Should I Buy An Investment Property?

I want to deploy my capital in an efficient and diversified manner.  I read Afford Anything and No Nonsense Landlord I feel like I am missing out by moving some investments to real estate.  I didn’t say a rental property, but that would be the most likely scenario.  I don’t think the flipping houses phenomenon is a reality in my locale (but it is possible I guess).

I have thought about adding a rental unit for a while now, but I keep putting it off for some reason.  As we head into summer, I am thinking about at least doing a cursory search to see if I can find something that will fit the bill.  I like the idea of getting some free cash flow each month from a rental unit and, hopefully, seeing the property appreciate over time as well.  It would be important to set up an additional bank account to keep the funds separate for repairs/maintenance, taxes, and insurance.  I tend to keep very little assets in cash, so I don’t want to co-mingle the funds and not be prepared for something that needs to be handled quickly.

I am fairly handy around the house.  I am not great with electrical, but can replace switches, fans, etc. without a problem.  I can fix drywall, trim, and paint issues (as I hope most people could) and make it look like it was done right.  I am okay with plumbing, but have some things to learn there as well.  I also have most of the tools I would need to get minor repairs done.  After repairing my own washer recently, I am feeling like I could learn more and take on some additional things.  Of course I also think I would have the smarts to call in a professional when I feel like I am in over my head.

I should also mention that I while I have not ever bought a property for rental or investment purposes, I have purchased two foreclosures for my main residence.  The first one was in Kansas City and I made improvements over about two years before I sold it and moved to California.  That included things like flooring, painting, updated kitchen, considerable landscape improvements, and some other small repairs and upgrades.  That property was sold at a profit despite it being 2010 and the real estate market was down.

My current residence was also a foreclosure.  I have not spent very much time on the inside (yet), but turned a dirt backyard into a pretty nicely landscaped space.  As I mentioned in my last post, flooring is on the horizon as is interior painting and a bathroom remodel due to a leaky shower pan.  I might even attempt to follow Mr. Money Mustache’s concrete shower pan advice when I replace the plastic shower with a tiled one.

sold houseSome Items to Consider for a Rental Property

  • Do I have the time to be a landlord?
  • Do I have the knowledge to handle repairs and maintenance?
  • Do I have the cash flow to support an empty unit for an extended period of time?
  • Do I have the cash for a down payment and the ability to get a loan?
  • Do I have the cash for an needed repairs and renovations?
  • Is my financial model sufficient to review the risks/rewards and does it consider all of the potential costs?

I have thought through most of the questions above over the last year or two.  I am comfortable with the cash flow piece and my model, but am most leery about working with a property management company and finding a good handyman that will do timely and quality work at a reasonable price.

I know there are other considerations, which is partially why I am writing this post.  I want to see where my gaps are at currently. I could have gone out and researched a bunch of things and wrote this like a guide, but I preferred to document where I am at in the process and how I am approaching this potential change in our financial life.

Steps to Finding a Property (Simplified)

I think the first step is evaluating the potential properties in the area considering both what I can afford and the type of unit (single family, duplex, etc.).  At this point, I would probably look for a single family home or maybe a duplex.  I really want to avoid anything with a pool or other features that would increase my ongoing costs.  I would start my search with foreclosures and short sales.

Maybe I should back up and find a real estate agent to aid me in this quest.  I need someone that can help me measure the market and identify potential properties.  There are some deals out there that you can’t just stumble upon on the internet (hard to believe right?).

So now that takes us to the third step. Building a model based on a property that looks promising.  I don’t want to overpay for a ready to go place, so I would look for a property that has a distressed look, but is not necessarily distressed.  By that I mean it needs cosmetic work, but the bones are good.  Painting, flooring, fixtures, etc. are easy items that can make the place look very appealing to a renter.  Having to replace the HVAC, do major roof repairs, replace lots of windows, etc. are much more expensive and time consuming to deal with in getting it ready to rent.  I am not saying I would rule out a place that needed more work, I would just want a much better purchase price!  I think it’s a risk versus reward scenario.  The more you are willing to take on, the better the return could be for you.

Assuming I find a place and lock in a deal, that’s when the real work starts.  It is crucial to get a timeline in place to coordinate all the things that need to get done, so that it can get rented in a timely manner.  Repairs, cleaning, landscaping, etc. all need to happen quickly.  I don’t want an empty house sitting there too long (not making money and break in target).  At some point I need to find a property management company as well.  The 10% fee is something that I would build in to my model.  Maybe down the line I would handle it myself, but right now I need to outsource that piece of the puzzle.

My Simple Rental Model

Below is a screenshot of my model.  It is just the summary page, but it gives the high level information.  This is based on a fictional scenario of $1,000 rent and about $90,000 total investment ($64k loan, $16k down, and $10k cash renovation).  The vacancy allowance is set at 8% (one month empty each year).    Monthly expenses include property management, pest control, and a 1% repairs and maintenance reserve.  Taxes and insurance are also included in the expenses line item as well.

 investment property model screenshot

Well, I think that is my scatterbrained plan so far.  I need to do more research and also talk to a friend that has several rentals in the area for some guidance as well.  Having some knowledge about the rental market in the area will be invaluable to me. 

