Author Topic: On investing ledge - current situation  (Read 692 times)

typicalmillenial

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On investing ledge - current situation
« on: January 30, 2019, 04:08:12 PM »
Hi everyone, really seeking some solid advice here. I am having an extremely difficult time deciding what is a better approach in my situation.

Age- 24
Employment- Second job, entered workforce in July of 2017
Savings- $35k (in an Ally savings account)
401k- 3k (I have not been maxing this out just yet. My focus has been on accumulating a lot of cash and then making a plan to move forward. Also, I recently got a new job and will be making different choices after speaking with our free advisers, but advice here is welcome also).
Before tax base- $67,000. Sales role and potential earnings of close to $100k in first year.

I understand that this is a very rough picture of finances, but it should be sufficient information for the question at hand.

My issue is concerning my investment strategy moving forward, and I have essentially narrowed it down to 3 options.

1) I have been learning about, and primarily saving towards, investing in residential real estate. I have an opportunity to put a decent sum of this $35k into a down payment (FHA loan) on a three family house. I am well aware of the analysis needed on these and all of the associated expenses. While living here, it would cut my housing expenses to about $300-$400/mo, and upon moving out would provide positive cashflow after accounting for a property manager. If done properly (i.e. the right tenants and the right property) this strategy could significantly boost my savings rate and snowball into more properties/other investments. If done poorly, my savings rate would be shot (evictions, etc).

2) Take my money and invest in low-cost index funds. Keep throwing money in here and diversifying as needed.

3) Do nothing except focus on making more money and keeping expenses low. I am a real believer in the possibilities of real estate, and maybe it would be better to accumulate more capital before beginning in REI to mitigate the risks associated. (this of course brings me back to choice #1 where I could save a significant amount of money more by dramatically cutting my living expenses!).

Anyway, I apologize for the long-winded post here, but any insight is greatly appreciated!!!

**Updates**
Property- 3 family building (each is 3BR and one bath)
Purchase price will be between $300,000 and $325,000. Market rent is $1300/unit.
The area cuts the commute to work in half. The new job is a "rotational program" and I am considered a protected employee for 2 yrs.

***Additionally, this is a very tenant friendly state, which is far less than ideal, but can work with adequate management. I also intend to move out of this state in around 2 yrs and have a PM company be implemented full time. Both of these factors are also weighing in on my decision here.

waltworks

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Re: On investing ledge - current situation
« Reply #1 on: January 31, 2019, 08:24:57 AM »
Are the units rented at market rent right now? If not, can you raise the rent on the tenants or will that be tough due to state laws?

Gross rents of $3900, assuming they're all rented for that $1300 now.

Assuming a 5% loan on the full $325k, you're at about $1750 a month for P&I.
10% for management is $390
10% for vacancy is $390
$300 a month for maintenance and capex

So I'd say before taxes and insurance, you'd cash flow almost $1000 a month.

Sounds like a good deal to me. The only downside for you is that you're super cash poor right now so if something big goes wrong (lawsuit, repair that requires tenants to be out for several months) you'd be in trouble.

-W

Another Reader

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Re: On investing ledge - current situation
« Reply #2 on: January 31, 2019, 09:24:00 AM »
What did those "free advisers" at work suggest as investments?  Often those "advisers" push products that are good for their company, not for you.

belly05

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Re: On investing ledge - current situation
« Reply #3 on: February 01, 2019, 08:26:23 AM »
Hi typicalmillenial -

As someone who is roughly 6 years older than you, and went down this exact same path I thought I could provide some hopefully helpful advice.  About 8 years ago I purchased a 2 family home.  This was right out of college and it took all the money I could scrape together to buy the house.  If I am remembering the numbers correctly the house sale price was 128k, and I put a down payment of 3,500 down.

This situation ended up working out gloriously for me over the past 8+ years.  I lived in one side of the 2 family house, and rented the other side out.  My portion of the living expenses were roughly ~200/month.  I can easily say that buying and living in this 2 family house was the best financial decision I have made so far.  I want to also point out a few reasons why my situation might be different than yours, and also now that I have become more involved with real estate I also wanted to provide you a worksheet that you can use to help crunch the numbers on any specific house you are looking at buying.  This is a document I wish I would have had at the time of purchasing my first house, I think a lot of that my first house purchase ended up being "luck" and if possibly it's always best to not have to rely on luck haha.

