Newbie - thinking about this correctly?

[Freedom2016]

DH and I are toying with the idea of getting into real estate investing. We have 65K cash available immediately; don't have a HELOC but wouldn't anticipate problems getting one (we have $100k equity in our condo).

We're definitely still in the research/exploration phase; our goal, if we dove into this, would be to buy-and-hold positive cash flow properties to provide income in FIRE (~10-ish years away). Not looking to build a REI empire, but perhaps a small handful of properties that comprise 15-25% of our net worth. Something like that.

I've read the biggerpockets newbie guide and wanted to check with this crowd to see if my emerging thinking is going in the right direction (pending further book/blog/article research, of course)...

We live in HCOL area (Boston) where I think it will be hard to meet even the 1% rule. My midwest hometown, on the other hand, looks more promising. A cursory MLS search shows a few multi-family properties there that could meet the 1.5% rule (though probably not 2%). So I'm leaning toward exploring that market - I know the city and have reason to visit periodically. Is it a bad idea for a newbie to make an initial RE investment 1500 miles away? If not, is there an advantage to selecting a location where I have some ties, or should that be irrelevant and we should seek even better markets?

To test whether I understand the "rule of thumb" numbers, is the following correct regarding this listing: http://www.realtor.com/realestateandhomes-detail/5202-Leighton-Ave_Lincoln_NE_68504_M70683-57543?row=8?

Rents on 4 units: $1400/mo
Asking price: 89,500 (1.56% ratio)

Let's say we could purchase for $80,000 (1.75% ratio). Let's further assume 20% down cash ($16,000) and $5K cash in closing/repair costs, with remaining 80% financed through HELOC @ 3.006%.

This would mean monthly expenses on $1400/mo rents of:

PI: $270
"50% Rule": $700 (not sure what this all covers - does this include vacancies? property mgmt? taxes? ins? repairs? capex?)
Remaining free cash flow: $430/mo.

Return on cash invested = (430*12)/(16,000+5000) = 24.6%

Is that return calculation correct? It seems really high to me.

I know there's lots more we need to know; not sure if this is the kind of property we want to focus on (low-ish rents in a university population with frequent turnover - but perhaps low risk of vacancies?). Frankly this whole thing scares me/us a bit because we've never been landlords before.

I've read about the need to build a local team, which would be another whole learning curve. On the plus side, my dad's an attorney in my hometown and could draw up LLC papers for us pretty easily, plus he may know real estate lawyers in town and otherwise be helpful on the networking side of things.

What else should we be thinking about at this early stage that we may be overlooking?

Thanks for any/all thoughts!
 

[Less]

I will be following this with interest. My sister and I have discussed doing something similar as an investment, and as protection for the property market running away from us before we are ready to buy individually. I'm in NZ so the numbers are different, but getting some guidance on what to account for would be very helpful.

[monarda]

This particular listing looks like a good place to start on, mostly because the previous owners just put a lot into renovating it, so one might guess that your expenses might be lower at first (although do plan for 50% in the long run). You're lucky to have grown up there, you can probably use your family's favored/trusted plumber/electrician/painters for some of the little jobs that might need doing.

Another benefit of knowing the area, you'd know how close this is to campus.  Close to campus would indeed mean low vacancy. Is this a rowdy campus? Would you be renting to students? Efficiencies might be more suited to grad students, who are in general, quite good tenants.  Those are just some of my first thoughts.  You should also join biggerpockets.com. You'll learn a lot there.

[Annf]

I'm originally from Lincoln and was a Realtor there for years. I also own rentals there now. My advice is figure out "rules" you want to follow and not strictly look at numbers unless you just want to be a slumlord. For example, our rentals are all places we would live in. We have high standards and very long term tenants. That is worth more than you can imagine. We rarely get calls and still have nice cash flows. I saw this place and all I could think about was the problems I'd likely have with tenants. 

We had a really good mentor when we started and this was the best advice we got. I'm really glad we listened!! Lincoln is a great place to invest in real estate though. Prices are good and rents are decent. Good luck and let me know if you have questions or need a good Realtor referral. I still have tons of contacts there.

