All Forum Posts by: Josh Young

Quote from @Chris Kendrick:

Quote from @Josh Young:

Hi Chris, low down payment loans like 5% is for a primary residence. You should buy a primary residence every year or two and keep the previous as a rental.  If you want more cash flow you can rent out the rooms individually instead of the whole house, this gets really good if you get into 5 bedrooms houses.  In a few years you will have multiple houses and can start doing cash out refinances on them.  The one downfall with this strategy is that you have to move every time you buy a house using a low down payment, but it's also a good to live in the houses, so you can get them ready to be rentals, it's helpful if they are all in the same area so you really get to know the market and it makes it easier to self manage. I hope this is helpful. Good Luck!

 Well dont do house hacking, or moving every year, or renting out rooms, this example is for people who already own a home

Yes buying a home to live in is the 1st step. Becoming a successful real estate investor doesn’t happen over night.

Hi Chris, low down payment loans like 5% is for a primary residence. You should buy a primary residence every year or two and keep the previous as a rental.  If you want more cash flow you can rent out the rooms individually instead of the whole house, this gets really good if you get into 5 bedrooms houses.  In a few years you will have multiple houses and can start doing cash out refinances on them.  The one downfall with this strategy is that you have to move every time you buy a house using a low down payment, but it's also a good to live in the houses, so you can get them ready to be rentals, it's helpful if they are all in the same area so you really get to know the market and it makes it easier to self manage. I hope this is helpful. Good Luck!

Quote from @David Yee:

Hello! At the moment my retirement investments are primarily focused on the S&P 500. I've used a number of different retirement calculators but am having a bit of difficulty navigating them; especially with respect to accounting for inflation. What average percentage of growth should I expect from the S&P 500 year over year? I've seen percentages range from 7% to 11%. How should I account for inflation? 

Thank you!

Hi David, the average return on the S&P 500 is 11%, this only if you buy a low cost index fund like VOO and not a mutual fund that might charge 1+% every year in fees. Inflation averages 3%, so the adjusted return could be 8% per year, but the stock market deviates an average of 15% annually, so your sequencing of returns risk is high. Returns in real estate are usually going to be less than this, but real estate is setup to use leverage, so returns can be a lot higher if leveraged correctly and the standard deviation is much lower, so the sequence of returns is lower and real estate has a lot of tax advantages that stocks don’t have, such as depreciation.

Quote from @Michael Dumler:

@Kyle Knab, if you want to assume the risk of securing a short-term loan with high-interest payments while having zero experience in rehabs/managing contractors in what many believe to be a declining market, then proceed at your discretion. Here's what I would advise though, purchase a house hack deal that you can force appreciation into (sweat equity), finance via FHA 203k, or Fannie Mae HomeStyle renovation loan. This is a good deal that will allow you to obtain experience in both the rehab process and managing tenants.

You should be able to buy a primary residence with very little down. Buy in the best neighborhood you can afford and this should help you with appreciation. Also buy the largest house you can afford with a layout that will allow you to add bedrooms by closing off a family room or dining room, so you have more rooms to rent out. Next year buy another primary residence and move into it doing the same thing. Do it again the year after that. In a few years values will increase and you can cash out refi.

Talk to a lender to make sure understand the rest of the requirements to get a mortgage such as DTI, pay stubs, W-2, tax returns, and credit score. You should be able to get a seller to pay your closing costs in most markets right now, so that should help with your limited available cash, but I'd save to make sure you have access to 6 months of PITI to give you time to pivot just in case of emergency, you don't want to get foreclosed on if you lose your income suddenly.

Quote from @Atampreet Singh:

Quote from @Jeff Copeland:

Good advice here already. We're going to start seeing this a lot over the next year or so. Up until now, appraisals (looking back 6-9 months) have supported prices from 6-9 months ago. Not anymore. 

Pretty soon, 6-9 months ago will reflect last Fall, when interest rates spiked and sales stalled. 

The thing is if I wait and don't find a layout like this for another 5 months, I would have lost about 20k in earnings. So based on that I decided to accept the 250k paying 15k over appraised. 

Any follow up thoughts? I am thinking I ll be able to get it refinanced in a year or so when rates go down. 

Exactly why you have reserves and extra cash on hand, you might have missed out on this deal otherwise. If $277-8k made sense then you should be better at $250k, you just have a little more cash tied up until you cash out refi in a few years.

Quote from @Bill B.:

You were happy at $277-8k right? You should be ecstatic at $250k. You just “made” $19k. One person out of 330 million in the country made up a number of $235k. 

If you got 10 more appraisals do you think any of them would be the same? I bet you $100 at least 8 would be over $235k. As you mentioned it’s going to be a rental for you. Guess what. Properties have different values to different buyers. How much is a tear down in San Diego on the beach worth to an owner occupant who can’t afford to tear it down or rebuild? Now offer it to a flipper or a builder or a well off buyer of their dream property. And yet the appraisal would be the same for all 3 buyers. 

 This a perfect example of why you need to have extra reserves and cash on hand, you might have missed out on this deal otherwise. If the numbers made sense at $277-8k then you are fine at $250k, you will just have a little more cash sitting in the deal until you cash out refi in a few years.

Hi Tom, the primary residence is the best loan you can get because it's a low down payment and low interest rate, I like the conventional 5% down loan, FHA is a higher rate, if you are a veteran the VA loan is the lowest rate. An LLC is a pass through entity. How you make the investment property not hurt your DTI is the projected (appraisal) rent has to be 1.333 times the PITI, or after it's on your schedule E of your tax returns they will use the net number, so don't get crazy with expenses if you are trying to show income to qualify. I really like the strategy of buying a primary residence and then later(you must intend on living in a primary residence for at least 12 months, but circumstances change as long as you have an explanation) put a lease on it (the lease doesn’t have to start until after you close on your next house), they count the same 75% of the anticipated rent as income and that helps you qualify to buy the next primary residence so you can get the best available terms on both loans. Just don’t max your DTI on the 1st or you’ll have trouble qualifying for the next.

Jake, Getting started is the most important thing, you need to live somewhere and buying a property as a primary residence is the easiest way to get started, you can then either rent out the rooms while you are living there, or sell after 2 years and avoid capital gains, or turn into a rental after you live in it for a years and then buy another rental or any combo of these. An LLC is a pass through entity and not necessary until you have over $1M in equity, it's also harder to get a loan for an LLC, so just buy them in your name and after you get a few properties you can think about quit claiming them into an LLC, but that's down the road. Once you have rental income you will file a schedule E on your taxes and that's where you will claim all your expenses including depreciation. Step one: talk to a lender and learn the criteria they use to qualify for a loan, like DTI, then find out how much you qualify for and start making a plan based on that criteria.

Hi Angela, great question. One of my favorite measures in making this type of decision is return on equity. So you have 3 different kinds of return, cash flow, principal pay down on your loan, and projected change in property value. Your cash flow is known, and you know your principal pay down (since this rate is relatively low this could be a valuable asset depending on debt/equity and other terms like length, adjustable, balloon, etc.), finally we have projected change in value, this is unknown, but probably 3% long term, but could be -10% short term or maybe not, every market is different. The other big question is if you sold what would you do with the money and what kind of return would you expect to make on that. Obviously there are special circumstances for every situation but these are things that I like to think about. I hope this is helpful.