Author Topic: Is this enough captial to buy my first rental unit?  (Read 5076 times)

Megma

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Is this enough captial to buy my first rental unit?
« on: December 08, 2014, 10:27:51 AM »
I want to buy my first rental in the next year but I'm worried about the risks and wondering if I will have enough of a contingency fund. I keep reading advice to have a large fund for unexpected vacancies or repairs but how large is large?

My situation:
Age: 29, single (but live with BF and roommate)
Liquid assets: 20K
non-liquid assets: 30k 401k/IRA, ~40k in equity in the 150k townhouse I own and live in.
Salary: 50k/yr + additional 7,200/yr in rental income for a room in my house which offsets 2/3 of my mortgage (very few household costs for me after the rental income and my bf pays all utilities as his "rent")

My plan:
Purchase a 2 bed/2 bath townhouse for ~100k, condition would be close to move-in ready. I have an area in mind and there are listings there between 90-105k. After seeing what comparable units rent for in the area I would expect to rent it for 900-1100 (this is a conservative estimate).

I would like to use 10k of my liquid assets as the down payment and reserve the additional 10k for any repairs to either the rental or the 2 bed/2bath townhouse I live in. I will also save additional money for closing costs and extra reserve over the next few months as I look for a property and continue to prepare. Some repairs would also be the responsibility of the HOA since it's a townhouse.

Do you think this is enough? Or should I wait longer and save up more?


SunshineGirl

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Re: Is this enough captial to buy my first rental unit?
« Reply #1 on: December 08, 2014, 11:35:53 AM »
I tend to like to consider the worst-case scenario, which in your case would be a job loss, loss of roommate and/or boyfriend, and two mortgages to pay while there is a vacancy on your rental, plus an unexpected large repair.

I highly doubt all that would happen at once, but sometimes when it rains, it pours. For that reason, I personally would want more cash on hand after making the purchase. Six months living expenses is a decent guideline. (Of course, you didn't post your expenses, so you may already have that?)

waltworks

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Re: Is this enough captial to buy my first rental unit?
« Reply #2 on: December 08, 2014, 11:43:14 AM »
You won't be able to put 10% down on a non-owner-occupied property. Lenders will require 25%, at least in the US, unless you have a long history/relationship with the lender and many other properties or something.

So keep saving. To answer the original question, I'd want to have 6 months worth of mortgage payments for both houses, plus about $5k/house in oh-shit money. You aren't even close right now.

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Beaker

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Re: Is this enough captial to buy my first rental unit?
« Reply #3 on: December 08, 2014, 11:46:53 AM »
You may have a hard time getting a mortgage for an investment property with only 10% down - some banks require up to 25% these days. You can probably find 10%, but you should make sure it's possible at a reasonable rate before you get too far into the purchase process. Call a few places and see if they'll prequal you. If they say no, try local banks and/or credit unions - they're usually more flexible.

Also, be careful about those HOA dues. The basic numbers look OK without an HOA, but dues of $200-300/mo could really hurt.

Apparently everyone else here is much more careful about their capital reserves than I am, since I bought properties with nowhere near 6 months in reserve. I guess it depends on how stable you think your job is, what the local vacancy rates are, and if you have anything other reserves to tap in an emergency.

SpiritMark

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Re: Is this enough captial to buy my first rental unit?
« Reply #4 on: December 08, 2014, 12:23:12 PM »
I agree youíll have to keep saving, but I think youíre close.   Can you get a HELOC on your property to cover the oh-shit situations?  Once you get your 20%, a HELOC and a small safetly net, I would keep your eyes open for a steal.  Another option would be to owner-occupy the new place and fully rent your current residence.  One thing to be careful of, I havenít found the cash flow to be that great for townhomes when compared to SF and duplexes.  If youíre the analytical type like me and have done your homework, I think sometimes you should just go for it.  It will be a great learning experience for you.  Best of luck!

waltworks

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Re: Is this enough captial to buy my first rental unit?
« Reply #5 on: December 08, 2014, 12:29:50 PM »
OP does not have enough equity in current home to get a HELOC.

I think the main problem here is that if OP is saving up for a RE purchase, he/she is letting a lot of money sit on the sidelines. I think at that stage in life/finances, just throwing money at index funds (of course maxing tax advantaged stuff first) would be a much better plan.

-W

I agree youíll have to keep saving, but I think youíre close.   Can you get a HELOC on your property to cover the oh-shit situations?  Once you get your 20%, a HELOC and a small safetly net, I would keep your eyes open for a steal.  Another option would be to owner-occupy the new place and fully rent your current residence.  One thing to be careful of, I havenít found the cash flow to be that great for townhomes when compared to SF and duplexes.  If youíre the analytical type like me and have done your homework, I think sometimes you should just go for it.  It will be a great learning experience for you.  Best of luck!

Mazzinator

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Re: Is this enough captial to buy my first rental unit?
« Reply #6 on: December 08, 2014, 04:38:07 PM »
OP does not have enough equity in current home to get a HELOC.

