Author Topic: Educate Me: We want to purchase a rental within a few years  (Read 1162 times)

kandj

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Our 5 year goal sees us purchasing our first rental property, or possibly a piece of land as an investment. Ideally we want to build our passive income. I've been reading the forum here for a long time about landlording, and I read a couple other blogs about people who have rentals but I'm struggling to really figure out how to learn about the types of loans you'd need, tax differences, etc. I like to drown myself in information before making a decision.
  • Are there any book, podcast, or website recommendations? I've already heard of BiggerPockets.
  • Is the actual best place to start with a bank? A year before we purchased our home I met with several mortgage brokers to learn what I needed to know and prepare.
Specific Questions or opinions I'd like to hear about:
  • Short Term or Long Term Rentals? I feel like it is less of a burden/risk to have a local long term rental, but we live in the fastest growing county of MI so the housing market just keeps pushing higher. We've kicked around buying a downtown property within an hour or two, somewhere like Ludington, MI as a short term summer rental because the houses are WAY cheaper (also more run down) and it's a very popular summer vacation area.
  • Does anybody have strong opinions on short term rental sites like airbnb, vrbo, etc?
  • I've gathered that a lot of people here seem to be their own property manager, does anybody have big tips on why to use or not use a company?
  • When you take out a loan for a second property do you need to put down 20%? Is using my current home's equity the smarter option? This is where I'm struggling to learn.
Thanks for any responses!

SeattleCPA

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #1 on: July 17, 2019, 07:59:36 AM »
I think this book would be a really good, "rational" resource to start with...

https://www.amazon.com/Retire-Rich-Real-Estate-Long-Term/dp/1572486465

waltworks

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #2 on: July 17, 2019, 08:13:34 AM »
Just read the last 2 years or so of this forum. You'll see all of your questions asked and answered.

-W

Papa bear

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #3 on: July 17, 2019, 06:59:05 PM »
If you want to drown in education, start here:

https://www.irs.gov/pub/irs-pdf/p527.pdf

Other than that, read about the 1% rule for valuation, and the 50% rule for calculating cash flow. 

When you get serious, talk to a loan officer at just about any bank to get more info on what requirements will be for a mortgage.  Typically 20-25% down payment is required. 

Some handy real estate phrases you will hear and what they mean:

Location location location (pretty obvious, but the physical location is usually the most important factor. Not only the city or neighborhood, but proximity to positive or negative things. Park - positive, halfway house - negative. Access to transportation - positive. Close to polluting industry - negative.)
You make your money when you buy the property, not when you sell it (you can have a good property, but if you overpay, you won’t make any money, whether or not you rent or flip.  Buying the property at the right price is paramount to actually being profitable)
Cash is king (cash buyers will have the upper hand when purchasing a property, cash is needed on hand to make improvements or capital expenditures, calculating cash flows is more important than net income)
Use OPM for housing (in the same regards that cash is king, if you can finance your property using Other Peoples Money wisely with low or 0% financing, it can be immensely helpful to your cash flow, OPM can be a bank, credit cards, investors, hard money lenders, etc.  you will hear about OPM in a lot of the “learn about making money in real estate fast!” Seminars or books)


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kandj

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #4 on: July 19, 2019, 12:30:16 PM »
Thanks for the book and link suggestion, and I have been reading this forum for a  couple years. I guess a lot of what I am still questioning is going to be the banking side and maybe that's not something people can offer insight into.

Jon Bon

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #5 on: July 19, 2019, 12:53:14 PM »
A big thing you are going to run into is your debt to income ratio. You mentioned pulling out cash of your house to put down for a property. This is fine but most banks will lend a maximum up to 40-45%  D/I.

It gets more complicated as you add rentals.  BUt for your first one it should not be terrible. As long as all your monthly payments (including new rental mortgage, tax etc) are less than 40% of your income you are fine.

As a twist if you buy an already occupied rental they will let you count 70% of those rents in the D/I ratio.

waltworks

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #6 on: July 19, 2019, 01:44:42 PM »
Thanks for the book and link suggestion, and I have been reading this forum for a  couple years. I guess a lot of what I am still questioning is going to be the banking side and maybe that's not something people can offer insight into.

No offense, but if you've been reading the forum for a few years and you are asking these (very basic, asked often) questions, you maybe should reconsider this type of investing and stick with index funds.

You need to be very detail oriented to find and get the right properties. If lots of reading/paying attention over long periods of time isn't your thing, forget it.

-W

kandj

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #7 on: July 24, 2019, 01:12:53 PM »
No offense, but if you've been reading the forum for a few years and you are asking these (very basic, asked often) questions, you maybe should reconsider this type of investing and stick with index funds.

You need to be very detail oriented to find and get the right properties. If lots of reading/paying attention over long periods of time isn't your thing, forget it.

-W

I don't understand why asking for more resources makes me stupid but okay, thanks for the advice, Waltworks.

Maybe I haven't been paying attention well enough but I haven't really read too much that is useful for me about what kind of loans people do on the forum, or where they learn about the money end of paying for a rental. I fully understand working out if a home is a good rental option or location and stuff like that. I wanted to be able to read more in order to be over prepared, exactly as I was when I bought my first home, but sure, you can tell me I'm not cut out for rentals just because I asked for advice and resources to learn more. Thanks to the other guys who offered links and books.

terrifictim

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #8 on: July 24, 2019, 01:25:19 PM »
I'm not sure I understand your post. You have heard of BiggerPockets but then are asking for generic advice. They have blog posts and guides on almost any topic you can think of. Have you read the Ultimate Beginner's Guide https://www.biggerpockets.com/guides. Coach Carson https://www.coachcarson.com/ is another great site.

