my journey from negative net worth to financial freedom

Start Dreaming Big

Start Dreaming Big

Finished my HOLD book! Which is sadly a big accomplishment for me since this is the first book I’ve finished in a while. Overall, HOLD was a great foundational book. Based on this book, I was able to craft my initial REI goal, understand the basics of researching target markets and analyzing buy and hold deals. I also gained an understanding of the basic financial (tax) benefits that are gained in buy and hold investing (more about that in a later post!) and the components of successful landlordship. I’ve already downloaded my next read from Amazon: Set for Life: Dominate Life, Money, and the American Dream…..starting my 20 pages today!

Jumping back to goals and the HOLD book for minute. I’ve slightly updated my REI goal:

In 13 years or less, acquire at least 25 SFH and multifamily properties each generating at least $100-$200/month in net cash flow. The goal of which is $120,000/year in after tax cash flow.  Begin by house hacking a multifamily property (ideally a duplex or triplex) in the areas of Detroit, Oak Pak, Madison Heights, Ferndale, Hazel Park, or Kalamazoo, Michigan. Areas to target for investing in SFH are the communities of Westland, Garden City and Redford, Michigan.

So, in the last chapter, the authors suggest doubling whatever monetary goal you came up with at the beginning of the book! The rationale: if  you can craft a plan to accomplish twice your original goal – it will erase almost any mistakes you may have made along the way. TBH when I first read that I got an anxiety pinge – like $120,000 is more money than I’ve ever made in my life (I’m a social worker by education and experience). $60,000 was comfortably in my realm of possibility. But, doubling my goal – is thinking big – and in thinking big, as the authors state, I might find myself achieving things well beyond my original (limited) vision. So, here’s to thinking BIG!

Ask and Ye Shall Receive

I was able to get some insight from folks in the BiggerPockets(BP) community on one of my questions from last post. I’d specifically asked whether house hackers typically save money from their W-2 jobs to cover expenses not paid for by their tenant’s rent. The overall consensus was “yes.” One member also suggested saving until I have a cushion I’m comfortable with and then using any remaining savings for my next investment purchase – sounds like a good plan.  I was also given some valuable information on a mortgage product I had no prior knowledge of called: Home Possible . Home Possible is a conventional mortgage backed by Freddie Mac. This info for me came right on time because during my first analysis I noted that some MF listings did not have FHA listed as a financing option. Many had cash and/or conventional only. My original plan was to use a FHA mortgage to purchase my first MF because of the low down payment requirement (3.5% of purchase price). This is in addition to the fact that a percentage of projected rents could be used as income – if there are signed leases (info from my cousin Jay – shoutout!). But I’ve since learned about other considerations that may impact my decision to go the FHA financing route. First, the upfront and yearly private mortgage insurance (PMI). PMI is something you have to pay if you make a down payment that’s less than 20% of the purchase price. I have a conventional mortgage (not FHA) on my primary residence and pay yearly PMI. Since I secured a conventional mortgage, I did not have to pay upfront PMI. In the long run these costs makes an FHA mortgage more expensive than one would think. Second, there is apparently something called a Self-Sustainability test that properties with 3-4 rental units must pass (triplex and quadruplex). Now, my first property will more than likely be a duplex… so that second consideration is less of an issue right now. But, like I said before there is that first consideration: in only using FHA to finance my first deal, I may be limiting the number of properties I can submit offers on (since sellers might prefer or demand cash/conventional only).

With the Home Possible mortgage, as an owner-occupant, I’d be able to put down a  minimum down payment of 5%. Their PMI rate is lower than FHA’s. There is no upfront PMI. I’d still be able to count a percentage of projected rents as income – though admittedly not as high a percentage. This countable income would strengthen my chances of qualifying for the mortgage and since it’s a conventional mortgage I’d hopefully be broadening the sphere of properties I could bid on. So, I’m happy to have this as another option. Right now, the financing options I’m considering are FHA (standard), FHA (203k renovation loan), HomeStyle (conventional renovation loan) and Home Possible (standard conventional).

Now on to analysis practice!

Analyzing with Fire and Fury

The three properties I’m analyzing this time around are:

Single Family (SFH)

  • 12751 Leverne, Redford, MI
  • 28655 John Hauk, Garden City, MI

Multifamily (MF)

  • 16871 Baylis, Detroit, MI

 

12751 Leverne, Redford, MI

This property is a single family home, it’s located in an area of Redford where a majority of the homes are owner occupied. The seller lists FHA as a financing option so I analyzed the deal assuming a FHA mortgage. Negative cash flow for this property makes it a no-go.

16871 Baylis, Detroit, MI

I’m going to add a few Detroit neighborhoods to my list of target areas. Specifically, areas which are appreciating in value and where there is noticeable investment (both on the part of the City and private/public interests). This particular property is a multifamily home. It’s located not far from the University of Detroit Mercy and in a neighborhood where a lot of the homes have beautiful architectural details. The seller does not list FHA as an option (cash/conventional only) so I analyzed assuming the Home Possible mortgage.

This one is a winner with a net cash flow at $381/month. From what I can tell – this home has had the same owner since like 1977. The current tenants are paying below market rent – which is why I projected rent at $1450 instead of the $1250 the owner is currently collecting. The property definitely seems to be priced too high though – given the local comps. I was also surprised by how low the property taxes were on this property – those City of Detroit reassessments are really making an impact.

28655 John Hauk, Garden City, MI

This property is a single family home. It’s a pretty old home given the area. This home was built in 1933, while a majority of the homes in this area seemed to have been built in the 1950s. It’s also been on the market for a while. Looks like since around February 2017 – which leads me to believe there might be something off about this property. With a net cash flow at $147 this property doesn’t meet my personal criteria anyway so it’s another no-go.

 

Have additional insights or experiences to share? Please leave a comment below!

 

Motivating Mantra: “Dream, Act, Plan, Believe”

It’s in my nature to be somewhat of a pessimist (or realist depending on your POV). At times I’ve thrown ideas out the window before they’ve had a chance to truly hatch, staying stuck in a thinking phase, never taking action. I think, perhaps even on an unconscious level, I tell myself: “things in your realm of experience are achievable, things outside are not”. But honestly that’s limiting. I want to see beyond my experience (limited) and dream big, think big, and truly embrace the fact that I can accomplish great things (specifically in this RE game). The only thing which can truly limit by success in this pursuit is me – I think I’ma start stepping out of my own way.

 

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