Another option would be to just invest in some REITs like Jason from Dividend Mantra has in his freedom fund portfolio.  That is probably a better plan for a real estate newbie like me.

Ebates Coupons and Cash Back

Any advice for me?  What other things should I consider?

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18 Responses

  1. You should check out RealtyShares.com.

    They are a real estate crowd sourcing platform. You can invest as little as $5K per deal. The investment time horizon sounds from 6 months to 5 years.

    Many of the deals come with some sort of monthly or quarterly cash flow depending on the deal structure.

    Let me know what you think.

    Cheers

    • vawt says:

      Is that sort of like RichUncles.com? I mention that one since we are both in California (outside of CA can’t invest in it). I will definitely check it out, though. Thanks.

  2. Meant to subscribe to the comments.

  3. I haven’t heard great things about crowd funding for real estate platforms. Maybe that’s because I saw Mark Cuban and Kevin O’Leary berate one on the show, so my view could be skewed. Maybe once one is established for a while and I can see a proven track record, I may be swayed.

    I’m not a huge fan of REITs either as they are not tax efficient since usually the dividends are taxed as ordinary income and not qualified dividends. Here is a good post by jlcollinsnh on why he stepped away from REITs http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/

    I do plan on adding real estate to the mix, but not while I’m in NYC and most likely not while I’m in the corporate world. I’d like to manage the property myself and buy a distressed house through a foreclosure. I do like handy work and I am pretty proficient in it so I believe it would lower my cost basis quite a bit. Also if I did this once I left the corporate world, I would have more time to manage my properties plus have a better understanding of the local markets to try and lower my risk with each property purchased.

    Best of luck to you,
    FF

    • vawt says:

      I agree, I would like to do it after I retire so that I could do a lot more of the work myself. Ideally I would still like to start sooner and grow it later.

  4. Do not for get about maintenance (10%) expenses, and management. I think you should plan on 50% of rents towards expenses.

    Join a RE club. You want to get deals from a bird dogger, not the MLS. Or get a RE license so you get a discount.

  5. I had never heard of RichUncles.com until you mentioned it. It’s similar. I need to check out Rich Uncles more though, it looks interesting as well.

    GYFG

  6. Hey Vawt,

    I just thought I would circle back and say thanks for putting Rich-Uncles on my radar. I actually just made my first investment with them. Do you actually invest with them?

    They are actually in Newport Beach (my old stomping grounds), which is only about an hour drive for me. I talked with Harvey, one of the account executives, and he is going to help set up a date for me to come interview the team for the blog.

    I had been sitting on the fence as to whether we pick up a 2nd investment property or invest in Public REITS, since RealtyShares requires the accredited investor status (which I am not).

    However, my wife and I like this investment better.

    I plan to write about it on the blog and will of course credit you for making me aware of it. If you have personal experience from investing with them, I would love to include a blurb from you if you were interested and a link back to your site.

    Cheers,

    GYFG

    • vawt says:

      I have been watching it for a while and have almost pulled the trigger a few times, but I keep waiting for some reason. Glad it interested you, that may put me past the tipping point!

  7. If you think of any questions you want me to ask, let me know. I will be setting up an interview with the Rich Uncles team sometime in the next couple of weeks.

    Cheers!

  8. Don’t forget to factor in taxes. In our case, income taxes make our rental property a net loss, because even after writing off mortgage interest and maintenance expenses, plus depreciation, the rest counts as income, even if you’re paying most of it out to your mortgage. We’re okay with that for now because we bought the income property specifically to rent to a loved one, and plan on getting our money back long-term or when we sell. But it’s an important consideration! Don’t assume that you’ll be making money until you factor in income tax using real numbers and your real tax bracket, plus state tax.

  9. I never thought that buying investment property was possible as I live in the NYC area. It was just too expensive and the numbers don’t make sense. You can bet on appreciation but that’s speculative and too risky for me. I started reading blogs which talked about investing out of state and also found the biggerpockets site. I did my research and jumped in…hopefully it goes well. I am in the process of buying a rental property in Kansas City…and I see you lived there at one point. Would you consider buying out of state?

    • vawt says:

      I would consider one out of state like in Kansas City or somewhere else where I know people and contractors that I trust. Thanks for stopping by!

  10. Chella says:

    Inspiring tips right there! I have a friend who owns a rental unit and still manages to run her family business at the same time. Good thing is that she lives in the same unit and the tenants report directly to her in case of any repair problems. Again, she makes use of one of her tenants who does all the repairs and maintenance then invoices her the costs which she deducts from his monthly rent expenses then pays the balance. And it works pretty well for her!

  1. May 11, 2015

    […] Vawt over at Early Retirement Ahead was contemplating a real estate investment and was looking for feedback and other ideas from his […]

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