Whats the best to go about this ?

Question

Hey BP,

I'm ready to jump into my first real estate investment property with the following opportunity described below. Let me know whats the best way to go about it.

So my brother will be stationed in the Military in San Diego starting April. He will be there for a minimum of 2 years and up to two years. We came up with an idea to BUY a property (single family/Condo: 3 bdrm, 2 baths) and rent the two other bedrooms to his two classmates. We took the average rental for a 1 bdrm, 1 bath in Oceanside, CA. and came up with $800/per person. This gives us $2400 (including my brothers rent) to have as rental income.

Our Goal is to be positive cash flow.

We're also thinking about using a VA loan to finance the home.

Our downpanyment can exceed 20% but it will all depend on how much cash flow we can generate.

Any advice/opionion is appreciated.

Account Closed · Answer

I started in San Diego with a similar “house hack” back in 2011 but with a conventional loan on a 2bed/2bath condo.  I agree with @Kevin Fox that it is all about location, with the right location you could easily have 20-30 applicants and others will be vacancy magnets.  Is your brother being stationed in Pendleton, Miramar or Coronado?

Justin R. · Answer

@Michael Bangsal You have mentioned "cash flow" several times.  Forget about cash flow - "cash flow" doesn't determine whether any particular investment is a good one or not.

Think about it this way: you could loan your $200k to me [or insert any ones of hundreds of others that would take you up on it] and I will GUARANTEE you $12,000 in interest every year and you can have your money back any time you want with 3 months notice.  You don't have to do ANY work for it other than cash the checks.

Now, try to find a property where, if you invest that same $200k, your total annual returns (cash flow, equity from paying off a mortgage, appreciation) gets you AT LEAST $12,000 and compensates you for any headaches related to managing a rental property.

It's gonna be really hard for you to find that in Oceanside.

The point is to think about this potential rental investment compared to all other investment opportunities available to you ... then pick the one with the largest total return that matches your desired life style.

Account Closed · Answer

@Michael Bangsal, cash flow is vital but you need stay focused on your cash on cash return. I would look for a property what would cash flow with the zero down VA loan. This will provide you with a very high/infinite COC return depending on your miscellaneous repairs and closing costs.  Try to keep your COC returns above 12% at the minimum, otherwise you could make that return lending hard money without as much hassle.

Dan H. · Answer

I agree with virtually all of what was written above.  There is a lot of good information in the post about leveraging money rather than big down payment, about how to determine room rental rates, and about taking vacancy into account.  I agree with the information provided so I will not rehash it.

I want to make sure you realize cap expense rates in the populated areas of Southern California (including San Diego) is significantly higher than for the nation as a whole.  For a 3/2 in San Diego I would use a cap expense of between $300 and $325 per month.  So your cash return should take into account vacancies (I have never done room subletting but for my units I use 5% vacancy rate and I am always significantly under so far - for last 5 years I am below 2%), maintenance (I self manage and use 5% of rent), and cap expense (I recommend you budget at least $300/month).

Finding positive cash flow on a SFH in San Diego is not easy if taking into account full expenses and minimal down payment (and like the posts above, I recommend minimal down payment to better leverage your money).

Good luck

Jeff B. · Answer

Question the viability of $800 room rent.  There are areas what one could get a full studio or 1bed/1bath for that.  Roommates resort to renting rooms due to economics, and seldom due to "oh these are my best friends".

Elizabeth Colegrove · Answer

Each to their own :) Personally what you describe is not my kind of deal. I am a navy wife so I am very familiar with the community. We own 7 house that we have bought as we have moved base to base. So I think the idea is great. I personally just invest differently. I don't put tons of cash into the deal to generate cash flow. I always feel that is false inflation. My goal is to put as little into the deal and have the tenant pay it all off.  Therefore for personal properties we used the VA loan at 0% and once that was used up did 5%.

If you bother is an officer why doesn't he use his VA loan and go into it on his own. While he might not cash flow positive, since he only has two roommates. He is still doing way better than if he had to pay rent.

Than you can use your money and get two houses with that 50% down. while your cash flow might not be as great, you probably can break even. Therefore over time allowing you to build up a profit.

We have bought 7 houses. While some of them were pure rentals with 20-25% down, we buy as many as personals so that we can put very little into them. while our margins aren't as awesome as they could we still make $1800 before variable after fixed expenses.

Again your strategy isn't necessarily bad, I just personally like to be as efficient as possible with my money making it work as hard as possible for grow.

PS- Don't forget that mortgages are still low. So putting tons into a 3.5-4% mortgage is a loss opportunity cost in relationship to investing in other investments.

Good luck!

Kevin Fox · Answer

Sounds like you have a fairly solid plan in place for your first investment. The only flaw I see in your analysis would be the way you estimated rental income. Generally speaking, the price/bedroom will go down as the number of bedrooms go up.  If there is a particular neighborhood you had in mind, I would be happy to help you shore up the numbers a bit on that end.

The other thing that I would recommend is talking to a lender and getting that aspect sorted out sooner rather than later.  Do you have a lender out this way who is helping you out?

Elizabeth Colegrove · Answer

Michael,

A couple of questions? Why are you guys going on the loan together? Are you both going to be living there? If you are using the VA loan why are you putting 50% down? Personally for me the whole point of personal properties is for me to be able to put as little down as possible. On the other hand, I am huge believer in my tenants paying off my loan.

Michael Bangsal · Answer

@Kevin Fox

@Elizabeth Colegrove

Account Closed

He will be stationed in Camp Pendleton.

We're looking at a property now listed @428K.

Using the VA loan and also a 50% downpayment ($214)

Is this a proper investment strategy? It comes to positive cash flow, but Can i be utilitzing that money else where

Michael Bangsal · Answer

NA Beard

Great point about your lease agreement on your tenants! 100% agree.

I have some analyzing to do when it comes to my strategy.

Whats the best to go about this ?

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