Newer Young Investor Confused on How to Proceed

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Newer Young Investor Confused on How to Proceed

Nicole Jacobson
Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes

I grew up watching my parents invest in real estate, and grow their net worth this way. I have had the opportunity to dabble myself, and how recently purchased a few homes, but concerned I am missing the boat on how I should be handling these investments.

I have 3 properties, working on purchasing my 4th. They are as follows

The 3 are all located in Phoenix, AZ and all rented

1: paid $180k was rented before it closed, paid cash with an HOA of $200 monthly and rent of $1300

2: paid $135k was rented in 1 day, paid cash with an HOA of $200 and monthly rent of $1100

3: paid $215k rehabbed total $260k mortgage on property is $100k with payment being $800 a month, and HOA of $50 a month rented for $1475

4. looking to buy a house in Colorado, where I will rent it out and also live in it. So hoping to put 20% down and pay mortgage in full with income from roommates.

I am 27 with a stable job, but being newly out of college I don't want to take on too much risk. I make a fair income, purchased these by saving and help. I save all the rent that I make monthly which is currently about $2,500 a month but I know that the cash flow is low. I am wondering if I should mortgage them and invest this money in the stock market ( I would have to pay a planner though cause I don't know the market at all).

I would love some advice about what I should be doing or am possibly doing wrong! Thank you in advance for your time I appreciate it!

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Robert Herrera
Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
10y

@Nicole JacobsonGood job owning Real Estate. The reason your returns are low, are because you are not LEVERAGING Your Real Estate. You Paid ALL CASH so your ROI is low. If you were to get a Mortgage on you houses, you would have a Huge Chunk of that money back, NON TAXED. You don't pay taxes on a DEBT/LOAN. Next, use this money to buy more Properties with 20% down.

$180K CASH, $1,100 positive cashflow after HOA is only bringing in about 7% annually. HOA is eating all a huge chunk of profit. Also this doesn't account for Taxes and Insurance so its even less of a performer. That is why you are wondering what else to get into, but in my OPINION, stocks is not the answer. Lets Look at this Deal With LEVERAGE and NO HOA.

(I Know I Have Not Included Repairs/Maintenance, and Utilities, as well as Vacancy rates)

180K purchase price ,House (No HOA) with 20% down. That's $36K out of pocket. Payment is $900/month= Principle Interest Tax's and Insurance "PITI". Rent is $1,300/month.

Simple cashflow numbers = $400/month Profit. This is about a 14% return on your money! Now go buy 4 more with the remaining money from the original $180K you had cash. Your income from just the 180K cash could be around $2,000/Month if you multiply the results over 5 houses. ALSO< you will still gain ALL The APPRECIATION from EACH HOUSE, without having to pay full price out of pocket. This is HUGE. 

I would Cash Out on all my HOUSES. Then i would turn around and implement a strategy just like this one i stated above.

I think you are on the right path, you just need more Understanding about the Rental game. I Personally see Even Better returns, you just need to Increase Your KNOWLEDGE and Leverage your DEBT in the Right Location.

On A Side note... I NEVER Buy "HOPING" for Appreciation. This is Called GAMBLING. You can loose it all in a Market Shift. If you buy with CASHFLOW, it doesn't matter if the Market Shifts, you can wait it out until the market comes back, and still make Money Every Month.

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  • Charles Sullivan
    Wholesaler · Glendale, AZ · Member since 2015 · 46 posts · 12 votes
    10y
    Good morning Nicole. I am a local investor in the Phoenix market and would love to connect with you and see what kind of value I can bring you. I work with a large group of investors in the valley that have a lot of experience that can get you going in the best direction.
    0Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    10y

    @Nicole Jacobson personally I think leveraging real estate to buy stocks is a horrible idea since you said by your own admission that you know nothing about stocks. 

    I would say this, by seasoned investor standards you overpaid for your property in AZ. At the same time, you are doing much better than most and although you don't have great cash flow they are not eating your lunch either. You did not mention the current value of the properties. If you have experienced appreciation then your rate of return could be pretty nice. Probably better than the stock market over the same period of time. 

    While you could be doing better, I see nothing horribly wrong with it. Keep learning and growing as a real estate investor. In 5 years or so step back and see where you are. I think you will be blown away. 

    I like your idea of buying here in Colorado and getting roommates. In a few years you might move on from your properties in Az. Perhaps sell and do a 1031 or do a cash out refi for the purchase of another property. 