I think the main problem here is that if OP is saving up for a RE purchase, he/she is letting a lot of money sit on the sidelines. I think at that stage in life/finances, just throwing money at index funds (of course maxing tax advantaged stuff first) would be a much better plan.

-W

Maybe, maybe not..depends on how much the OP is saving per month and how long it will take to get to save "enough"

What are the rules/amount needed for a heloc?

Ls85-

Do you/are you maxing out your 401k and ira?
How much are you saving outside those two retirement accounts?

My opinion, from what i've read, i don't own any property.

$25k down payment
$5k closing/fees
$10k-$20k cash EF (it's been advised to me to have $10k each for the first few houses, then drop it down to about $5k per house until you reach your max amount, most people max it at $25k)

Also, some people use their Roth ira and/or taxable account or heloc as a backup to having a smaller amount of cash EF. Depends on how risky you are.

waltworks

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Re: Is this enough captial to buy my first rental unit?
« Reply #7 on: December 08, 2014, 04:50:55 PM »
For a HELOC, banks will typically lend on ~75% of the value of the home minus whatever is owed. In the OP's case, that would be a very minimal amount of money.

I think maxing 401/IRA contributions is a no brainer before trying your hand at RE, unless the RE deals are just crazy good.

-W

Megma

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Re: Is this enough captial to buy my first rental unit?
« Reply #8 on: December 08, 2014, 06:27:15 PM »
Thank you all for your advice!

First the HOA is pretty low, the properties I've been considering only ~80-125. There are also some duplexes in another area I've looked at that are priced from 60-80 but I was concerned about the quality of tenant there, thought I would do better with a Townhouse. Rents for SFH aren't high enough in this area (most still have HOAs here too, though lower fees) because the prices are so much higher, double a townhouse at least.

I did not anticipate that I would need 20-25% for a down payment on an investment property. My experience with banks when buying the 2 different house I've purchased to occupy has been that they couldn't give me enough money! Every bank has pre-approved me for more than I asked for "just in case," sometimes 75k more than I asked for, but I always stuck to my budget of course. I was thinking to talk to the agent I used for my home loan in a few months to see what they would approve me for.

Regarding my expenses, they're about 2k/month (with the rental offset 1,400, but I'm saving all of the 600/month and usually more), so I'm close to 6 months of expenses and will be over that by the time I would buy something.

I like the worst case scenario thinking - if I would lose my job, I could probably find another one but likely for at least slightly less pay. I could get a new roommate in heartbeat, I'm in an area with two large universities within 15 minutes drive both with sizable graduate schools including medical, law - this is one reason rentals are appealing here, the pool is huge and it keeps prices up. If my BF would also move out, my expenses would increase probably 400/mo max because I would start paying the utilities for the house.

Regarding the questions around my savings in 401K/IRA, I'm currently saving 5% in the 401K and getting a 10% match, the highest my employer offers. My IRA is mostly rollover from previous jobs, I contribute to it sporadically because I don't like the restrictions on taking it out. My "20k liquid" is actually currently on loan to my mother for her established business to expand, she is paying me interest (still a bad idea, I know but we do stupid things for family).

Daleth

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Re: Is this enough captial to buy my first rental unit?
« Reply #9 on: December 08, 2014, 06:55:19 PM »
I want to buy my first rental in the next year but I'm worried about the risks and wondering if I will have enough of a contingency fund. I keep reading advice to have a large fund for unexpected vacancies or repairs but how large is large?

My situation:
Age: 29, single (but live with BF and roommate)
Liquid assets: 20K
non-liquid assets: 30k 401k/IRA, ~40k in equity in the 150k townhouse I own and live in.
Salary: 50k/yr + additional 7,200/yr in rental income for a room in my house which offsets 2/3 of my mortgage (very few household costs for me after the rental income and my bf pays all utilities as his "rent")

My plan:
Purchase a 2 bed/2 bath townhouse for ~100k, condition would be close to move-in ready. I have an area in mind and there are listings there between 90-105k. After seeing what comparable units rent for in the area I would expect to rent it for 900-1100 (this is a conservative estimate).

I would like to use 10k of my liquid assets as the down payment and reserve the additional 10k for any repairs to either the rental or the 2 bed/2bath townhouse I live in. I will also save additional money for closing costs and extra reserve over the next few months as I look for a property and continue to prepare. Some repairs would also be the responsibility of the HOA since it's a townhouse.

Do you think this is enough? Or should I wait longer and save up more?

Not realistic because in my experience you can't buy an investment property with only 10% down. Unless it's a multi-unit and you're moving into one of the units, you need 20%, or with some banks 25%. Also, you're not factoring in closing costs (e.g. your half of transfer taxes) and reserves (the cash you need in the bank--lenders will require that you have cash equal to 2-6 months' worth of various expenses, e.g. property taxes and insurance).

waltworks

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Re: Is this enough captial to buy my first rental unit?
« Reply #10 on: December 08, 2014, 09:26:47 PM »
You can take money (principal) out of a Roth IRA anytime you want to with no penalty. Depending on what your tax situation looks like, though, a traditional *might* be better. Regardless, you really should not be shorting tax advantaged accounts to invest in other stuff unless there are amazing deals. The townhome is not an amazing deal based on the numbers you've provided.

