Young guy considering investing in rental property

spencer_electricianOctober 26, 2008

Appreciate any advice, encouragement, or warnings to my idea. I am twenty-one years old and already have a licensed electrical business that profits $90k per year. It does well enough with referrals that in the last year and a half, I have had every week full with 40 hours as well as part-time helper's hours. The funny thing is, I'm still at home with my father, but that needs to change. He is a full time musician that tours the world most of the time which works out giving me independence. Avoiding rent and utilities for the last few years has allowed me to save $120,000. I need to get out on my own and buy my first home but had this idea. #1- I am very cautious and like to assume my income as half of what I really make, so I don't wind up with a house I can't afford. #2- Having such a savings seems like a great opportunity to grow more money. #3 Still being at home for a little while would be ok as I make sure the investment works. #4- If it all works out, I could potentially have an investment that pays my mortgage as well as help me with retirement and the benefits that I do not receive.

The Opportunity I have- An 18 unit apartment building is for-sale for $199,000. It has been completely renovated a few years ago. Currently 11 units are already rented. The rent is apx. $300 per unit. Where it is at now, the loan (with $40k down) at $990 per month plus a hundred or two for insurance, $3300 rent would start with a $2100 profit per month. The bad part is that it is in a somewhat bad area.

It seems being self-employed and in direct connection with every maintenance trade, I could handle the hassles of maintenance. If the building is half rented and someone destroys a unit, another unit could take its place as I deal with the damage. On the other hand, if it is full and someone leaves and vandalizes it, I would have enough revenue to quickly repair it anyway. It seems that as long as four units are rented (out of 18), the rent would pay the mortgage, insurance, and taxes.

So, keep looking into an apartment? Be a little more simple and buy a duplex/ fourplex. Or forget it all and just buy a house? I am proud of my business and do not want to do anything stupid. My broke friends in college sure think I'm doing something right :) Thank you for your time.

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Hello Spencer,

May I ask what City & State this 18 unit building is in or better yet the zip code for better figures?

Without knowing that first it's hard to give you advice as there are many many other factors to take into consideration which I'm not sure if you have thought of or not.

Thank you!

    Bookmark   October 26, 2008 at 11:50PM
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It is in Kansas City. The property is in a bad part of town however. It does sound from the few people I've talked to that it could be a nightmare of kicking out non-paying renters and a risk of losing money. 64124 is the zipcode. Seems that the idea of having that many units to rent is good but maybe being in a bad area makes it a bad idea.

    Bookmark   October 27, 2008 at 1:59AM
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You've done so well for yourself, please don't go looking for such a mess now, especially as, with the economy as it is, you're likely to spend half your life in court, never mind trying to fix what might be broken in the place. Your idea in general is not a bad one at all, renting to pay a mtge, etc., but the size and general description of that place would scare many more experienced people away. Go for a duplex or triplex, it won't preclude problems by any means, but at least they'll be manageable while you're still getting established in your profession and possibly having to deal with the fall-out of this probably long term recession. Don't lose what you already have on the (very) off chance that such an "investment" (not) as the big place would be a smart move now. Cheap will always be around, but a money pit is not what you want to take on now.

    Bookmark   October 27, 2008 at 6:30AM
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Lots of good advice above. Just to echo, I'd suggest you start small with a duplex/triplex as "training wheels".

At least in the early phases, I'd suggest you try to find a place that will give you more reliable renters. (In my very limited landlord experience, I had a bad tenant and it wasn't fun.)

    Bookmark   October 27, 2008 at 7:07AM
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Hello again Spencer,

Based on your information I would really stay away from the building. I would assume by looking at the stats in that area the building value probably would not be increasing by leaps and bounds and to put yourself at risk for $2,100 give or take depending on the occupancy rate is just not enough. You may find yourself spending more than that a month on god knows what? I'd hate to think of what you may get yourself into and suck your savings dry.

I would as mentioned above start small or just with a place on your own but nothing over 2 to 3 units. I'm sure you could score a great deal on a nice home based on the market conditions in your town. Even with your background and contacts find a nice fixer upper in a great neighborhood with great schools that you can work on and that maybe even a better choice. If you can get into something 30% under the value you'll be in good shape.

