All Forum Posts by: Jason Powell

I've got 30k set aside to invest and would like BP's advice and what to do with it. For some background, I bought a 4plex using a 3.5% down FHA loan about 5 months ago and live in one of the units. It cash flows well at this point (assuming I'm paying the same rent that the others do). I have a steady job and am able to save about $1,250 a month on average. My goal is to build a passive income that covers all my living expenses as quickly (while not being stupid-risky) as possible. Should I continue saving for years until I can buy another plex at 25% down, pay down my existing loan at 4.25% interest, buy a house as a 2-year flip, or is there a better idea out there? I live in Portland, OR, and even a 2 bed/ 1 bath house will run around 200k or more, even in the suburbs.

Thanks!

@Devonte Dinkins 

I closed in about a month with FHA starting from the time I made my first offer. It could be as quick as three weeks if you can hustle on your inspection period and have a good lender. You MUST be pre-approved to make things go more quickly, eliminate risk that you won't be able to perform, and frankly, to get RE agents to event give you the time of day. Sellers will be hesitant to accept any offers from someone who isn't pre-approved in fear that they will tie up their property for a month with a flaky buyer and miss out on other opportunities.

A little bit about my particular deal...perhaps you can draw ideas or similarities.

When I got my FHA loan, I locked in a 3.75% interest rate about 1.5 months before I actually closed. FHA requires a ton of pre-paid PMI in addition to the monthly PMI. My closing costs would have been around $25,000. I lowered my closing costs to around $4,000 (including appraisal) by accepting an interest rate of 4.25%. Since up front cash was my biggest hurdle, and I wanted enough cash reserves for any issues that could arise, I the 4.25% option (the payback period for this decision was about 10 years. I don't plan on having this 4 plex for that long, which is why I chose this). Mortgage insurance for FHA is 1.35% right now. For me, this amounts to $456 a month.

I purchased the property at 3.5% down with $4,000 closing costs, so I was all in at around $19,000 up front cash. You can always make the seller pay closing costs and just bump the purchase price accordingly. My wife and I live in one unit and "pay ourselves" rent of $900 a month (for a place that should cost $1200) to make the place break even. $600 of every payment we make goes towards principle. Just by these numbers, this isn't the world's greatest deal, which leads me to another point. If you want to buy an undervalued 4 plex, you will most likely be inheriting tenants who are paying rent way below market value. In may case after moving into one of the units, I inherited one year leases that all end at different times of the year. This should be factored in to whether or not you can "afford" the property, as you may carrying the property for a year or so, when it actually may still be a great deal.

My leases are all up in 5 months or less, and I conservatively project a 30% increase in rents, which means I would be able to live in my unit for free, and enjoy a "theoretical" 30% increase in my property value. IF I can get my property appraised for 21.5% more than what I bought it for, I've suddenly showed I have 25% equity, meaning I can refi and get my $456 a month PMI away and free up my ability to use the 3.5% down FHA loan again. I'll then move out, my total positive cash flow being around $1,400 a month with an additional $600 a month going towards principle and own a property valued at approx. $125k more than I paid for it. This all happening in less than a year. My plan is to do it all over again. This isn't necessarily my life long strategy, but is a way for a 22 yr old to get in the game early.

Moving back to reality, these are all projections, which I feel are realistic and conservative. I have NO track record of real estate success, and experienced investors may see serious flaws in what I just said. I just thought I'd go into depth, because it appears you and I had very similar situations and mindsets. To be honest, I really had no mentor and wasn't a member of BP yet, so I'd be really curious to hear what more seasoned investors have to say! It's in the Portland area by the way.

Thank you everyone for saying hello and for the many recommendations. I will make it a point to go to some REIA meetings in the area. I would like to personally meet other investors in my area in addition to those on BP.

@Brandon Foken I'll take your advice and be sure the check out Tucker Merrihew's material.

I recently purchased a multifamily plex with rents way below market rents. I'm raising the rents significantly and expect the tenants to move once their lease is up (November 1 and December 1). How hard is it to find new tenants during this time of year and will it effect the rents I can charge? Ideas on the best way to shift my lease terms so they all end in an ideal time of year (if any)?

I've got a couple thoughts on this.

