Author Topic: Buy Rental Property Cash  (Read 4487 times)

nkrohn

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Buy Rental Property Cash
« on: July 17, 2014, 01:40:31 PM »
This is my first post! Happy to join other Mustachians!

I have about $160,000 cash and I want to buy some rental properties outright. I have heard of fantastic deal back east (Ohio, FL, TN, etc). I want to be able to purchase a property at $60,000-$75,000 each and buy 2. Here are my questions:

1) How do i find someone to find these properties?
2) What markets do you buy in? (Give some typical examples for the market)
3) Do I get a Property management company??

What do you recommend.

JayKay

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Re: Buy Rental Property Cash
« Reply #1 on: July 18, 2014, 12:45:42 PM »
Hi NkRohn, welcome!

Right off the bat, I'd say that buying cash is a poor choice.  Do the math and you'll see: With 160k, you can get 6-8 homes worth about 100k apiece.  Figure out the cashflow after all expenses are paid and compare that to what you'll have if you were to pay cash outright.  It's a very different picture.

Secondly, be suspicious of "fantastic deals".  What people *usually* mean by that is "cheap, old properties in depressed areas".  They look great on paper but are often trouble: you'll get more vacancies, higher repair bills, evictions, etc.

Thirdly, narrow your search and know *why* you're buying in the city you are.  Each of the states that you've mentioned is very different.  Make sure to do your homework. And, even further, be mindful of what *part* of the city you're buying in.  A bad neighborhood can be right across the street from a good one.

Since it sounds like you're not living in the places you've mentioned, yes you'll need a property management company, especially if you want to scale up.  They're well worth the money, but you may have to go through a couple before you find a good one.  Rates are about 7-10% of gross rent.

As for finding properties, I've gone through turnkey providers for some of my out-of-state purchases.  But if you do try that route, be careful when selecting one.  The marketplace is saturated with them.  I have bought with Memphis Invest and have been happy with them, though there are downsides that I've detailed in my other posts.

Currently, I'm buying in Texas.  Employment is excellent, no state taxes, and lots of good, blue-chip neighborhoods.  In the earlier days, I was scouting myself and buying local in CA, but that's inadvisable now, so I'm selling to capture the equity and redeploy it.

Take all of this with a grain of salt, though: I've only been doing this for 5 years and feel like I still have a lot to learn.  If you want some heavy-hitting advice, visit Jeff Brown's site www.bawldguy.com or read some of his blog posts on Bigger Pockets.  He's been helping me select my investments and he's very knowledgeable about RE in general.

Fishingmn

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Re: Buy Rental Property Cash
« Reply #2 on: July 19, 2014, 06:50:48 AM »
Right off the bat, I'd say that buying cash is a poor choice.  Do the math and you'll see: With 160k, you can get 6-8 homes worth about 100k apiece.  Figure out the cashflow after all expenses are paid and compare that to what you'll have if you were to pay cash outright.  It's a very different picture.

Most of JayKay's argument is good except for this part.

Buying with cash can be a great choice - it all depends on your goals. There is no blanket statement for all investors regarding the level of leverage one should choose. All those investors that bought with high amounts of leverage in 2005/6 were in a world of hurt 3 years later.

I'm an all cash investor and I believe these were the advantages to me -

- Way less risk. If you put 25% down and market goes down 25% you've lost everything and I've lost 25%
- All cash deals are much more likely to be accepted and you probably can negotiate a lower purchase price. I know that I specifically had my first property deal accepted by a bank even though my offer was $10k less than other offer because mine was all cash and other wasn't
- My goal was to provide an income stream at retirement which I hope to do in 2 years (54). I'm very happy with a locked in 9%+ return that keeps up with inflation as I believe this will be a superior income stream to relying on only the stock market
- Since I self manage I didn't want 30+ properties to have to deal with (this may not apply to nkrohn)
- Finally, while in theory it's better to find 6-8 places the reality is that it's not always easy to find 3-4x more investable properties and when you do you'll have 3-4x the closing costs involved. In my market, closing costs on a cash deal are around $300-700 and are more like $3-5k on a financed deal.

While I agree that, on average, leveraged investors will likely have a better return over time there are certainly good reasons to buy with all cash too that make it a good choice depending on your situation.
« Last Edit: July 19, 2014, 06:53:27 AM by Fishingmn »

clarkfan1979

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Re: Buy Rental Property Cash
« Reply #3 on: July 19, 2014, 01:58:41 PM »
You have a lot of buying power with cash. You can always finance the house after paying cash. If it were me, I would look at houses that have major disrepair and are unable to be financed. You will not have a lot of competing buyers for cash only houses. There is a house in my neighbor for sale for 60K that is in major disrepair. I think this house would normally be listed for 80K. However, it cannot qualify for financing so the bank had to drop the price. This is just my 2 cents.