    1Reply
  • Nicole Jacobson
    OP
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes
    10y

    Hey Bill, so I purchased both properties for the long term gains. The $135k property is valued at about $150k and was purchased this year. The other at $180k, is in an area where new builds are selling for $300k plus, and are actually selling. And the house I paid $215k for is in a neighborhood where most properties go unrenovated for $270k. I know I am not making the cash flow I should, but without buying into low income areas I am unsure how to increase my cash flow? 

    Thank you for your advice, I am hoping to stay on the low end of purchasing a home in Denver. Any area that might be better then others to consider from an investment standpoint? I would like to stay under $300k if possible. I really appreciate your time, I want to make sure I make the best decisions possible and given my limited experience it can be tough at times! :)

    0Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    10y

    @Nicole Jacobson Welcome to BP!

    Personally, I would recommend taking a few hours (it does not have to be all at once) to learn the basics of investing the stock market.  That might drive your curiosity to spend a little more time to learn a little more.  It's a relatively small investment which could effect you for years to come.  I am against paying some "planner" or advisor or stock broker or anything like that to do what you can do anyway.  If you read up on it minimally, you would probably come to the conclusion that it makes no sense to pay someone to do what you can easily (and cheaply) do yourself.

    I recommend this, not because it's better than REI, but because (1) it is an alternative and/or (2) it is a pretty decent place to leave your money while you wait for your next deal. I like it is an alternative investment vehicle, and my goal is to have two or three sources of passive cash flow over time. It also returns significantly more money while you wait for the next deal (with the risk of the value of your holdings decreasing when you need it).

    Feel free to message me if you have any questions.  I am not any stock market guru, I've just spent a lot of time learning about it.

    Unfortunately for me, I don't know anything about Arizona or Colorado, except that I can only think about investing there at this time, because it is too far for me to feel comfortable.

    Good luck!

    0Reply
  • Nicole Jacobson
    OP
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes
    10y

    Hey Simcha,

    Thank you, I will take that advise. I am looking to diversify my assets a little bit after I purchase this next property. I am hoping to save a little nest egg and get it invested. So you are probably spot on with starting to understand the market better. I read in Money Magazine that one of the biggest mistakes investors make it paying the typical fees to investment brokers, so I am looking to get out of that but don't want to lose my tail either.

    0Reply
  • Matt Dickens
    Tempe, AZ · Member since 2016 · 76 posts · 18 votes
    10y

    Hey Nick,

    I'm 22 and by no means an expert but have had a few mentors suggest some reading. Jllcollinsnh.com is an awesome place to start for a really high level overview. He has an 81 page series on stock investing that so far has given me a significant amount of exposure to the different areas. I'm currently reading a book called Laws of Wealth by Dr. Daniel Crosby which gives really good insight into investing. Hope this helps!

    0Reply
  • Bryce Sawyer
    Specialist · Parker, CO · Member since 2016 · 10 posts · 9 votes
    10y
    I don't really have any advice. But you said you paid cash for your first 2 properties. So wouldn't that make your cash flow for the first 2 properties the sum of the rent minus HOA, taxes, and %for cap expenses and vacancies?
    0Reply
  • Nicole Jacobson
    OP
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes
    10y

    Hey Matt, thank you I will check those sources out. I appreciate that, it's sometimes hard to find reliable sources for this kind of thing. 

    Hey Bryce I was under the assumption that the cost of the properties is taken into consideration as well. I might be wrong though and that would be why I am potentially confused. I was under the impression because I have that sum of money tied up, it can be negatively factored into the cash flow because of opportunity cost? I could be totally off base here though. My mom made a killing in real estate but hasn't run a number a day in her life so I am trying to follow in her footsteps in a more calculated fashion.

    0Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    10y

    I don't think you would typically include the opportunity cost into your return on investment, but it's definitely a good thing to look into.  The problem you would face, if you mortgage in order to invest in the stock market is that you'd be paying approximately 4% on any loan in order to invest in the market which, on the whole, has a yield distribution of less than that (e.g. the S&P 500 yield (check out SPY) yields about 2%.  You'd essentially be losing 2% on the spread, not to mention that technically your amortization includes some principle, which means that your second month, you will earn slightly less, and the 3rd month slightly less, etc., causing your negative spread to be even greater.

    On the other hand, you could try to pick funds or stocks that yield higher and capture the spread.  If you take out $100k mortgage at 4%, your monthly payment would be approximately $790/month or $9,467/year.  If you found something that yields a little less than 10% a year, you'd essentially pay off the mortgage over 30 years and get to keep that $100k asset free and clear.  In my opinion, that return is not large enough for the risk, although I often contemplate the idea.