Potential Pitfalls:
Over the past 8 years this 2 family house required a lot of work.  I knew it would at the time of purchase, in fact I specifically searched out a house that needed extensive repairs so that I could buy it on the cheap.  That being said, my dad is a retired mechanic and in general a very handy person.  I also really enjoy home renovation projects, and while I don't have as much skill as a full blow tradesmen, my enjoyment for home repairs/construction played a big part in the success of owning this house.  Things are going to break in a multifamily house.  It's important to take this into consideration, if the thought of a furnace crapping out, and saddling you with a ~3500 repair bill stresses you out then a multi family home might not be the right choice for you.  With 3 units you will almost assuredly have some type of issue every 6 - 10 months.  Most often these end up being small problems that only take a few hours to fix, but rest assured they always come and bad times lol.  However on the flip side of all of this, if you get enjoyment out of problem solving and troubleshooting then owning a multifamily property can be a very rewarding experience.  It's also possible to outsource all of these types of maintenance and upkeep items, but I do personally think that it's very important to have a solid understanding for the cost of operating a multi level building.

Running The Numbers:
You can use the attached spreadsheet to help you get a good idea on the overall profitability of the potential house.  It's important to also consider hidden costs in your projections as well, such as:

- Monthly Sewer
- Monthly Water/Trash/Recycle
- Yearly Property Taxes & Insurance
- Vacancy + Occupancy Permits




waltworks

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Re: On investing ledge - current situation
« Reply #4 on: February 01, 2019, 09:01:31 AM »
A peyote-addled monkey could have made money in RE buying basically anything 8 years ago, so there's that when comparing your situation.

But OP's deal sounds pretty decent to me. As I said earlier, the biggest issue is making sure you have sufficient reserves to handle an emergency.

-W

typicalmillenial

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Re: On investing ledge - current situation
« Reply #5 on: February 01, 2019, 11:19:13 AM »
I appreciate all of the reply's here. @waltworks is basically summing up my thoughts/concerns exactly. I understand that things will indefinitely break, especially as the 3 families in my area are on the older side. The thought of having to shell out cash for a replacement/finding solutions for different maintenance/CapEx expenses does not stress me out, but having to do so in the first 3 months of owning the thing absolutely would due to a lack of sufficient capital.

I am still ~4-6 months out from the actual purchase, giving me a decent amount of time to sock away additional reserves.

I suppose my biggest holdup right now is trying to weigh the different scenarios. Could purchasing this investment and running it properly be a total game changer for me financially? Potentially yes. Would a worst case scenario of evicting tenants at the same time as a HVAC meltdown and dip in the market devastate my finances? Almost definitely.

This is really where my hang up is. Am I overthinking? The numbers and the area make a lot of sense to me, but the lack of reserves causes a bit of discomfort. 

belly05

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Re: On investing ledge - current situation
« Reply #6 on: February 08, 2019, 10:30:00 AM »
Agreed @waltworks makes a great point about the timing of housing purchases greatly affecting the success/failure.  The past 8 years have seen an amazing run up in my local area, so I was very lucky in that regard!

One thing that always helps me in the "worst case" thought process is the idea of "fear setting" from Tim Ferris (https://tim.blog/2017/05/15/fear-setting/).  That link is a huge blog post, but the applicable point for your scenario in my opinion would be:

1.) Define your nightmare, the absolute worst that could happen if you did what you are considering. What doubt, fears, and “what-ifs” pop up as you consider the big changes you can—or need—to make? Envision them in painstaking detail. Would it be the end of your life? What would be the permanent impact, if any, on a scale of 1–10? Are these things really permanent? How likely do you think it is that they would actually happen?

2.) What steps could you take to repair the damage or get things back on the upswing, even if temporarily? Chances are, it’s easier than you imagine. How could you get things back under control?

In your last note you said your "worst case" would be evicting tenants at the same time of major system (HVAC, ELectrical) meltdown during the first year of home ownership.  I agree this would be devastating.   What I did to try and lesson the potential devastation is after buying the home, I went to my local bank and took out a 10 year line of credit for up to 15k.  I paid nothing if I didn't use the credit line, but it was always there in the case of a true emergency.  If I ever had to tap into the credit line I could pay it back at a modest 5% interest rate, and that would have theoretically enabled me to ride out any emergency "worst case" situation.

That would seem like a good option for you as well, after you purchase the house go to your local bank and open a 10 year home equity line or personal credit line.  The interest rates will probably be a lot higher today, so that sucks, but this really is reserved for a true emergency.

typicalmillenial

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Re: On investing ledge - current situation
« Reply #7 on: February 11, 2019, 07:22:43 AM »
@belly05

Excellent advice, thank you for the well thought out response. I think the worst case is unlikely, and can be mitigated with proper tenant screening, but it still causes me a great deal of unease.

Kl285528

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Re: On investing ledge - current situation
« Reply #8 on: February 11, 2019, 07:41:25 AM »
Liquidity is always the biggest concern for a landlord. Make sure you have access to some funds in the event of a worst case occurrence. When I started out, I wound up with a number of high limit credit cards, enough to be able to actually buy a house for cash if need be. Gave me a lot of comfort that I could handle any situation like multiple vacancies , evictions, and large repairs all happening simultaneously.