my journey from negative net worth to financial freedom

Taking First Steps

Taking First Steps

So, after some thinking, more reading, a little analysis, and research, I’ve settled on an initial (real estate investment) (REI) goal for myself. Yay for first steps! My goal is as follows: in 13 years or less, acquire 25 properties (single family homes and possibly duplexes) generating $60,000 after tax cash flow.  Cash flow is the difference between net rental income and total operating expenses minus debt service (mortgage). I’m a frugal, low maintenance girl so I don’t require a lot to live comfortably. This goal will allow me to be financially independent at a level that works for me. If I happen to exceed this goal – which I think is fairly conservative – even better!

Still reading HOLD . The authors mention that if your goal is cash flow focused you should invest more in duplexes. If your goal is net worth focused then single family homes (SFH) would be best. I’m honestly nervous about the prospect of buying a duplex. In my mind that’s double the initial improvement costs and double maintenance costs. But I can visualize buying a duplex and “house hacking” it.  I recently learned  this means living in your rental property while also renting it out. Something I’ll continue to think about. Either way, they suggested any rental property you purchase should ideally be cash flowing at least $100/month.

Change of Plans…maybe

Speaking of which I’ve started to rethink my decision to sell my primary residence. It hit me that since I already own a property why not just convert it to a rental – done and done. Then instead of selling my house and using proceeds to start REI, I could pull out some equity from the property through a home equity line of credit (HELOC). I could then secure a mortgage on a rental property and use the HELOC funds to put up a down payment.

Things go as planned – the renter in my primary residence would be paying off that mortgage and the additional HELOC bill. The other rental property would ideally be cash flowing at least $100 a month. Now, from what I’ve read this would be considered a fairly risky proposition. I would be pretty heavily leveraged (meaning I’d be using a fairly high percentage of borrowed funds to fund this initial REI). So I would definitely need a back up option should things not go as planned (e.g. problems in renting either property).

A Rough Rental Income Comparative Analysis

So, that realization already had me like….hmmmm. But I decided to see if it could work. I analyzed whether or not my primary residence would  be a suitable rental given my goals and the local rental market. I modified a worksheet provided by the HOLD authors. The analysis is below:

 

Initially, I used Zillow to find 6 properties currently for rent in the area around my primary residence. Using these 6 properties, I then calculated the average rent (add up all rents and divide by number of properties), average square footage (add up all sq. footage and divide by total number of properties) and average rent per square foot (which is average rent divided by average sq. footage). Then, I took the average rent per sq. foot and multiplied it by the square footage of my residence to arrive at an estimate of rent ($1090). This number I think is pretty accurate based on what I know of the neighborhood, amenities, etc.

The second table shows what my net cash flow would be given the $1090 rent per month accounting for expenses and debt service (mortgage). I included a vacancy rate of (10% or approx. 30 days vacant) and maintenance rate of (~10% of gross rental income) because  based on my readings:

A. You must account for vacancy and maintenance because they’re inevitable.

B. Overestimating these expenses hopefully ensures you can withstand unexpected issues/problems with the property that might arise (and still be able to pay the mortgage).

Expert insight needed

Soooo, after this analysis I’m thinking it would be too risky to go this route. First, I’d have to take out the HELOC before converting the property to a rental (it seems banks are reluctant to do HELOCs on rentals). I’d then need time to get the property rented. Once rented, the net cash flow that would be generated would not cover the minimum payment the bank would probably expect for the HELOC withdrawal. Now, funds I would generate from a second rental property could cover the HELOC but – I’m still nervous about it. Mostly because I wouldn’t really have enough back up savings (plan B).

Haven’t fully trashed the idea yet – I’m going to hit up Bigger Pockets and see if I can get some insight/recommendations from more experienced folks. I’m also excited because I recently found out there’s a REI meetup group in Seoul for English speakers and Koreans. The group is not exclusive to REI in KR but REI in general. I plan to attend a couple of groups soon.

 

Are you a would be/ newbie investor? What are your plans? Please leave a comment below!

 

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