    A website that helped me a lot when I got started, and still, is seekingalpha.com.  It's a lot of community-based knowledge, a lot like BP.  Although, I will say that over the years, more and more of the articles are being written by people trying to market their wares (I assume something like that happens here, but I haven't been around long enough to notice) - I guess just the nature of the beast.  But the comments sections to the articles are great; the community has a lot of really helpful and knowledgeable minds willing to answer all sorts of beginner (and beyond) questions.  (I am not getting paid by them to say this, although I did write 2 articles for them a few years ago.)

    Look into ETFs.  They're really easy to use nowadays, with pretty low expenses, and extremely easy to purchase through a discount brokerage, so you can save more of your money while diversifying over whatever base you want.

    0Reply
  • Nicole Jacobson
    OP
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes
    10y

    Simcha, ok thank you! I appreciate your help. I will take that advice and stick with what I have going on for now. I am going to start looking into the options you listed as my next move and hopefully get some money invested in the market over the next year or two. I want to make sure I am at least a little diversified, so EFTs might be a great option.Thank you for breaking down the returns on the market for me as well, I at one point had a fair amount of money vested with the promise of decent returns so I wasn't sure if this was common or not. I pulled it out because the market was overall performing poorly and since I didn't understand enough I didn't want to keep losing money.

    0Reply
  • Kevin Grinstead
    Realtor · Denver, CO · Member since 2016 · 499 posts · 129 votes
    10y

    Hi Nicole, welcome to BP. There are many opportunities here in Colorado. Congrats on making it out of college. For 300k you can possibly find either a duplex or a house that had a mother in law suite or you can go the usual roomate route and share a kitchen and other common areas. What area of Colorado are you looking in?  

    0Reply
  • Robert Herrera
    Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
    10y

    @Nicole JacobsonGood job owning Real Estate. The reason your returns are low, are because you are not LEVERAGING Your Real Estate. You Paid ALL CASH so your ROI is low. If you were to get a Mortgage on you houses, you would have a Huge Chunk of that money back, NON TAXED. You don't pay taxes on a DEBT/LOAN. Next, use this money to buy more Properties with 20% down.

    $180K CASH, $1,100 positive cashflow after HOA is only bringing in about 7% annually. HOA is eating all a huge chunk of profit. Also this doesn't account for Taxes and Insurance so its even less of a performer. That is why you are wondering what else to get into, but in my OPINION, stocks is not the answer. Lets Look at this Deal With LEVERAGE and NO HOA.

    (I Know I Have Not Included Repairs/Maintenance, and Utilities, as well as Vacancy rates)

    180K purchase price ,House (No HOA) with 20% down. That's $36K out of pocket. Payment is $900/month= Principle Interest Tax's and Insurance "PITI". Rent is $1,300/month.

    Simple cashflow numbers = $400/month Profit. This is about a 14% return on your money! Now go buy 4 more with the remaining money from the original $180K you had cash. Your income from just the 180K cash could be around $2,000/Month if you multiply the results over 5 houses. ALSO< you will still gain ALL The APPRECIATION from EACH HOUSE, without having to pay full price out of pocket. This is HUGE. 

    I would Cash Out on all my HOUSES. Then i would turn around and implement a strategy just like this one i stated above.

    I think you are on the right path, you just need more Understanding about the Rental game. I Personally see Even Better returns, you just need to Increase Your KNOWLEDGE and Leverage your DEBT in the Right Location.

    On A Side note... I NEVER Buy "HOPING" for Appreciation. This is Called GAMBLING. You can loose it all in a Market Shift. If you buy with CASHFLOW, it doesn't matter if the Market Shifts, you can wait it out until the market comes back, and still make Money Every Month.

    2Reply
  • Nicole Jacobson
    OP
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes
    10y

    Hey Kevin, I work in the Denver Tech Center but I am all over for work because I am in sales. I am considering Lakewood, or Aurora but only in Cherry Creek School district. Everyone keeps saying these aren't the greatest areas, but I want something that has some ability to bring in some rental income.. Aka basement preferably. 

    0Reply
  • Nicole Jacobson
    OP
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes
    10y

    Hey Robert,

    So this is what I was considering doing. Refinancing the ones I own for now and using that money to buy another one or two. I know the HOA's kill me but they have benefits also.. And thoses houses are currently rented with me not able to handle selling them atm. My concern with this is risk, I am new in my career and not stable enough to take on huge amounts of risk. Do you think it would be a huge detriment for me to purchase this fourth house and wait a year and possibly dump the two I paid cash for or cash out refi them? I am just concerned that the interest rate will jump and make this challenging.