Kriegsspiel

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Re: Buy Rental Property Cash
« Reply #4 on: July 19, 2014, 03:20:50 PM »
You have a lot of buying power with cash. You can always finance the house after paying cash. If it were me, I would look at houses that have major disrepair and are unable to be financed. You will not have a lot of competing buyers for cash only houses. There is a house in my neighbor for sale for 60K that is in major disrepair. I think this house would normally be listed for 80K. However, it cannot qualify for financing so the bank had to drop the price. This is just my 2 cents.

Am I wrong, or does that STILL not seem low enough? I'd want a really good deal if I was going to be rehabbing a property, not just breaking even, when repair costs are included.

thedayisbrave

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Re: Buy Rental Property Cash
« Reply #5 on: July 19, 2014, 06:18:17 PM »
Agree with Fishingmn.  The amount of leverage you are willing to take on is largely a personal choice and depends on your goals, your willingness to take risk, etc.  I had a mortgage on my first property but paid it off a few years later.  Just bought my second property cash.  Sure, my returns are not in the 20+% range cause I'm "all in" but I feel more secure this way, especially considering these are all buy-and-hold investments. 

I'm debt-averse but risky in my AA.  May seem counterintuitive to some, but it works for me.  But it may not work for you.

RetireAbroadAt35

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Re: Buy Rental Property Cash
« Reply #6 on: July 21, 2014, 02:16:48 PM »
I'm still learning myself, so take my words with a grain of salt, but my understanding is it is difficult to get traditional mortgages on more than 4 or 5 houses with many US banks.  I think an alternative strategy might be to buy a couple with cash and use them as collateral for loans to buy additional properties (HELOCs?) if you wanted to use leverage.

escolegrove

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Re: Buy Rental Property Cash
« Reply #7 on: July 21, 2014, 09:42:14 PM »
You can get unto 10 mortgages in the US (I have 5 mortgages currently). I personally like to leverage my money so I am able to get better returns. We are investing for a FIRE date in 15 years. While I personally invest in nicer houses it also tends to allow me to have better tenants and in areas that also experience appreciation. I also self manage as a female so I want an area that I am comfortable at all times I would definitely research the tax laws on the area you invest. South Carolina's tax in 3x that for an investor than a personal property.

My biggest piece of advice is to establish a business plan and than buy houses that meet your plan.

arebelspy

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Re: Buy Rental Property Cash
« Reply #8 on: August 12, 2014, 09:50:31 PM »
If you want some heavy-hitting advice, visit Jeff Brown's site www.bawldguy.com or read some of his blog posts on Bigger Pockets.  He's been helping me select my investments and he's very knowledgeable about RE in general.

I'd love to hear more about this.  I've talked with Jeff a number of times, but don't know anyone that's actually invested with him.

You are buying the newly built duplexes from him, that return about 4-5%, in places like New Braunfels?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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Hannah

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Re: Buy Rental Property Cash
« Reply #9 on: August 13, 2014, 07:28:18 AM »
I think buying with cash for your first house is a great idea because you are learning about the real estate business, pure and simple. If you want to learn about creative ways to finance a house, you can learn about that later

Whatever you do, stay away from HOAs. We've gotten burned Twice on this (both times on our primary residence rather than a rental, but the same applies). The fees start at $50 a month and within a year or two they've quadrupled or more.

thedayisbrave

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Re: Buy Rental Property Cash
« Reply #10 on: August 29, 2014, 02:23:41 PM »
Whatever you do, stay away from HOAs. We've gotten burned Twice on this (both times on our primary residence rather than a rental, but the same applies). The fees start at $50 a month and within a year or two they've quadrupled or more.
I'm curious about this part... was there a specific reason for the HOA to go up that significantly? I've never heard of that happening...

arebelspy

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Re: Buy Rental Property Cash
« Reply #11 on: August 29, 2014, 03:06:35 PM »
Whatever you do, stay away from HOAs. We've gotten burned Twice on this (both times on our primary residence rather than a rental, but the same applies). The fees start at $50 a month and within a year or two they've quadrupled or more.
I'm curious about this part... was there a specific reason for the HOA to go up that significantly? I've never heard of that happening...

If they're underfunded, future owners will be the ones footing that bill.

Do your due diligence on an HOA's financials when buying a property, and don't buy one that is shaky.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Poorman

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Re: Buy Rental Property Cash
« Reply #12 on: August 29, 2014, 03:23:52 PM »
You can get unto 10 mortgages in the US (I have 5 mortgages currently). I personally like to leverage my money so I am able to get better returns. We are investing for a FIRE date in 15 years. While I personally invest in nicer houses it also tends to allow me to have better tenants and in areas that also experience appreciation. I also self manage as a female so I want an area that I am comfortable at all times I would definitely research the tax laws on the area you invest. South Carolina's tax in 3x that for an investor than a personal property.

My biggest piece of advice is to establish a business plan and than buy houses that meet your plan.

The maximum for Fannie/Freddie mortgages is 10, but you can find smaller community banks and credit unions that will lend higher than 10 with conservative requirements.  There is a credit union near me that will do as many mortgages as you want but you have to put 50% down.