Reference: Here is a previous topic of FWF user attempts to become wealthy. But this post focus on getting wealthy via real estate investment.

This is a wonderful thread dealing with real estate investment. However, it does not discuss investment property relating to the personal financial situation/goal/picture.

Goal of this post: As a typical FWF saver, I would like explore the best options to use our current finincial resources to get wealthy via real estate (I know it sounds crazy in the current market condition). We do have other investments (e.g. retirement account) set aside, so these will not be the focus of this topic.

Where we are now: I am in my earlier 30s and my wife is in her late 20s. We have a combined household income about $130K ($110K from me and $20K from my wife as a graduate student). We also have a little bit over $100K savings. No debt. My wife might graduate and find a job in 1-3 years or she might need to stay at home to take care of the kids (we are planning to have at least two but none so far). Also, we currently still rent an apartment ourselves in Riverside county, California.

Where we want to be: We want to have a real estate investment as one of our wealth creating policy. No. We don't think primary residence is a "real estate investment". So our goal is to buy 2 SFHs in the current real estate bear market cycle. Rent one out and live in the other one. Therefore, we DO NOT CARE what banks or realtors tell us what we can qualify. We want to buy two houses in $250-$300K price range each (I think such moderate price house fits my moderate size ego better). The goal is to pay off the investment property in 10-20 years. And the future rental income could support another house purchase. Wash, rinse and repeat.

Strategy Needed
Given the above information, we would like suggestions from FWF community on how we can optimize our current/future financial resources to support our dream. That is:
1.How should we time the two purchases? We plan to buy one this fall, when should we make the second purchase?
2.How should we construct the loan? We plan to put 20% downpayment and construct 15 year fixed loan for the first house. Pay it off as quick as possible so we can be better qualified for the second house when we are ready to pull the trigger, is that wise?
3.At what debt level should we be comfortable with if we are going to "wash, rinse, repeat"? Normally, people starts off at 3 times the household income and it gets lower when they get older. Is there a rule of thumb for investment property? I see too many "real estate investors" stretch themselves with all the cashflow issues and I don't want to be one of them. I would rather err on the conservative side.

Quick Summary
1. Focus on buying that primary residence first
2. Read, read, read - every landlord book you can get ahold of, every real estate investment book you can find, blogs, forums, etc. Get emotionally ready to take a second job to be the landlord. The following websites are helpful as a start:
www.mrlandlord.com
www.zilpy.com
www.rentometer.com
3. Get 30-years mortgage, make prepayment if possible
4. Make sure you can comfortably make the mortgage payment to carry the rental ON YOUR OWN during periods when there is NO rental income coming in
5. You must know your market to accurately predict rental rates, expenses and vacancy.
6. Switch residence after 2 years so one can get owner-occupied loan for the second house and if forced to sell the first one, there is no tax on the profit (update: tax loophole might be closed)
7. Hire a professional property management company unless you really know what you are doing
8. Join a property owners/apartment owners association
9. Hire a tax preparer knowledgeable in rental real estate for your first return
10. Check your insurance for an unbrella policy

FWIW, first time homeowners always always always underestimate the cost to maintain and repair houses.

Thanks. We are only looking at houses less than 5 years old (it is a relative new town). And I factor in 15% rental income for the cost to maintain and manage the house, plus 5-10% vacancy rate (on top of the normal PITI+HOA). Is it still not conservative enough?

KennyDou said:Thanks. We are only looking at houses less than 5 years old (it is a relative new town). And I factor in 15% rental income for the cost to maintain and manage the house, plus 5-10% vacancy rate (on top of the normal PITI+HOA). Is it still not conservative enough?It's impossible to know the vacancy rate without knowing the market, and 15% of rental income to maintain/manage the house ... it's impossible to know that, too without knowing more information. For instance, if you're going to pay a manager 10% of gross rental income, then I'd say, no, 15% is not enough.

If books are too much for you, try movies. I buy a lot of property from would-be landlords who bit off more than they could chew, and I don't pay full market value, if you catch my drift.

KennyDou said:2.How should we construct the loan? We plan to put 20% downpayment and construct 15 year fixed loan for the first house. Pay it off as quick as possible so we can be better qualified for the second house when we are ready to pull the trigger, is that wise?Get a 30 year loan. You can still make additional principal payments to pay it off sooner. But you don't have to. If you run into cashflow issues with your rental in 5 years with kids and your wife at home, you won't be forced to continue paying off your primary residence at the faster pace. It will give you some breathing room.

My only other suggestion: Buy your house you want to live in. Live in it for a while. Have the experience of being a homeowner for a while and the associated costs. Then re-evaluate your real estate investment idea and see if it is still compelling.

Might I suggest looking into purchasing a Duplex?

You get to buy your 1st home and you get to play landlord on the part you don't occupy.

Currently, I own one myself and the repair costs are as I had expected. Granted, I bought a much older home (~55 years old) than you are looking at but after purchase, easily dropped $20K in repairs/upgrades in the first year(I don't mean for granite counter tops or top of the line appliances - it was to repair things the previous owner 'repaired'). After that, I budget ~1% in upkeep costs/maintenance (I have a list of things that I would like to fix/repair/upgrade and look at my budget to determine what will be fixed - but there will be unexpected expenses). I also manage the rental unit myself. You get to deal with phone calls at 10pm regarding gas leaks, etc. Really, as the others have suggested, do it one step at a time. Don't get into more than you can handle.

As an FYI, the tenant pays for 1/2 my mortgage and lives in 2/5 of the property while my family occupies 3/5 and I get to write off a portion of my home insurance, water bill, etc.

SaulHudson said:I always had this same idea getting rich renting real estate. But, I could never be a landlord. I don't even like fixing the home that I'm living in. If I could somehow own a rental property that someone else could maintain, I would consider it.Property Managers are what you're looking for.

Kenny

My sis and bro in law (MBAs from top ten b-school) bought a rental and lost it. They made every mistake in the book. That was expected. But making the mortgage payment during this period was killing them. $2800/mo primary and $3700/month rental!!

I was going to give you all sorts of advice, but IMHO it really comes to this:

Unless you are fortunate, you are going to make mistakes. Expect it. As long as you can comfortably make the mortgage payment to carry the rental ON YOUR OWN during periods when there is NO rental income coming in will you learn from these mistakes, get good tenants and workmen, and keep the property. Its when you're cash strapped that you are forced to sell in bad markets and this kills investing.

Where you looking at, Eastvale ?

my family has been in RE since before I was born... and suffice to say the past two years have been very lean.

problem is that the market is reaching a low point... but the financing just isn't there as it's been in the past.

the owner-occupied loans are still out there... but they WILL come after you if you lie on your loan app. I've defended more than a couple of those this year.