Author Topic: What Was Your Financial Picture When You Began RE Investing?  (Read 758 times)

ReadySetMillionaire

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What Was Your Financial Picture When You Began RE Investing?
« on: October 15, 2020, 09:04:37 AM »
I have a detailed case study here, which is probably a decent cross-reference if you want more details -- https://forum.mrmoneymustache.com/case-studies/aiming-for-01012030-fi-lots-of-cash-but-lots-of-debt-need-a-plan/

But my main question for this subforum is when did you get started with real estate investing? It seems to be that this is an area where you can let perfection get in the way of good.

For me, at the end of the year, I will have roughly $80,000 cash. I also have $104,000 in student loans.

I could either refinance these loans, set them and forget them, and get started in real estate; or I could pay them off before I get started.

What would you do? And more importantly, what was your broad financial picture before you started getting into RE Investing?

Fishindude

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #1 on: October 15, 2020, 09:06:53 AM »
My suggestion is bust your tail and get those student loans paid of and behind you before anything else.
Too many people carry those student loans into their 30's & 40's.

Mr. Green

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #2 on: October 15, 2020, 11:01:29 AM »
It really depends on what you are comfortable with. If you refinanced those student loans and made some savvy investments in real estate, it's highly likely that your returns from RE will best your student loan interest costs by a significant margin. However, I don't know anything about your RE market. How hard is it to find homes that meet the "rule of thumb" numbers RE investors like to use to determine if a place is worth buying? You mentioned you are partnering up. That introduces risk, depending on the nature of your partnership. Being a landlord is also work, unless you're going to give that job to a management company, which will cost you 10-15% of your rental revenue. Do you want that job? Screening tenants, managing periodic repairs, possibly dealing with evictions, etc?

At the end of the day, some people are more comfortable with less debt than better returns. That same reason is why people pay off mortgages in stead of carrying them and investing the cash, despite the knowledge that it's highly likely they'd do better investing the money.
« Last Edit: October 15, 2020, 11:03:17 AM by Mr. Green »

SwordGuy

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #3 on: October 15, 2020, 07:05:00 PM »
You have to plan to meet your positive goals and you ALSO have to plan to avoid disaster.

So, let's say it all goes wrong.    For example, you buy an (on paper) acceptable deal but there are some hidden repair costs that come in.   The HVAC dies an untimely death and you also get another 5% repair cost.   It can happen.   It's happened to me.  :(

And covid kicks back in with a vengeance.   You have delays getting the repairs done but that mortgage payment is still a requirement.   Then you get a tenant in who loses their job to the covid economic fallout and your government won't let you evict people for the next 6-9 months.   The tenant gets depressed and trashes the place, so it will cost another $10,000 to repair it when you get them out.

And that mortgage payment keeps on being due.   Do you live in a really cold area, the kind where the pipes can freeze in winter?   You find yourself paying for heating so you don't have a catastrophic plumbing failure.

Can you handle that on top of your student loans and other financial obligations?

Can you handle it if your income drops 20% from covid?   But your hours aren't cut so you can cut expenses on repairing the property after you get the tenant out?

Can you handle it if you can just walk away from the deal and cut your losses?   And real estate prices plummet in your area so you'll lose 20% off the purchase price plus 6% in realtor commissions...

If you can, go right ahead.

If not, maybe cutting your overhead by paying down those loans is a better choice.

I have zero idea of the cost of rental property and expected rents in your area.

When we started in 2014, my first 3 properties were in the $30-40K price range, with $7-13K in repair costs (plus a lot of sweat equity).    If the first property had failed and we had to sell, we would still have broken even just because of the difference between our rent-ready cost vs the sale price (even with a 25% price drop after purchasing).   Plus, with no mortgage, our carrying costs for the year would be less than $2,500.   We had no debt at the time, plenty of savings and a high savings rate.

Other folks have scraped together every penny they had to get their first property leaving them very exposed to ANYTHING going wrong.   Can't imagine the stress they were under!

Archipelago

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #4 on: October 15, 2020, 07:27:57 PM »
I purchased a 4 family property around 3 years ago. I was making $17/hr at the time plus $175/week in meager self employment income. I purchased the property for $350k using an FHA loan, owner occupied 3.5% down. The deal was $21k out of pocket. The way the numbers worked was that the income from the 3 units covered the entire expenses of the property. I bought the place at an all time high for multi families in the area. The deal itself was okay, but the overall situation was and has been fantastic.