But all of your questions are almost impossible to answer without knowing details. Some people specialize in only short term rentals, others do just fine with long term.  Some people enjoy being more hands-on and being their own property manager, others like to have one less item on their plate. There's multiple paths to real estate, but without knowing more details impossible to give you more helpful advice.


waltworks

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #9 on: July 24, 2019, 01:46:33 PM »
I don't understand why asking for more resources makes me stupid but okay, thanks for the advice, Waltworks.

You claimed to have been reading this forum for "a couple years" and then asked questions that have been asked and answered here dozens of times. Either you weren't reading very carefully, or I've misunderstood you somehow.

-W

ilsy

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #10 on: July 24, 2019, 03:06:50 PM »
I'm not sure I understand your post. You have heard of BiggerPockets but then are asking for generic advice. They have blog posts and guides on almost any topic you can think of. Have you read the Ultimate Beginner's Guide https://www.biggerpockets.com/guides. Coach Carson https://www.coachcarson.com/ is another great site.

But all of your questions are almost impossible to answer without knowing details. Some people specialize in only short term rentals, others do just fine with long term.  Some people enjoy being more hands-on and being their own property manager, others like to have one less item on their plate. There's multiple paths to real estate, but without knowing more details impossible to give you more helpful advice.
That, plus, or rephrase:
Everyone finds their own niche and works in it. I can have the similar to you financial situation, live in the same place as you do, but do totally different RE investment than you because of my low/high risk tolerance. I, for example don't feel comfortable over-leveraging my properties, that's why I use OPM (CC to finance my properties renos short term) and then own them free and clear. This and the fact that my own salary is low, makes it impossible for me to get a loan for my rentals. So, I use cash and CC.

I also don't trust other people to take as good care or do as good of a job as I do (that's in relation to you property management companies question). I have a long established relationship with some professionals, like a plumber or electrician with the Masters license who make sure the things are up to code and pass codes for me. But I don't bother them with service calls that I can handle myself. And since I have built my properties from the studs up, only I can troubleshoot everything effectively, because only I know what is behind the walls. No management company has the same interests as me: preserving my property long term with the least amount of spending (or a reasonable spending).

Question #4:
No one can tell you that, it's pertinent to your financial situation. Yes you put down 20%, but you might not even qualify for refinancing or another mortgage. I have more than $200k of equity in my primary residence, but don't qualify to take even $80k out. Every time I log into my account to pay my mortgage, I get bombarded with "use your [huge equity] to go on a dream vacation," but I've tried (to pull the equity out) and I don't qualify. I don't spend money I have to borrow on a vacation. So, here is the simple answer to #4, talk to your banker. If you qualify, compare the monthly payments, the closing costs, the taxes and insurance to see how much you can spend on a property and how much you have to rent it for. You might get to a conclusion that stock market is the king.

I live in a great neighborhood, but when I look at how much people buy properties for and how much these properties are rented for (and that amount does not include the renovation costs and the maintenance), I struggle to figure out how the .... do they make any money? They can't just loose money for the sole purpose of shielding their income from taxes? Or could they?  And that's why I don't buy my rentals in my neighborhood, my math doesn't work here.

Airbnb. I did short term rental of the lower level in my personal property. I had a special agreement with our largest teaching hospital and was hosting visiting students. A few years ago, I could rent it for $850/ month. Now the competition is so high, I dropped the price to $600/m and still not very busy. Below $600/m I don't really see a point in continuing doing that, more headache than reward. I totally don't envy Airbnb people with the turnover every week or a weekend. There is one location I like to visit myself on Airbnb with a private lake and a huge fish, but again this years there were a lot of people fishing and it isn't as private as it was a few years ago.

Again. it's just me. Someone might find that $600/m isn't much of a headache. But building a property from the studs is.

So, ask yourself these questions: why do you need a rental? Why not stock market? If the money wasn't an issue, would you be doing rentals? What "edge" do you have to beat your competition during the purchase and over the tenants? These are the main questions to ask. These are your motivators. 20% down or refi your house are just minor details that could be easily solved, if you really want to get involved in RE.

SwordGuy

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #11 on: July 24, 2019, 07:11:20 PM »
There is a sticky thread in this subforum that lists good books and other resources.

I would suggest reading thru those and then come back and ask questions based on what you learn.

I would, at the same time, see if there is a REIA (Real Estate Investment Association) group in your area and start going to their meetings.


Bobberth

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Re: Educate Me: We want to purchase a rental within a few years
« Reply #12 on: July 25, 2019, 03:02:23 PM »
Index funds are an investment. Real Estate is a business.
Get to know, understand and love the 50% rule.
Don't expect to get rich quickly. Real estate builds wealth slowly.
Don't start out trusting anybody. Verify everything. This goes with sellers, agents, contractors, managers, internet posters and most of all, tenants.
You make your money at the beginning. Whether that is the purchase or the tenant you approve.
A month(s) of vacancy is cheaper than a bad tenant. Make sure you can afford to not accept a bad tenant.

Vacancy/turnover is going to be one of your highest expenses. Make sure anything short term or vacation can cover those costs. Regarding something like Airbnb, I wouldn't count on it. If you can do it and make additional $, great. But don't NEED it to make a property work. My town, St. Louis just increased property taxes on short term rentals by 67% without notice or a vote. They did this by reclassifying short term rentals as commercial property instead of residential. The city did their homework and has the proof the properties were continually listed on Airbnb and are no longer "residential". People are fighting the reclassification but I don't see them winning. Look for more locations to increase their tax revenue for "free" if they are successful. NPR's Planet Money did a story about Airbnb in New Orleans and how it was nearly shut down via local ordinance.