Author Topic: Where to invest prior to buying rental homes?  (Read 5073 times)

Texan

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Where to invest prior to buying rental homes?
« on: June 04, 2015, 04:55:20 AM »
My plan as of now is this, I plan to make around 75,000 - 90,000 by next year when I graduate. Then, I plan to save 40-60% of my income. This includes 401k contributions.

Thus, Ill invest perhaps 20,000 each year in taxable accounts. Mainly being just VTSAX (simple, I know). Then after a few years of compound growth and more contributions, I will take my money out of the taxable account and purchase, either large down payment or pay in full, a rental property.

My concern here, is where to put money prior to real estate? I just assumed put it where I can gain decent returns?
But, having money in VTSAX for short term has potential for large down swings. Your thoughts are very appreciated.

Thank you.

Bjorn

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Re: Where to invest prior to buying rental homes?
« Reply #1 on: June 04, 2015, 06:01:48 AM »
I mainly keep mine in a bank account, despite real negative interest. It takes me 2 years to save up for a downpayment and I'm halfway to my second rental unit now. Generally, if you are going to spend your savings on something within the next 2 years, I think it would be wise to be risk-averse.

jnc

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Re: Where to invest prior to buying rental homes?
« Reply #2 on: June 04, 2015, 06:20:10 AM »
I would first build a safety net, *at least* 6 months of living expenses. Also depending which market you are looking to invest, you may only need to put down 10-15k to purchase a rental property.

arebelspy

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Re: Where to invest prior to buying rental homes?
« Reply #3 on: June 04, 2015, 07:57:53 AM »
If you are saving that much, you should be able to just about buy a house every year. No need to use anything other than a low risk, short-term investments, like bank accounts, money market accounts, or CDs.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

waltworks

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Re: Where to invest prior to buying rental homes?
« Reply #4 on: June 04, 2015, 06:53:02 PM »
Come ask the question again when you have successfully executed the prior parts of the plan.

-W

NoNonsenseLandlord

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Re: Where to invest prior to buying rental homes?
« Reply #5 on: June 04, 2015, 07:37:43 PM »
The first place, is to become debt free.  Then, get a solid emergency find.  Max out a 401K and Roth.  And an HSA is you have one.  Only then, start thinking about rental homes.

The best rental for your first one will be a 4-plex or less, than you can owner occupy.

zephyr911

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Re: Where to invest prior to buying rental homes?
« Reply #6 on: June 06, 2015, 10:14:06 AM »
My plan as of now is this, I plan to make around 75,000 - 90,000 by next year when I graduate. Then, I plan to save 40-60% of my income. This includes 401k contributions.

Thus, Ill invest perhaps 20,000 each year in taxable accounts. Mainly being just VTSAX (simple, I know). Then after a few years of compound growth and more contributions, I will take my money out of the taxable account and purchase, either large down payment or pay in full, a rental property.
Good credit and financials will get you rental financing at 5-6%, and a viable rental will net twice that - so you can grow your portfolio faster by maintaining a higher leverage ratio. IOW, if you're looking at $100K properties, and you have $40K, you can put 40% down on one... or you can buy two and double your revenue. As long as you have high wage income and cash reserves, the downside is minimal - you mitigate the added risk by maintaining a cushion to ride out low periods.

Cwadda

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Re: Where to invest prior to buying rental homes?
« Reply #7 on: June 06, 2015, 10:17:59 AM »
I'm in a similar situation. Should I try to get a rental property with seller finance or getting a cosigner? Or should I just wait until I'm making enough to finance on my own?

zephyr911

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Re: Where to invest prior to buying rental homes?
« Reply #8 on: June 06, 2015, 10:40:20 AM »
I'm in a similar situation. Should I try to get a rental property with seller finance or getting a cosigner? Or should I just wait until I'm making enough to finance on my own?
I can't say I've never stretched to finance an investment, and I'm actually looking into owner-financing on a current prospect, but be careful about overextending yourself. Sometimes when you don't meet bank lending standards, it's because the commitment really isn't a good idea for you. And of course, sometimes it's because the system isn't structured for MMM types. Think carefully about your situation, be prepared for surprises, and overestimate costs to be safe.

Last fall we downsized and added our previous townhouse to the rental portfolio. It was a good plan, but a few things went wrong and I didn't get a rent check for six months. Fortunately I had the income and reserves to pay the mortgage, and now it's finally turning a profit. Be sure you can handle a surprise like that, or bigger. As a landlord the buck stops with you.

Texan

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Re: Where to invest prior to buying rental homes?
« Reply #9 on: June 08, 2015, 04:00:53 AM »
My plan as of now is this, I plan to make around 75,000 - 90,000 by next year when I graduate. Then, I plan to save 40-60% of my income. This includes 401k contributions.