Congrats on all your hard work!

    Bookmark   October 27, 2008 at 10:06AM
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Spencer: I think you might be spending lots of effort fighting/getting complaints about drug dealing and such going on in the area, and possibly in that building.

However, go to mrlandlord dot com and click on the area at the top/middle where it says " Ask a LandLord a question (or view Q and A)". That will open up a window where there are topics on the left. You can ask a question, and read all the Q and A. There are many landlords that have large buildings with many units that post there. There are landlords in bad areas too. I think they will help you a lot. They are very, very knowledgeable and many have been landlords for a long time, but there are newbies too. I highly recommend the site. It is free.

    Bookmark   October 27, 2008 at 3:50PM
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Land/housing is ALWAYS about location. At some point and time you will want to sell your investment. If it's in a crappy part of town now it's gonna take lots of time for the area to get better IF ever.
You are much better off to buy smaller and expand as you get the hang of things in a decent neighborhood.
Renting has it's perks but it also has some down right painful parts to it. It's not just keeping the place ready to rent. It's dealing with late payments, no payments, lying. sob stories. It's checking back rounds and enforcing leases. It's dealing with pets when there aren't suppose to be any. It's dealing with smokers in a non smoking building.
It's phone calls at midnight for emergencies that are nothing more than a dripping faucet. It's making sure sidewalks are shoveled. It's getting one renter out so you can move in another on the time line you set up.
At 21 you're life is going to change alot between now and 30. Do you really want to be tied down to something so big that it takes all your spare time?

    Bookmark   October 27, 2008 at 6:28PM
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I agree with everyone - start small! It takes a certain mindset to be a landlord. We owned a duplex for a while and although keeping it would have made us (eventually) a very nice profit, we LOATHED being landlords and have never regretted turning it over to our partner via quitclaim.

And location truly is everything in RE. We were fortunate that our starter neighborhood gentrified into a nicer area, but our home is still worth $100K below the "better" areas, even though it's worth $100K more than the "bad" areas. If nothing else, you'll get a better class of renters in a good area, LOL.

Good luck to you. Before you invest in RE, BTW, have you fully funded your Roth or SEP IRA every year? Be sure to do that first before jumping into property.

    Bookmark   October 27, 2008 at 10:40PM
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At 21y/o ou are too young to take on a big 18 unit building like this. You still live with your parents and do not even know what it is like to live on your own, much less manage an apartment building while trying to learn to live independantly. The renters in this building are probably way more street smart than you, and they will take advantage of that fact.

You sound like you have a good head on your shoulders and a good work ethic. I commend you for having goals for yourself that will keep you financially stable. Start out with a duplex or triplex. It will be easier to manage and you can know your renters better. There will be less repair and maintenance issues and less turnover to deal with going with a smaller investment. Being a landlord to an 18 unit is a full time job and you already have one. Do you really want to be sitting around all day waiting to hear your case called in eviction court when you could be out making $XX per hour? Do you have time to run back and forth to the apartment for weekly repairs?

    Bookmark   October 29, 2008 at 1:55AM
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I agree with the above sentiments. From the description of the area, sounds like you could run into some problems down the road.

If I were you, I would continue to grow your electrical business, and perhaps, as lucy suggested, start by buying a duplex or triplex (preferably in a nicer area of town). You could even reside in one of the units, and rent out the other one or two units.

Whatever your decision, I wish you the best of luck!

    Bookmark   October 29, 2008 at 4:13PM
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First, I want to congratulate you for you being able to save this amount of money at only 21 years of age....way to go!!
But, as the others have stated....location, location, location is what is important in owning property. I think it would be great to get a duplex or triplex and live in one of the units....the rent would make your payments, taxes, and insurance....they would pay for your living quarters, as well as the other units.
Good Luck.....I am from Kansas, so I know KC pretty well...and some areas are not where you should be investing....also make sure you buy in a good school system area.

    Bookmark   October 29, 2008 at 4:26PM
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