivals what you see in the south and Midwest but has a higher ceiling. I am a Dave Ramsey fan (and ELP) but have a slightly different opinion on debt when talking about a multi family property. Even at the bottom of the crash in 2008/2009... Class B apartment complexes in Northern Ca were full and rents were stable or rising. If anything the tenant pool improved dramatically. Since you appear to have a good income you can plow extra income from that property to pay off the note like a debt snowball. In 5-7 years you could have a paid for apartment complex within 90 miles of your house rather than having a bunch of sfr's halfway across the country.