Starting to invest in real estate in GA

Oh, a math problem. I love math.

I know most say not to use a PM but since im new to this, i think i will try them out for few months see how they operate and decide.

I would do just the opposite. Manage the properties yourself. If you hate doing it, then go to a PM. But you may find the effort involved is minimal, and the money you would spend for the PM in exchange for the time you would spend doing the management isn't a good trade off.

OK, the math. I'm going to assume you will need to put 25% down and spend $5000 in fixup on a house. I'll assume you can get a loan for 30 years at 4%. Or, you can pay cash. Since you brought up using a PM, I'll use the 50% rule (expenses, vacancy, and capital eat 50% of your gross scheduled rent). I'll try to be explicit enough (i.e., show my work, like the math teacher said) so you can adjust to your actual numbers. You don't mention a rent figure, so I'll use $1000 a month. I'll ignore closing costs. Figure maybe $1000 for those paying cash, $2000 with a loan.

Baseline:

Rent: $1000
Expenses, Capital, vacancy: $500 (50% of $1000)
NOI (net operating income): $500

Pay cash
Purchase: $75,000
Fixup: $5,000
Total investment: $80,000
Cash flow: $500 (NOI - debt service, you have no debt service)
Cash flow per year: $6,000
Cash on cash return: 7.5% ($6,000 / $80,000)

Finance
Purchase: $75,000
Down: $18,750
Fixup: $5,000
Total investment: $23,750
Loan amount: $56,250
P&I Payment: $268.55 (4%, 30 years)
Cash flow: $231.45 ($500 NOI - $268.55 P&I)
Cash flow per year: $2,777.45
Cash on cash return: 11.7% ($2,777.45 / $23,750)

So, from that math, using your $100K to pay cash would get your one house and $6,000 a year in return. Using the $100K and financing would get your four houses (almost, with closing costs you would be a little short.) Total return per year would be $11,109 per year.

Now, paying cash leaves you with a $20K cushion. That's a bit large, especially without a payment. But its a nice cushion. Buying four leveraged houses leaves you with no cash. That's bad. So, I would buy three houses and keep the remaining cash for reserves.

Also, once you have four mortgaged properties, lending becomes more difficult. Once you get 10 mortgaged properties, you're limited to commercial loans, which are going to be a slightly higher rate, but a much shorter term, probably 15 years max.

Also, realize that at first you will not be allowed to include the rental income when you qualify for the loan. You'll usually need the rentals to appear on two tax returns, then you can start including then when you compute your DTI.

Can you make a good living? What's "a good living"? If you want $100K a year, you would need 36 financed properties like this or 17 free and clear properties. But do realize I've made up some numbers here. Plug in your actual numbers and you can get a better idea. Also consider that you will get shorter loans at some point, and that will impact your cash flow. A 15 year loan drops the cash flow from my example down to $1000 a year. Until its paid off. So, if you don't need that cash now, and can roll that return and your savings toward eventaully having free and clear properties, you may be able to have a nice living in the future with fewer properties.

If you self manage, I'd adjust that ratio from 50% down to 35%. Realize though, you are "buying a job" and you'll be doing PM activities on an ongoing basis.

Source: http://www.biggerpockets.com/forums/55/topics/79261-starting-to-invest-in-real-estate-in-ga

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