You may be looking for a black and white answer - do I pay off debt or invest, which comes first? Why not do both? The beauty of real estate is leverage and the many options for creative financing. Even with student loan debt, you have enough bankable income to obtain mortgages.

Regardless of which direction you decide to move in the short run, if you are seriously interested in building wealth with real estate, start now. 1 year from now you will have another $50k+ and the year is going to fly right by. Start learning and understanding real estate. Look at hundreds of hypothetical properties and get good at running numbers. Good properties are not easy to come by these days, but there is opportunity out there.

ketchup

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #5 on: October 15, 2020, 07:46:56 PM »
I was 20 years old living with my parents making $12.50/hr part time and had 10k in the bank (no debt).  I searched for the cheapest house within 25 miles of my parents house and bought it.  Lived in it for a year with roommates, then rented it out for a few years, had it paid off within five years, sold it on payments, foreclosed on the new alleged owner, rented it out again, and then sold it for real this time.

It's a bad strategy, but I stumbled into doing well for myself at the end of the day.

Paper Chaser

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #6 on: October 15, 2020, 08:25:30 PM »
I could be wrong, but I'm under the impression that when applying for a mortgage on an investment property lots of lenders will include the debt from the new mortgage, but not include any potential rent as income when calculating debt to income ratios.
If that's true, you'd have debt from your primary residence, your student loans, and your investment property (plus any other outstanding debt) compared to just your current income. I'm no mortgage broker or underwriter, but I'd be inclined to pay down the student loans for a better debt to income ratio. It might make your mortgage shopping easier, and might get you better terms.

ReadySetMillionaire

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #7 on: October 16, 2020, 06:03:43 AM »
Regardless of which direction you decide to move in the short run, if you are seriously interested in building wealth with real estate, start now. 1 year from now you will have another $50k+ and the year is going to fly right by. Start learning and understanding real estate. Look at hundreds of hypothetical properties and get good at running numbers. Good properties are not easy to come by these days, but there is opportunity out there.

I have dedicated a huge portion of this year to learning about real estate.  I bought four other books (on Kindle, so like $5/each) that I am going to read over the next couple of months.

Any book recommendations?

ReadySetMillionaire

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #8 on: October 16, 2020, 06:04:03 AM »
I could be wrong, but I'm under the impression that when applying for a mortgage on an investment property lots of lenders will include the debt from the new mortgage, but not include any potential rent as income when calculating debt to income ratios.
If that's true, you'd have debt from your primary residence, your student loans, and your investment property (plus any other outstanding debt) compared to just your current income. I'm no mortgage broker or underwriter, but I'd be inclined to pay down the student loans for a better debt to income ratio. It might make your mortgage shopping easier, and might get you better terms.

This was definitely part of my thinking as to why I should get the student loans behind me.

joe189man

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #9 on: October 16, 2020, 08:40:06 AM »
what can a $80k +/- down payment get you in your desired market? can you house hack and get room mates to start slow? or are you able to get a multi unit place right away?
whats your comfort level with the debt? how long did it take to save the $80k?
for reference we still have $30k+ in student loans that are over 15 years old, our rates are quite low so we invest instead of paying them off

SndcxxJ

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #10 on: October 17, 2020, 07:33:17 AM »
I took a look at your financial picture in the link you provided.  The comments above are all relevant, but if I was in your shoes I would happily refinance the student loans and hold them long term if I could get them at 4.1%.
4.1% for essentially an unsecured loan is cheap money.  Multifamily non-owner occupied loans secured by a heap of equity will cost that same amount or higher if it is a commercial loan.  To me, debt under 5% is not something I'm interested in paying down.  I'm much more inclined to invest that money. 
Given your financial situation, I would vote go for real estate now.  Like most investments, the longer you own them the much, much better the end result.

Valley of Plenty

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Re: What Was Your Financial Picture When You Began RE Investing?
« Reply #11 on: October 20, 2020, 03:00:47 AM »
I am in the middle of purchasing my first property right now - a triplex that I'm going to be house hacking.

As for my financial picture, I started this year with negative assets (about -$5k to be exact). In mid February my net worth hit $0 (never thought I'd be so happy to be worthless!). In early July I paid off the last of my consumer debt. Today I have a net worth of around $40k.

For me it's an easy justification: my mortgage on my house hack is going to be less than what I'm currently paying in rent, with the added bonus of 2 extra units that I can rent out to not only reduce my living expenses to $0, but generate some cash flow too.

I house hacking is definitely a great place to start, and the risk/return is much more controlled.