[monarda]

I'm originally from Lincoln and was a Realtor there for years. I also own rentals there now. My advice is figure out "rules" you want to follow and not strictly look at numbers unless you just want to be a slumlord. For example, our rentals are all places we would live in. We have high standards and very long term tenants. That is worth more than you can imagine. We rarely get calls and still have nice cash flows. I saw this place and all I could think about was the problems I'd likely have with tenants. 

We had a really good mentor when we started and this was the best advice we got. I'm really glad we listened!! Lincoln is a great place to invest in real estate though. Prices are good and rents are decent. Good luck and let me know if you have questions or need a good Realtor referral. I still have tons of contacts there.

This is good information. We also rent with high standards and tend to have long term tenants, who usually leave us when they buy their own places. But also make sure the numbers are good.  Especially good information about buying places where you might like to live. When we finish the remodel we're working on in one of our rentals, it will end up being nicer than the place where we live now!

[DoubleDown]

I have not gone through your numbers to assess whether or not this is a good investment on paper. But as to your highlighted question about investing somewhere else than where you live, this can absolutely be a good strategy. Arebelspy even created a thread about investing outside your own area just a few days ago, I'd recommend checking it out if you haven't already.

http://forum.mrmoneymustache.com/real-estate-and-landlording/purchasing-real-estate-you've-never-seen/

Personally, I'm more comfortable investing in a place that I have some familiarity with (as opposed to relying solely on outside experts for their opinion). Since you have familiarity with your hometown, that's a good situation and should help you know the character of the local neighborhoods. As an added bonus, you can deduct from your taxes all travel, lodging, eating, and related costs to visit and inspect your property as often as you like during the year. I.e., your visits to your home town now become tax deductible (provided you do some "work," like at least stopping by and taking a look at your property). It doesn't even matter if you visit for 4 days and work only 1 day -- the entire visit is tax deductible.

ETA: I am not a tax professional, so of course check with your CPA before following random-guy-on-the-internet's tax advice. But I believe my advice is sound.

[Freedom2016]

Thanks, everyone! You've given us some great ideas to think through.

Annf and monarda, thanks for pushing us to think harder about the kind of tenant situation we want to have. Following the advice of investing in properties we ourselves would live in... well that would certainly push our buying price upward, possibly near/over 100k for a SFR in Lincoln. I will need to research the economics of a property like that (can you still get 1.5-1.75% rent-to-value ratios that will support positive cash flow?).

It's always been my impression that Lincoln has been more recession-resistant than other parts of the country - friends tell me housing prices didn't crater and unemployment didn't skyrocket after 2008. And while my knowledge of the neighborhoods is a bit dated at this point, I both grew up in Lincoln and worked there as an urban planner for 2 years after school, so I do have a good foundation of knowledge to build on.

So I'm liking more and more the idea of investing in my hometown, not least b/c of the travel cost tax write-off - thanks for the reminder, DoubleDown!

[Freedom2016]

As we continue to research, a HELOC question:

Say we get a HELOC on our primary residence, to purchase a rental property with what is, to the seller, an "all-cash" offer. (We would probably pay 20-25% of purchase price with our own cash, and 75-80% funded by HELOC.)

Would it be feasible to then get a HELOC on the rental property and use proceeds to pay back the HELOC on our primary? I ask because we may want/need to sell our primary residence in the next 2-4 years so we'd obviously need to pay off the HELOC in/before that time.

With my income being very high right now, and only our primary mortgage as debt, I would *think* this would be feasible. Have others done it? Any caution flags we should be aware of?

[monarda]

Not sure about HELOC, but non-owner occupied mortgage rates are at least 1% higher than owner occupied
Could refinance what's left of the loan on your rental to a normal non-owner occupied mortgage at the point you sell your primary res??

If you sell your primary residence, will you be buying another primary residence elsewhere with that equity you get out of the house? Or will you rent? (Or live on a boat?)

[Freedom2016]

If we sell primary, we would almost certainly be buying another place and would want to draw on the $100k equity we have in the current place. I don't know if I'm getting too much into a financing "shell game" by borrowing against 1 place, then borrowing against another to pay off the first. Will do more research into rates and the like - thanks for your input!

(Funny, we have friends who live on a boat. As badass as that is, it's not for us!) :)