All Forum Posts by: Tom Wagner

@Tom Wagner there has been a lot of great info and advice on here. I would say just make sure that you can afford that mortgage if you have no renters or if your city has or develops rent control. Also know that your appreciation model is skewed, for the most part, those million dollar items don't appreciate at high rates like the lower price points do. I love your idea of taking advantage of low interest rates and high leverage, just know that there is a lot of risk with that.

@Tom Wagner It is definitely thinking outside the box a little bit but I dig it. I mean really it comes down to one question: what are your long-term goals? That's not rhetorical either, I genuinely want to know. If you're trying to build a lot of wealth while trying to minimize the # of units you own therefore minimizing time invested, it makes a lot of sense. And you're willing to take on the risk of being highly leveraged and have a high enough salary to support it if you're slightly cash flow negative for a little while so that checks out too. 

It's always good to be thinking ahead on what your next move is and exit strategies so here are some other things to consider. I believe the maximum number of low down payment loans is 4. If you start with an FHA loan you will need to refinance out before you can buy another property with 3.5% down, which you'd be able to do when you're at ~78-80% LTV. If you had to rely solely on equity paydown to get you there that'd take about 8 years, of course with appreciation helping you out you'd get there a lot quicker, more like 4-5 years assuming appreciation in the 2-3% range and your loan interest rate is in the 3s.

Another important point here, with all things equal multifamily generally doesn't appreciate as fast as single family. I don't have hard data to support this but I'm sure it can be found with enough searching, however it is always brought up when weighing pros and cons between the two so I'm trusting the conventional wisdom here. But I digress, my point is that if you're willing to play the long game your strategy works fine but if you have the desire to scale quicker forcing appreciation by buying and renovating a property that doesn't have all the bells and whistles is probably your best bet. If you're buying at the tip top of the market trying to maximize your leverage then naturally you will be looking at places where most if not all of their income potential has been realized. 

So I guess if I were trying to use that strategy I'd focus in one triplexes and fourplexes and not just look at the very top of the market but look a little below that too. Look in those A neighborhoods but instead of going for the 250k/unit fourplex go for the one with a slightly below market rents but with some cosmetic upgrades could put in on that same level. And of course doing diligence on the market to make sure it has strong fundamentals and isn't ripe for a downturn if COVID shakes our whole game up. 

Best of luck man, I'm interested to see where this goes for you

I see you have a pretty well thought out and reasoned approach, just wanted to bring up a few things to consider. 

A lot of these high rent markets also happen to be very tenant friendly, which should be a consideration in your search. If you buy a property for 1 million plus obviously you're going to be dependent on rents to pay your mortgage as you've stated. This also puts you at the mercy of the city gov't in their responses to this pandemic, many of which include eviction moratoriums and proposals to cancel rent. Hopefully the latter doesn't come through anywhere, but I'd hate to see you buy an expensive property only to foreclose a year later. 

This one I'm sure you've thought out already but really pay attention to property taxes. Coming from NJ you're probably aware of how much high taxes can affect cash flow, but just want to make sure since all that has been discussed so far is the % of monthly rent over the purchase price, which is an oversimplification but keep things quick for the sake of discussion so I can see why you're using it here.

Lastly I would say that instead of finding the most expensive market you can buy into, try to find the best market that you think still has room for upwards growth and buy into that (try giving Phoenix a look).  Leverage is great in realizing appreciation on the way up but equally as bad on the way down. A lot of investors don't even consider the potential for depreciation but with COVID19 there should be at least some degree of uncertainty about real estate moving forward. Is it going to spur people to move outward into the suburbs due to more people being able to work from home and a general desire for more space and safety during these next couple years? It's been theorized by people but who knows really. What I'm trying to get at is you seem very stuck on one strategy which could be a losing one, but the 3 tenets of sound real estate investing remain the same. 

1) Buy for cash flow 

2) Have adequate cash reserves 

3) Secure long-term debt

If you follow these 3 rules you should be able to weather any storm that comes your way. In buying into a million dollar FHA mortgage you're probably only following #3, unless you're sitting on 100k+ of cash but just want to get into your first property with as little down as possible.

@Tom Wagner

Hey Tom, I am evaluating the same strategy for North Jersey as well. Curious what neighborhoods you were focusing on?

I was looking at Jersey City but I’m getting nervous that the rental market is over saturated now. Especially with people like yourself moving away from the area.

After you sort out what criteria weigh most on your REI scale: i.e. cash flow, appreciation, job/population growth, landlord vs tenant friendly state, average cost of living, etc.

The majority of the US, besides the West coast and parts or the upper east coast will be just fine for this strategy.

Is the 1% rule your only criteria? What about the long term outlook for the market? Are you completely discounting rent growth and appreciation?