Author Topic: Want to buy more real estate - Am I jumping the gun?  (Read 3280 times)

rothwem

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Want to buy more real estate - Am I jumping the gun?
« on: February 05, 2016, 07:25:23 AM »
I'm fairly new to this frugality game, but I currently own a duplex. I live in one side and rent out the other.  Despite a few setbacks due to deferred maintenance from the previous owner, its been pretty awesome.  The tenants are great, the area is great, and I'm able to live super cheaply.  I don't want to jinx myself, but I'm pretty high on the whole real estate idea, and I'd like to buy another place and build my "empire". 

My issue is that I'm youngish (29), and rather than save the money I was not spending on rent/expensive mortgages, I was buying pickup trucks (two different Toyota Tacomas), BMWs (...yea two of them), motorcycles (3 different sportbikes) and carbon fiber mountain bikes (gotta have a full suspension bike to go with my hardtail!).  When I total up the money I've wasted over the past several years that I've been working, it almost makes me sick to my stomach.  My savings reflect my wastefulness: I've only got 65k in pretax 401ks, another 5k in a Roth IRA, and about 15k in cash savings. 

The bright side is that I'm back on track though, and I make a solid income for my area - just over $83k per year before taxes.  I'm saving about $1000-1500/month after my 401k contributions, so by June, I'll have another ~5k I can put down on a rental house.  The plan is to start looking for a house that can cashflow SOMETHING with a 3.5% FHA downpayment, buy it by June, live in it for a year, then rent it out.  I've run the numbers and I think it can work if I get a good deal.  If I can't find a good deal, I'll just sit tight and save for a while longer. 

So with all that information, what do you guys and gals think?  AM I jumping the gun?  I feel like I'm deviating from mustachianism, but I'd like to get some properties purchased while I'm young and have free time. 

ohana

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #1 on: February 05, 2016, 07:29:03 AM »
Do you have an emergency fund?

1) Get out of debt on all but real estate
2) Build an emergency fund, 9-24 months worth of living expenses  (especially important for a real estate mogul, in case one of your many furnaces, roofs, etc dies)
3) THEN buy real estate, OR max your tax-deferred investments


CashFlowDiaries

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #2 on: February 05, 2016, 10:46:46 AM »
I think you should save up more cash reserves.   Not having enough cash reserves to handle unexpected issues is one of the main reasons why real estate investors fail.

So make sure you have plenty of cash on hand AFTER paying that down payment and other expenses on the new property.   But other then that, if you can find a good cash flowing deal, I say go for it.

therethere

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #3 on: February 05, 2016, 10:49:15 AM »
For my own interest, can you buy multiple homes with FHA mortgages? Are there any restrictions on having income property when applying for an FHA mortgage? Not that I think I could cash flow anything with an FHA mortgage in my area. But just curious.

rothwem

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #4 on: February 05, 2016, 11:58:35 AM »
For my own interest, can you buy multiple homes with FHA mortgages? Are there any restrictions on having income property when applying for an FHA mortgage? Not that I think I could cash flow anything with an FHA mortgage in my area. But just curious.

That's actually a good thought, something I didn't give enough attention to.  Seems like you cannot, in fact, get a second FHA loan unless you have a child between the first and second mortgage or move >50 miles away.  While that IS a bummer, I could go with conventional financing and go single family on the next one.  One of the reasons I went with the FHA on the current property was because it was so difficult to find someone to finance a duplex without a 20% downpayment.  With single family homes, its much easier, banks are throwing buckets of money at people trying to get them to buy. 

lhamo

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #5 on: February 05, 2016, 12:19:08 PM »

My issue is that I'm youngish (29), and rather than save the money I was not spending on rent/expensive mortgages, I was buying pickup trucks (two different Toyota Tacomas), BMWs (...yea two of them), motorcycles (3 different sportbikes) and carbon fiber mountain bikes (gotta have a full suspension bike to go with my hardtail!).  When I total up the money I've wasted over the past several years that I've been working, it almost makes me sick to my stomach.  My savings reflect my wastefulness: I've only got 65k in pretax 401ks, another 5k in a Roth IRA, and about 15k in cash savings. 

How many of these vehicles do you still have?  Can any be sold?  You are one person -- how many different ways do you need to get around town?

rothwem

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #6 on: February 05, 2016, 12:25:06 PM »
I think you should save up more cash reserves.   Not having enough cash reserves to handle unexpected issues is one of the main reasons why real estate investors fail.

So make sure you have plenty of cash on hand AFTER paying that down payment and other expenses on the new property.   But other then that, if you can find a good cash flowing deal, I say go for it.

Fair enough.  But how do you decide how much cash is enough?  I'll have around 10-12k in reserves.  I've also got two credit lines that they "threw in" when I opened each of my bank accounts, 15k and 18k, at 6.9% and 8.9%, that I could use in the event of a real emergency. 