Do a bunch more reading here and elsewhere and you'll have a better idea of what to look for in a year or two when you're in a position to maybe buy something. 

-W

Skyhigh

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Re: Is this enough captial to buy my first rental unit?
« Reply #11 on: December 09, 2014, 02:12:12 PM »


Consider moving into it. Owner occupied homes usually require less down and get a better rate.

SKyhigh

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Re: Is this enough captial to buy my first rental unit?
« Reply #12 on: December 09, 2014, 03:09:34 PM »
For a HELOC, banks will typically lend on ~75% of the value of the home minus whatever is owed. In the OP's case, that would be a very minimal amount of money.

This has really loosened up over the past year.   I just closed on a HELOC that goes up to 85% and many credit unions are even more aggressive.

https://www.navyfederal.org/products-services/loans/equity/equity-rates.php

https://www.western.org/flex-rate-heloc

I'm not saying it's advisable, but for the sake of complete information it is possible to get a HELOC up to 100%.  Of course, the higher the LTV the higher the rate they will expect you to pay.

arebelspy

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Re: Is this enough captial to buy my first rental unit?
« Reply #13 on: December 09, 2014, 03:24:00 PM »
For a HELOC, banks will typically lend on ~75% of the value of the home minus whatever is owed. In the OP's case, that would be a very minimal amount of money.

This has really loosened up over the past year.   I just closed on a HELOC that goes up to 85% and many credit unions are even more aggressive.

https://www.navyfederal.org/products-services/loans/equity/equity-rates.php

https://www.western.org/flex-rate-heloc

I'm not saying it's advisable, but for the sake of complete information it is possible to get a HELOC up to 100%.  Of course, the higher the LTV the higher the rate they will expect you to pay.

Was it a HELOC on a primary, or a LOC on an investment property?
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Poorman

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Re: Is this enough captial to buy my first rental unit?
« Reply #14 on: December 09, 2014, 04:12:53 PM »
For a HELOC, banks will typically lend on ~75% of the value of the home minus whatever is owed. In the OP's case, that would be a very minimal amount of money.

This has really loosened up over the past year.   I just closed on a HELOC that goes up to 85% and many credit unions are even more aggressive.

https://www.navyfederal.org/products-services/loans/equity/equity-rates.php

https://www.western.org/flex-rate-heloc

I'm not saying it's advisable, but for the sake of complete information it is possible to get a HELOC up to 100%.  Of course, the higher the LTV the higher the rate they will expect you to pay.

Was it a HELOC on a primary, or a LOC on an investment property?

Primary.  I know some banks are doing LOC's on investment properties, but I don't know what terms are available.

EDIT:  Looking at the link above, Navy Fed will do investment properties with a pricing adjustment of 1% on equity loans and 2% on LOC's.
« Last Edit: December 09, 2014, 04:21:37 PM by Poorman »

arebelspy

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Re: Is this enough captial to buy my first rental unit?
« Reply #15 on: December 09, 2014, 04:20:23 PM »
Cool, thanks.
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Megma

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Re: Is this enough captial to buy my first rental unit?
« Reply #16 on: December 09, 2014, 07:23:48 PM »
Ok thanks everyone, I will keep looking at the market so I will know a deal when I see one until I have 20% + more for the emergency fund, maybe if I increase my savings rate I will be ready before next falls students arrive. Thanks for the tips!

zinethstache

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Re: Is this enough captial to buy my first rental unit?
« Reply #17 on: December 09, 2014, 10:39:30 PM »
My experience on HELOC for our primary. At our local Credit Union interest rates varied up to 100%, we opted for 80% LTV for the lowest rate (its variable however)... so you might try Credit Unions if you want to squeeze out a bit more to get started sooner. However, it will affect your DTI.  Max DTI in June 2014 was 38% for us as seasoned landlords. We had to put 25% down on a multi versus 20% for SFH. The underwriter will for sure need 6 mos. reserves for both of your PITIs. We own multiple props and have settled on 30k total reserves, our properties are multis... I've relaxed some on our own emergency fund, we shoot for never going under 40k cash on hand in case of a run of really bad luck. Because one bad luck scenario includes a layoff, I don't consider my 401k funds as accessible. I do have some other non cash backup funds that will never be touched, but if I did fall into hard times, we could live 2 years or so with all our money sources. I err on the side of caution because of some bad health as of late... Better safe than sorry.

If you end up being far enough out with your RE plans, I think index funds would be a good option, make that money work for you! You've already done that by lending $ to your mom... hope that goes well for you. We've done some money maneuvering like that over the years with our reliable family and have never had any issues.