    0Reply
  • Robert Herrera
    Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
    10y

    @Nicole Jacobson I would Refi, if your income will allow you to do it. If you ask me, you are taking on a HUGE RISK owning a property out right with no Mortgage. There is a lot of equity if someone decided to sue you. But that's another talk all together. Make your moves now. Only a few spots in Denver make good cashflow anymore. If you are looking for something to buy right now, and make great cashflow, i have an awesome house. I am selling my house in commerce city, next to Dicks Sporting Goods Park, NorthField, and Stapleton. Price is 225k, down payment would be about 40K. It is rented for $1,900/Month. Renters pay all utilities, Repairs, and Maintenance. Mortgage would be around $1000/month PITI. $900/month actual cashflow.

    This is about 27% ROI. Blowing away MOST Investments. I would keep it, but i have a ton of Equity built in, and I am looking to move that money into other houses.

    0Reply
  • Nicole Jacobson
    OP
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 2 votes
    10y

    I have them all LLC'd individually with a very high umbrella. I actually work in insurance for a living so I am cautious with that risk. I am looking for a home to live in, in Denver. I work in the tech center so don't want to be that far, I will have roomates in the house because I don't like paying my mortgage when I don't have to! :)

    0Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    10y

    As everyone else said, the purchase price of all your places is a little high. I rarely assume property values will rise just to be extremely conservative. I usually have to satisfy a majority of the following criteria before I purchase a place: at least 1.25% rent/value, 10% cash on cash, 10% CAP Rate, net income of $100/renter.

    You never know when the market will decide to screw you over and significantly kill your value, so try to make more of an effort to get the properties at a discount. Other than that, congrats and good job!

    I am 25 years old, started this year, and am working on purchasing my 7th rental. We are in the same boat for sure! 

    0Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    10y

    @Nicole Jacobson so first thing. When you want to "mention" someone, type the @ symbol and the first three letters of their name. To the left of your typing will appear a list of names that match your first three letters. Pick the one you want to "mention". When you do, their name appears in your post highlighted in blue and biggerpockets sends an email to us and we can know you are talking at us.

    Secondly, in my post I was warning you that folks would criticize you for your low returns not suggesting you change course. I am not knocking your approach of all cash. Personally I think it's great. Very low risk and I completely disagree with the statement that it's high risk. It does have a high cost in that your rate of return is fairly low but the risk is extremely low which it appears you understand.

    You asked about good areas to buy in and around Denver. Right now the urban core is where the action is so areas that are close to downtown are in demand. The down side is that the schools aren't so good. There are two neighborhoods where all my tenants buy in when they become home owners Barnaum and Curtis Park. Homes in those areas are less than $300,000 in most cases. They tend to be on the small side but if you search around you can find a 3 bed or one with a full basement. 

    Down around the DTC pretty much everything is cookie cutter which is good in that you know what it's like. The down side is that it's much harder to find opportunity IMO. Cherry Creek Schools are a good choice but Cherry Creek High School tends to be much more desirable than other high schools in the District. It's fairly hard to find houses in the Cherry Creek High School service area that are less than $300k. If you stay within the District you can probably find a $300K house. After that, buy and hold. 

    You seem fairly happy with your career and risk averse so nothing wrong with your plan. If you buy a house every two years and reinvest all the net rents in more real estate, in about 10 years you wont' need to work any more unless you want to. No need to get fancy and leverage up. You stay the course and you will be in great shape with very low brain damage. You have an awesome start with 2 free and clear properties and one with a low mortgage balance. 

    Personally I would recommend that if you want to learn more about stocks, search around and find an investment club that follows the NAIC (National Association of Investment Clubs) investment guidelines. Join the club and learn. The NAIC affiliated club I belong to, has resulted in almost a 10% annualized rate of return for me over the past 16 years.  

    0Reply
  • Hersh M.
    Engineer · Carlsbad/San Diego · Member since 2014 · 285 posts · 97 votes
    10y

    @Nicole Jacobson You have some great experience under your belt at such a young age. Congrats on that! And it must be good to have parents experienced in real estate as mentors. 

    BTW, if you are not familiar with 1% rule, just search for it. Its more like a reference and helps with analyzing deals. 

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    What is your end goal?

    0Reply
  • Sameet Koppikar
    Phoenix, AZ · Member since 2016 · 6 posts · 3 votes
    10y
    Nicole Jacobson who is managing your properties in Phoenix? Do you have any companies you recommend? Thanks. Congrats on the homes and the move!
    0Reply
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