Thus, Ill invest perhaps 20,000 each year in taxable accounts. Mainly being just VTSAX (simple, I know). Then after a few years of compound growth and more contributions, I will take my money out of the taxable account and purchase, either large down payment or pay in full, a rental property.
Good credit and financials will get you rental financing at 5-6%, and a viable rental will net twice that - so you can grow your portfolio faster by maintaining a higher leverage ratio. IOW, if you're looking at $100K properties, and you have $40K, you can put 40% down on one... or you can buy two and double your revenue. As long as you have high wage income and cash reserves, the downside is minimal - you mitigate the added risk by maintaining a cushion to ride out low periods.




What do you mean 'buy two'? That is true, I do mitigate risk by having high income. Is it true that what I receive in rental income is not considered profit until the house is paid in full? Thus, I should help pay down the house even when I am renting it out?
« Last Edit: June 08, 2015, 04:15:07 PM by Texan »

surfhb

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Re: Where to invest prior to buying rental homes?
« Reply #10 on: June 08, 2015, 10:23:43 AM »
The first place, is to become debt free.  Then, get a solid emergency find.  Max out a 401K and Roth.  And an HSA is you have one.  Only then, start thinking about rental homes.

The best rental for your first one will be a 4-plex or less, than you can owner occupy.

So don't think about the rental business unless you can max out $30K a year?    Seems like a stretch for most on here

surfhb

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Re: Where to invest prior to buying rental homes?
« Reply #11 on: June 08, 2015, 10:27:14 AM »
My plan as of now is this, I plan to make around 75,000 - 90,000 by next year when I graduate. Then, I plan to save 40-60% of my income. This includes 401k contributions.

Thus, Ill invest perhaps 20,000 each year in taxable accounts. Mainly being just VTSAX (simple, I know). Then after a few years of compound growth and more contributions, I will take my money out of the taxable account and purchase, either large down payment or pay in full, a rental property.

My concern here, is where to put money prior to real estate? I just assumed put it where I can gain decent returns?
But, having money in VTSAX for short term has potential for large down swings. Your thoughts are very appreciated.

Thank you.

Also,  are you planning that the market will continue its stellar performance the next 2/3 years?    I wouldn't get your hopes up. :)

I look at it this way:   If the money you're saving is for a rental or primary residence, it's already working for you.  I'd keep a large portion safe
« Last Edit: June 08, 2015, 10:29:24 AM by surfhb »

Texan

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Re: Where to invest prior to buying rental homes?
« Reply #12 on: June 08, 2015, 04:14:43 PM »
My plan as of now is this, I plan to make around 75,000 - 90,000 by next year when I graduate. Then, I plan to save 40-60% of my income. This includes 401k contributions.

Thus, Ill invest perhaps 20,000 each year in taxable accounts. Mainly being just VTSAX (simple, I know). Then after a few years of compound growth and more contributions, I will take my money out of the taxable account and purchase, either large down payment or pay in full, a rental property.

My concern here, is where to put money prior to real estate? I just assumed put it where I can gain decent returns?
But, having money in VTSAX for short term has potential for large down swings. Your thoughts are very appreciated.

Thank you.

Also,  are you planning that the market will continue its stellar performance the next 2/3 years?    I wouldn't get your hopes up. :)

I look at it this way:   If the money you're saving is for a rental or primary residence, it's already working for you.  I'd keep a large portion safe

I see what you mean. That is probably wise advice. Why invest in stocks for a few years only to gain such a small amount? The potential down side is huge, Ill put in money market account.

waltworks

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Re: Where to invest prior to buying rental homes?
« Reply #13 on: June 08, 2015, 09:35:04 PM »
Like I said, get back to us when you have a pile of DP cash and a property in mind.

-W

surfhb

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Re: Where to invest prior to buying rental homes?
« Reply #14 on: June 14, 2015, 03:12:35 PM »
I will take my money out of the taxable account and purchase, either large down payment or pay in full, a rental property.


Correct me if im wrong, but isnt the idea to use as little of your own cash as possible when purchasing a rental?   

arebelspy

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Re: Where to invest prior to buying rental homes?
« Reply #15 on: June 14, 2015, 05:41:45 PM »
I will take my money out of the taxable account and purchase, either large down payment or pay in full, a rental property.


Correct me if im wrong, but isnt the idea to use as little of your own cash as possible when purchasing a rental?

No, not at all.

If you want maximum leverage, yes, as that's the definition of leverage.  But not everyone wants more leverage (and more risk).  It depends on your goals, circumstances, etc.

Sometimes I buy a house outright in cash (using all of my own money).

Why would the idea always be to put down as little of your own cash as possible? 
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.