All Forum Posts by: Scott Thompson

Hi all,

I'm looking at getting my first property and cash flow is my priority right now, not appreciation. So, using the 1% rule as a guideline it seems that really targeting low cost condos is the way to go. I can find several condos/townhomes (1-2br/1-2ba) between $50-75k that could rent in the $750-950 range. I know there are HOA fees, but in my mind that pretty much covers the cost of property management as well as some of your general maintenance costs. As you go up in price from there, you get a little more in rent but it doesn't scale 1:1 and you quickly start to lose returns. It seems that's the sweet spot from a numbers perspective from the looking around I've done. Would you agree with that assessment?

The other question is, if that's the route I decide to go, what concerns do you have with that strategy? The biggest thing that sticks out to me is quality of tenant at that price point as well as the area it is in. Obviously at that price point it's not in an up-and-coming area and appreciation should not be counted on, but I'm purely thinking cashflow so that's a non-issue for me. The other thing is that I think several of these would just be cash purchases. At that price point, I think there may be some leverage to being able to move quickly and take something off someone's hands and get a better deal, then go take out a HE loan to get some leverage. If that's possible at this price point anyways. 

Michael,

Thanks for the input. Obviously getting a thorough inspection should uncover the likelihood of some repairs and provide somewhat of an estimate of the timeline for the major ones (HVAC, roofing, etc.). But you hit the nail on the head with the running toilet/stuck window/failed appliance examples. The small things that might get missed in inspections/walkthroughs but become an issue shortly after closing. I don't plan on starting with a shoestring budget necessarily, which is why I'm posing this question. I want to be reasonably prepared. However, I'm still pretty young and don't have a ton of cash reserves built up yet. I don't want to stretch myself to thin and end up over a barrel shortly after closing on my first property. I'd rather wait a little bit longer and be reasonably prepared. But I'm trying to get a better picture of what that should look like. Just trying to read through the text, it sounds like you are saying $3-5k is probably ballpark, but maybe a little on the low side. So maybe shoot for more like $5-7k? 

Justin,

Right, but my point is that this works as an ongoing strategy, but not as a liftoff strategy. If you save 53.33/mo and your HVAC breaks in month two, you've got ~$100 in your maintenance fund and are facing a $3200 repair cost. For liftoff, as I say, or for getting your first property, having an already built up emergency fund in place up front is surely essential to maintaining liquidity in the short term until these monthly contributions to a maintenance fund amounts to anything. So I'm trying to learn from experienced investors what you think is a reasonable cash cushion for liftoff to prevent a quick crash due to untimely repair needs before monthly cash flow builds up a maint fund. Is $3000 enough? Nowhere close? Assuming for a 3br/2b SFR.

Thoughts?

Hi all,

I'm looking at getting my first property, but a big concern for me is unexpected expenses in the short term. What would you recommend as a cash cushion for unexpected expenses/repairs in the first year or so of owning a rental property (3/2 SFR)? I know that often maintenance/repair costs are baked into ongoing cashflow analyses and proceeds from rent should go to an expected maintenance fund. Playing the percentages/estimates likely works out well once you've got some momentum and have some cash flow, but getting off the ground is a different beast. Say you've just purchased your first home-- you've drained a good chunk of your cash reserves and have yet to collect much in the way of rent. You're maintenance fund from rent might be a couple hundred bucks 3 months in. But problems don't happen linearly, they happen when they happen. Worst case scenario (and I've read enough stories to know it happens) you just bought a house and Murphy strikes with his best shot to bankrupt you....what's a reasonable emergency fund to cover most of what he'll throw at me without rendering me illiquid? Obviously there comes a point where you can't cover all possible contingencies, but what amount would you recommend having set aside before getting in the game to play it safe?

I ask because I don't have experience yet and don't know what surprises may or may not lay in wait for me, and some of you might have experienced some of the unlikely but horrible situations I'm worried about.

I appreciate whatever insight you have to offer.

As I'm doing my research, I see that 3/2 is kind of the bread-and-butter SFR. That's what I've been looking for as my first property, but just got to thinking today...I don't really know why I'm looking at 3/2 specifically. Why not 4/2? Or some other combination? I'm considering investing in something that I don't fully understand. Help me understand it BP!

Note that I've done a fair amount of reading on the difference between multi-family and SFR and understand that pretty well. But now that I've narrowed my target to SFR, I want understand why the 3/2 sub-category, so to speak, is the most popular as opposed to other configurations.

@Mike Hurney Well right now I'm just at the prequal stage, so no specific property is in mind (yet). My realtor wants me to get prequalified so she knows what kind of capital I have access to, and I think it's a necessary part of laying the groundwork as well. Whatever number they give me from a prequalified perspective I'm not going to treat as a true upper threshold, because I think if I found the right property increasing the equity/forced appreciation could help me out.

I have a car that is probably worth ~$10k that is completely paid off, so I am considering pledging that as collateral. I think between that and living in the property I may be able to get a 5% conventional, which I would much prefer. I think right now I just need to check out different lenders and see who wants my business the most.

@Wayne Brooks I appreciate the affirmation! That gives me a bit more peace of mind going the FHA route.

@Shawn Mcenteer Can you talk a bit more to 5% conventional financing? It seems to me that it's hard to find. From the reading I've done, 20% is typically required for a downpayment. I simply cannot put that much down right now and have cash reserves to cover any emergencies that might come up. 5% I can definitely handle, but I just don't know what hoops I have to jump through to get it.

@Travis Sperr That's what I figure but wanted to get some affirmation. Thanks!

@Travis Sperr

But that's the thing- if relocated I wouldn't take a second FHA mortgage. My company would put me in corporate housing, so I would not need another FHA mortgage. I would simply want to not live there as my primary residence and rent it out if relocated. And then after one year I would come back to Dallas so I would be back in the area where my property is, negating the management issue.

Right now, since I have no inkling of whether or not I would be sent somewhere else and the percentage of people sent out of Dallas is small, I am operating on the assumption that I will be here. But I'm just trying to get my contingency plan lined up and limit any downside risk associated with purchasing my first property.

I appreciate the feedback so far!

I am looking at purchasing my first property in the near future using an FHA loan, but have a question regarding the requirement to occupy the home for the first year. I am on a rotational program at my company where they put us through 3 distinct one-year rotations, and we have literally no visibility into where they are going to place us until approximately one month before starting the new position. If I were to purchase a SFR or duplex and then 3 months later find out that I'm being sent to California, does this exempt me from the owner-occupy requirement for the remainder of the first year? How does that work?

I've read a thousand posts and articles about how if you relocate you're allowed to pick up a second FHA mortgage, but I'm not interested in that at all and none of them seem to specify whether that applies during the first year. I don't see anything on the HUD website or anywhere else on the WWW indicating that this situation would be particularly problematic, but wanted to consult the (much wiser) folks on BP.

Bumping this as I'm looking for an attorney as well and noticed the same thing with Brian's website.