Real Estate Newbie

[MasterStache]

Just looking for some friendly real estate advice/suggestions. We (my wife and I) are currently looking to downsize from our current home. We purchased the SFH back in 2009 at below market value. I've made significant upgrades and ultimately increased the value of the home resulting in decent equity.

We had a real estate agent over the other night to give us suggestions on what upgrades/maintenance we should focus on before me try to move the home next year. He also gave us a rough estimate of what he believes our home is worth. I was thinking the home was worth about 250K and we owe a bit less than 200K. We didn't tell him what we thought it was worth but his initial impression was closer to 280K-300K. We are getting a second opinion next week. Needless to say I am quite surprised. We could potentially have 80-100K in cash leftover from the sale.

Now the dilemma. I am thinking we do a 100% VA financed loan on our next primary residence and use the cash reserve to possibly start investing in SFH rental properties. I am a very handy guy and made all the upgrades to our current residence myself even installing a solar array. I have no problems working on a fixer upper. I live in a great area with good potential. There seems to be a lot of knowledgeable people on these forums and just trying to soak up as much information/advice as possible. Would it be better to flip or rent? I work full time so time is a concern. Also I live in the Cincinnati area and I see there are at least a couple folks from this area as well.

[MasterStache]

Also as an aside, I am considering using the extra cash as a large down payment on our next home and free up enough income to max out mine and my wife's retirement accounts (401k and 403b). But that isn't real estate related of course. Just thinking out loud. Pondering our choices. 

[waltworks]

If you're not maxing tax-advantaged accounts, investing in rental properties is *probably* not going to make sense unless you live somewhere that is just bursting with awesome deals. Probably worth posting a full case study at some point - if you're only making $50k/year, then the tax advantages aren't huge. If you're up higher, it's a pretty big deal.

You should also think about what your RE strategy is going to be (ie buy/hold rentals? Flips? Slow flip/fix up?) and how much time you want to put in. Make a real plan, look at what's on the market and see if there's anything that will make the 1% rule around you, etc.

-W

[MasterStache]

Thanks Walt. I am a bit back and forth. If we downsize and cut nonsense cost (cable, cell phone, etc.) my wife and I should be able to max both our retirement accounts. We are only 38 with roughly 180K in them now. Didn't start saving until we were 31. On the other hand the Real Estate market is actually pretty good here.

[waltworks]

Again, do a real assessment of your finances/spending/goals. "I feel like buying rental property" is great but you need to figure out what you need, what you have, and what you want to have and then figure out if RE fits in. It sounds like your area has appreciated a lot and is solidly upper/middle class so it might be hard to find 1% rule rental properties. Have you attended any local RE investor meetups?

-W

[hardworkingpenguin]

If you are looking to downsize, why not rent out the house you are currently living in and then either rent/or buy a house that is more to your size? The transaction costs of selling a property is quite huge (depending on your market I guess, but it's going to cost you anywhere between 7 to 10% I imagine). Why waste that money when you can just rent it out?

[MasterStache]

We are in the process of spelling out our goals. I think I need to learn a bit more if/before I take the Real Estate plunge. There was a home around the corner from us that just sold at foreclosure auction for 100K less than market value. It's a nice house which no one has visibly lived in or taken care of for a bit. Would have been a great investment property.

As far as renting out our current home I don't see any return from doing so. Realistically the rent would have to meet or exceed close to 2K/mo. And the maintenance itself is a killer. I have a very high maintenance lawn, a large pool, lots of landscaping etc. My wife and I talked about it but we just don't see much of a market for a high income rental with lots of maintenance.

Thanks for the advice gents. 

[MasterStache]

Update. This past week we had several different real estate agents come in to assess/appraise our home. I asked about rentals in the area and the overwhelming consensus is that the rental market is pretty hot right now. One agent said she can't find enough rentals for tenants. The last agent we had in actually invests in rentals himself and offered a lot of good/bad stories. He seems eager to share stories and offer advice if I decide to go this route. He works with a team and one of the gents specializes in foreclosures. My wife found him as the #1 agent on Angie's list in the area. He appears to have a very solid reputation. After we sell our current home and get settled in a downsized home I am leaning towards testing the rental market.

I also have a co-worker who I just learned has 3 rentals all doing pretty well. I think I will pick his brain for more info.   

[waltworks]

Ask your buddy about the 1% rule. If he doesn't know what it is, his rentals are probably *not* doing as well as he thinks...

-W

[MasterStache]

That's certainly on the list of things to pick his brain about. I know he has had these same rentals for well over a decade. And he plans to retire around 50. He's certainly one of the more intelligent engineers in the office. Of course all purely anecdotal in terms of real estate investments.

[Bobberth]

I definitely think you should look into real estate investing but you definitely want to learn some more about it.  I got started investing in real estate from rehabbing our 1894 house and discovered I enjoyed doing that kind of work with my hands after sitting in an office all day so real estate started as a 'hobby that pays' for me.  Now I'm looking at downshifting jobs or possibly retirement in a couple of years.  Ohio has some great spots to invest in rentals, don't know about the Cincy area exactly but with your location and the skills that you have the potential to do well in real estate.  Just make sure to get a good base of information first so you don't make some glaring mistakes that doom an otherwise bright outlook.  Check out Biggerpockets.com and read through the posts on here as there are lots of knowledgeable people on both sites. 

I know others do it and have been successful, but I'm not a fan of keeping a previous house as a rental if you're not stuck in it.  You probably didn't purchase your house with renting it in mind so I think purchasing another property specifically with renting in mind will be more profitable for you (will renters care about a solar array like a purchaser might?).  Besides, any gains are tax free as it's your primary residence right now.  Those gains change into taxable after a couple of years as a rental.  The only part that worries me a bit is the 100% financing on your next primary residence. 

[CerebralPrimate]

My suggestion would be to join your local REIA... but do so with the rule of "I will NOT buy anything for the next6 months"... just attend the meetings, take any classes they offer, learn as much as you can. There's always a few aggressive sharks in any REIA that prey on newer members... easily defeated if you just go in with the attitude of "Im here to learn for now, maybe invest later".

Best of luck...

[MasterStache]

Thanks for the advice. I would much rather be getting my hands dirty fixing up homes then sitting in a cubicle, as I do now, all day long. I know it will take time and I'll make my fair share of mistakes along the way. I don't intend to jump right on in until I feel confident. I think having a full time job and family will prevent that anyways. But it would be nice to dabble a bit and see what happens.

For now we are going to focus on selling our current home and downsizing to free up more cash. Probably take a good 6 months for all this to occur anyways.