For what its worth, when I bought my first property, I had about 10k leftover after the downpayment.

rothwem

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #7 on: February 05, 2016, 12:30:16 PM »

My issue is that I'm youngish (29), and rather than save the money I was not spending on rent/expensive mortgages, I was buying pickup trucks (two different Toyota Tacomas), BMWs (...yea two of them), motorcycles (3 different sportbikes) and carbon fiber mountain bikes (gotta have a full suspension bike to go with my hardtail!).  When I total up the money I've wasted over the past several years that I've been working, it almost makes me sick to my stomach.  My savings reflect my wastefulness: I've only got 65k in pretax 401ks, another 5k in a Roth IRA, and about 15k in cash savings. 

How many of these vehicles do you still have?  Can any be sold?  You are one person -- how many different ways do you need to get around town?

All of the motorized vehicles have been sold except for the 2011 BMW 328i wagon.  It might go up on the chopping block soon, since its got a 16k loan on it that's costing $300/month.  The bikes aren't really worth anything, I might get a couple hundred out of each.  As much as MMM loves bikes, they depreciate even more than cars.

J Boogie

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #8 on: February 05, 2016, 12:59:44 PM »
For my own interest, can you buy multiple homes with FHA mortgages? Are there any restrictions on having income property when applying for an FHA mortgage? Not that I think I could cash flow anything with an FHA mortgage in my area. But just curious.

Seems like you cannot, in fact, get a second FHA loan unless you have a child between the first and second mortgage or move >50 miles away. 

Sweet, I didn't know that.  Closed on my 1st property, a duplex, back in December and having a baby in May.  I was thinking I'd have to save up the usual 20 percent down.  I know conventional personal finance wisdom suggests bigger down payments, but mustachian/cowboy wisdom suggests having cash work for you ASAP - and for me, the prospect of saving up $60 grand in cash over the next 2 years seems like a huge missed investing opportunity.

Megma

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #9 on: February 05, 2016, 02:14:28 PM »
I think you should save up more cash reserves.   Not having enough cash reserves to handle unexpected issues is one of the main reasons why real estate investors fail.

So make sure you have plenty of cash on hand AFTER paying that down payment and other expenses on the new property.   But other then that, if you can find a good cash flowing deal, I say go for it.

Fair enough.  But how do you decide how much cash is enough?  I'll have around 10-12k in reserves.  I've also got two credit lines that they "threw in" when I opened each of my bank accounts, 15k and 18k, at 6.9% and 8.9%, that I could use in the event of a real emergency. 

For what its worth, when I bought my first property, I had about 10k leftover after the downpayment.

Yes but if you buy another property you will then have twice the likelihood of needing some of your cash reserves...just a thought.

Bearded Man

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #10 on: February 05, 2016, 04:59:32 PM »
If you can find work in case of job loss relatively easily, have a college degree and sufficient reserves, I'd say go for it. I've done this but always with reserves. Well, my first house nearly drained me as I paid cash, but each one after I built savings rapidly before buying another, about 1.5 years apart. I save about 9K a month.

I'm actually looking to sell the ones that have lower coc returns as a result of appreciation and buying something new.

Bearded Man

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #11 on: February 05, 2016, 05:45:59 PM »
I think you should save up more cash reserves.   Not having enough cash reserves to handle unexpected issues is one of the main reasons why real estate investors fail.

So make sure you have plenty of cash on hand AFTER paying that down payment and other expenses on the new property.   But other then that, if you can find a good cash flowing deal, I say go for it.

Fair enough.  But how do you decide how much cash is enough?  I'll have around 10-12k in reserves.  I've also got two credit lines that they "threw in" when I opened each of my bank accounts, 15k and 18k, at 6.9% and 8.9%, that I could use in the event of a real emergency. 

For what its worth, when I bought my first property, I had about 10k leftover after the downpayment.


I wouldn't use credit cards as "reserves". There is a reason underwriters don't count "credit cards" as reserves when you are going through the loan process. One of the things they will look at is your reserves for existing real estate you own, which in my experience each time I've done this, has been 6 months of expenses for each rental you own. 

The reality is that unlike sooo many people who want to try desperately to live beyond their means (not saying you just people I know), if you can't put 20% down, have to borrow the down payment from the bank of mommy and daddy, or have to have room mates to be able to afford the house, you can't afford it.

My girlfriends sister and her husband are so proud because they moved from an apartment to a house with a bunch of room mates, with granite counter tops and stainless steel everything that they can't really afford. It was really exciting for them until their landlord sold the house a year in and forced them to move and brought them back down to reality from their "I've arrived - it just took a bunch of room mates to be able to afford it" delusions..


brandino29

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Re: Want to buy more real estate - Am I jumping the gun?
« Reply #12 on: February 06, 2016, 11:25:07 PM »
All of the motorized vehicles have been sold except for the 2011 BMW 328i wagon.  It might go up on the chopping block soon, since its got a 16k loan on it that's costing $300/month.  The bikes aren't really worth anything, I might get a couple hundred out of each.  As much as MMM loves bikes, they depreciate even more than cars.

Unless we're talking Wal-Mart/Target/Costco bikes you're not looking in the right place to sell them.  Good quality bikes that are well maintained should definitely not depreciate more than cars.

Check out bicyclebluebook.com.