1. Devonte, you can purchse a 1-4 unit building with 3.5% down using an FHA loan. You can also get up to 35k for repairs that gets thrown onto the mortgage. Just a word of caution using FHA, mortgage insurance NEVER goes away while under the FHA loan. I would consider maybe looking into Homepath Mortgage. With Homepath, you can only purchase FannieMae forclosed properties, but at only 5% down for 1-4 units. You can also pull around 30k for repairs tacked onto the mortgage. Using this option, there's NO PMI. It's definitely a better option if you can save the extra 1.5%, and if you're looking for cash flow. The caveat to using the loan to make repairs is that the repairs have to add as much value to the property or more than the repairs themselves cost. This would hardly ever be an issue though.

2. Private money, in my experience, is almost always more expensive. Most private lenders make you pay 1-3% of the loan up front, which means you have to save even more to make the deal work. They also charge 2-3 times the current market interest rates.

Hope this helps. I've done the FHA deal myself with a 4 plex. I really do hate the PMI though. $465 a month down the drain until I can refi!

Hello BiggerPockets community!

Thought I'd take minute to introduce myself and hopefully meet others with common interests and maybe even same location. I was born and raised in Corvallis, OR and just moved to the Portland area a few months ago after graduating from Oregon State with a degree in Construction Engineering Management. I work for a Mechanical Contractor installing piping and sheet metal, mostly for high tech and industrial clients. I'm as green as it comes as far as real estate investing is concerned. I purchased my first property, a four plex, just a week after graduation.

Immediate goals include building strong local relationships to form a successful real estate team (real estate agent, lenders, other investors, accountant, etc). My mid/long term goals are to have passive income that can cover all my living expenses by the age of 30 so I can pursue career passions and not just a "secure" job. I don't really have a mentor in this journey, so I was excited to hear I could get hundreds of them in this BiggerPockets community!

Don't be shy; say hi!

Jason Powell

Choose close to home, hands down. I say this for a few reasons.

1. Unless you are thinking about purchasing a very large property, paying a property manager will be a significant expense and eat away at cash flow. Most property managers reduce their fees the larger the building gets. Having 100 houses takes more work than one 100 unit building. Why not pocket the 7-10% fee and learn something while doing it?

2. Real estate is a more tangible investment vehicle that requires care (as opposed to stocks or bonds), it greatly mitigates risk to be at least somewhat involved in the business operation of the property. Are tenants paying the rent on time, but trashing the place as they live there? You may never know if it's out of state. Is a property manager skimming a little extra off the top by reporting a higher vacancy (Most reputable property management firms would never do this, but I've seen enough horror stories to make me consider it!)? Can you stay familiar enough with the area to know competitive prices to rent, buy, or sell?

3. You may not have dreams of being a landlord forever, but it will pay off in the long run to gain some experience managing the day-to-day operations and tenant relationships! Remember, real estate is a business, and rents pay the bills and put money in your pocket. Do you really want someone managing your business when you have never once done the job yourself? A crash course in property management will teach you valuable lessons that can only be gained from experience.

Hope this food for thought helps. I'm certainly no guru, but maybe the points are good for consideration.

I know this is probably elementary, but I would like to know how one should react to both the peaks and valleys of real estate cycles, using both a 1031 exchange and a conventional buy/sell as an example. Bear with me and I’ll try to explain. For the sake of discussion, assume we have a crystal ball that will tell us future real estate market trends with certainty.

In a perfect world, we buy low and sell high, but how does a 1031 exchange fit in? If I exchange at a peak market cycle, I get top dollar for my property, but I also pay top dollar for the property I exchange into right? If I exchanged in 2009, I would have sold during a “crash”, but would that become irrelevant because the newly acquired exchanged property would have been (theoretically) purchased at a steeply discounted price? Does it matter at all when one exchanges? (I realize this doesn’t factor in the possibility of buying a property at a discount or adding value over time.)

Now take the buy sell example. Say I buy at a low and sell at a high. Do I then park all my cash in the bank inactively for a couple years so I can then buy at the next low?

I’m a 22 year old in Portland, OR and recently purchased my first property (a fourplex). I’m trying to figure out my best game plan moving forward, and it led me to start thinking about how to react to market price fluctuations. I bought my plex for 400k. If it’s worth 600k three years from now (let’s say we use that as a peak price period), what do I do to best grow the seeds of my initial investment? I could exchange up into a bigger property, only to ride the price all the way down to the next low. I could pull equity out to buy another property, only to ride the price of both properties down. I could sell, pay taxes on the profits, and just camp out until I buy at another discounted price, but keeping a ton of money in the bank just doesn’t seem wise, plus I’d miss out on cash flow.

I’m aware I’m overlooking a lot, but I wanted to Q&A to be specifically about best decisions for the highs and lows of market cycles. I appreciate any input!