All Forum Posts by: Josh Young

@Michael G.

Single family homes and condos almost always sell for less when they are occupied by a tenant.  You want the property to be as marketable as possible, clean and available for showings.  I actually got a great deal on a condo in 2021 because it was occupied by a tenant, it was cluttered, dirty, and had bad photos too, I bought it for $15k under the appraisal when all the other properties available were selling for over asking and waiving contingencies. 

@Michael Naples

That seems really high for most markets with today's rates and prices.  Make sure you are accounting for Vacancy, Maintenance & Repairs, Property Management and Cap Ex. These combine could be 20-25% of rent or more depending on the property.  I think most markets are negative on single-family unless you put 40% or more down.  

@Joe Wall

You should do a HELOC instead of a cash out refi. They will basically give you a line of credit and you won't have to pay anything until you draw against it, and it will be interest only payments for the draw period (usually 10 years, but depends on the lender).

@Ubaldo Gonzalez

I'd shop your local Credit Unions, they will vary a lot, but local Credit Unions are usually the best place to get a HELOC, after you find the best one you might need to open a checking account there to qualify.

@Nathan Bischof

You also want to have in your lease that your tenants are required to have renters insurance.  I use Geico for my car insurance and get a discount for bundling all my properties and vehicles with them, although Geico doesn't directly sell homeowners insurance it's actually Travelers insurance but through Geico.  Whoever you choose I'd recommend you put all properties and vehicles together with one company so you get a discount and it's easier to keep track of.

@Tyson Williams

I'm a Rental Property Investor and Real Estate Agent and I also live in Gilbert.  Take a look at my profile and read a few of my posts, most of my content should be helpful to you.  Here is a link to an article that I wrote and posted: https://www.biggerpockets.com/...

Good for you for wanting to learn so much at a young age, out of all the things there are to learn about in life Real Estate Investing is right up there at the top! Feel free to DM me if you have any questions.

I have one of my properties listed for rent right now, and I have a lot of people request to view the property, but I only give showings to qualified applicants, I am good about messaging and answering questions, but the decision is based on their application (good credit/no evictions/consistent income) this really helps keep the process more standardized, if someone doesn't qualify then I don't need to meet them or show them the property.

@Elmer Wayne Fisher it depends on the rate/terms of your current debt on that property, but generally 3 options: cash out refi, home equity loan or HELOC. You should calculate Return on Equity to help you decide. Here is an article that I wrote that might help.

How to Become a Rental Property Investor

You need to learn the rules that underwriters follow to be able to qualify for a mortgage. Once you learn the rules you can develop a plan to fit the lender's qualification requirements. Terms to learn and what lenders will need from you: Debt to Income Ratio (DTI), W-2, Pay Stubs, Bank Statements, Tax Returns, and PITI (this is your total mortgage payment including Principal Interest Taxes & Insurance).

Primary Residence loans have the best rate and terms, they also require a relatively small down payment (5% or less) making this the most affordable way to get started. You will be required to move into the property within 60 days and live in it for at least 12 months. You should buy in the best neighborhood that you can afford.

After you fulfill the requirements of living in the previous home for a year, you are ready to turn it into a rental and move into a different house. Qualifying for the next house is the same as the 1st with one difference, you are going to have two mortgages. Good news, the lender will be able to offset the mortgage on the 1st house with 75% of the market rent since it is going to become a rental.

Example: your PITI (including HOA) is $1500 and market rent is $2000, this will cancel out the 1st house on your DTI and all you have to do is qualify for house #2. If market rent is only $1600, then that will hurt your DTI by $300 (75% of $1600=$1200), you can still keep it as a rental, you just won't qualify for as much on house #2.

Say you paid $250k for a property and the PITI (including HOA) is $1500, current value is $330k and you owe $230k, so you have $100k in equity. Market rent is $2000 (expenses of: 4% CapEx, 4% Maintenance & Repairs, 4% Vacancy, 8% Property Management) these expenses equal 20% of rent (these vary a lot depending on the property, but this is a good starting point), so Net Rent after expenses is $1600.

This means you are getting $100 of cash flow; $1200 annually

Plus let's say your monthly principal portion of your PITI is $500; $6000 annually

Plus let’s say your property appreciates 3% on $330k value that's $825 monthly; $9900 annually

Total that’s a $17,100 return on your $100k (17% ROE)

Lets change this example so the property only rents for $1600, so $1280 after expenses:

Cash Flow -$220; -$2640 annually

Principal Paydown $500; $6000 annually

Appreciation $825; $9900 annually

Total that’s a $13,260 return on $100k (13% ROE)

Home is worth $400k and you owe $160k (Rate of 4%). PITI is $1300, Principal Paydown is $400 and Rent is $2000 ($1600 after expenses)

Cash Flow $300; $3600 annually

Principal Paydown $400; $4800 annually

Appreciation $1000; $12,000 annually

Total that's a $20,400 return on $240k (8.4% ROE)

In this example I would consider a cash out refinance, you could borrow up to 75% of the Value, so you'd take out a new loan for $300k (Rate of 5.5%), pay off the $160k loan, pay some closing costs and cash about $130k tax free that you could use to buy another property and add to your reserves. Your new numbers on this property would be worth $400k, owe $300k, PITI $1900, Principal Paydown is $300 and Rent is $2000 ($1600 after expenses)

Cash Flow -$300; -$3600 annually

Principal Paydown $300; $3600 annually

Appreciation $1000; $12,000 annually

Total that’s a $12,000 return on $100k (12% ROE)

This example might look like you went negative on cash flow, but remember you took $130k cash out of the deal, you were making $3600 per year in cash flow, so that’s over 36 years of cash flow that you took all at once and if rents increase by 3% annually you will be back to positive on your cash flow within 5 years.

Let's use the same example as above, but say its paid off, so $400k value, PITI is $200 (because you will always have Taxes & Insurance), Rent is $2000 ($1600 after expenses)

Cash Flow $1400; $16,800 annually

Principal Paydown $0

Appreciation $1000, $12,000 annually

Total thats a $28,800 return on $400k (7.2% ROE)

This strategy can build equity and create wealth but managing the cash flow and reserves is essential. As you can see in the examples, the cash flow usually makes up the smallest portion of the overall return, but the cash flow is what you need to survive. Make sure you always have 6+ months of PITI payments as reserves. Appreciation and rent increases can really accelerate this strategy. The key to both of these things is buying in an area that has an increasing population and high paying job growth, tech jobs for example. Here in Arizona, Gilbert and Queen Creek are both great examples of this. Over time, rents increase, values appreciate and the principal portion of the PITI increases. As the amount of equity in a property increases the ROE decreases, when the ROE gets below 10% it's time to consider doing a cash out refinance or second position loan or sell the property. There are also tax considerations, such as depreciation and IRS Section 121 Exclusion.