How do I buy(set up) buying House Hacking#2

Question

Alright guys so I finally committed and bought my first house! :) Closing was definitely a new experience- I am glad I was able to use the stuff I read about over the several years of analyzing. Now to my question - Going after my second house hack. Where do I get this money b/c I'm seeing a lot of newbies saying they get into 5+ rentals in two years. It took me personally years to save up the cost of buying this first house hack. Closing costs, DP, Appliances etc. Though this is a basic question I know; am I using all of the money from the rooms I'm renting in my first house hack to use as a down payment on the second HH#2? I've done all the bigger pockets analyzing so it will cashflow as a rental "barely"...In my experience reading books I haven't seen much about how to get into the second home? I used the 3 percent down so there is about 10 percent equity in my home because of the after-appraisal value. No more renovations can be done to this house. So, to sum up- I don't see an equity move and getting a hard money lender to cover seems like they would hurt me in the approval process since they wouldn't take the rents for potentially two years in. Is this the right forum to as this question?

PS- I bought a SFH, first househack* Duplex second potentially*

Thank you in Advance :)

PS- I bought a SFH, first househack* Duplex second potentially*

Thank you in Advance :)

Account Closed · Answer

"Where do I get this money b/c I'm seeing a lot of newbies saying they get into 5+ rentals in two years."

This site, unfortunately, can often end up being Instagram for REI. ...they are usually leaving quite a bit of reality out.

Family help, buying in dirt cheap areas/ghettos, starting years ago when REI was market conditions were much more favorable, ect.

Jonathan Greene · Answer

What's the rush? Great job in nailing down the first one. Now, spend the time working on your first investment and making it CapEx proof so that when you do go to your second investment, when you have the capital, your first one will be in full cash flow mode. Too many new investors rush to get more, but all you are doing, no matter how you would fund it, is putting more burden on yourself. If you saved and scratched to get this one, it makes sense that you can't just go get another one. Keep making money and working on your current asset before moving on to another one.

Paul Vail · Answer

@Joshua Hughes -- Thank you for confirming you do have funds to cover your backside.   I really misinterpreted the first post.  I worked with (many) folks in a retail gig that had nothing in reserve, like $0.  Scary.I'm sure you listen to the podcasts and read the usual book collections.   My ideas are digested from a bunch of theirs and my own business philosophy.  Some say it's vital to keep any tenant deposits in a dedicated account (savings/CD ladder/FDIC-insured accessible thing) so commercial landlord accounting books reflect that this is a definitively separate non-fungible account from other spending accounts.  If you have a financial advisor/accountant, maybe ask them if this practice is common (or required) for your area.  It's on my checklist for my first BRRRR adventure.  And you mention your 'normal' checking account.  In all of my businesses, I've found it very helpful to have completely separate banking accounts from my personal accounts.  Easier bookkeeping, easier doing taxes, easier if there's an audit.  I imagine that is what you meant.  In a perfect world, we maximize efficiency and profit from every corner:  rent checks go into business checking account for that house or that LLC (not one's personal acct).  From there, whatever money is not needed for the next 2 or 3 months' worth of immediate bills funnels into better yielding free insured accounts.  As you said, every dollar has a job.  Your goal here is to fund the next investment, so that's your eye-on-the-prize.   Optimizing that growing dowry/downpayment can be shifting all excess funds to a high-yield money market account, or a CD.  Just not something that is harder to get at (I-bond) or can lose value unexpectedly such as stocks/bonds/crypto/gold.  Every budget is different.

----------------------------

And you don't have to take any out as owner draws for your personal budget?  Presumably there is a W-2 job for ones own income to personal bank accounts.  Paying for the roof over head, feeding and clothing family, buying healthcare insurance (I like HSA plans for the investment opportunity), put gas in the non-work car, etc. all comes from somewhere.  As would contributions to a Roth or SEP-IRA as a tool for your wealth building.  Presumably a fraction from a W-2 gig goes into a 401k/403/TSA plan.  But that is all on the personal ledger, not the real estate empire ledgers.

Ty Ash · Answer

@Joshua Hughes

Congrats on your first investment purchase! My 1st piece of advice, don't compare where you currently are in your investing to where others are. As many wise investors will tell you, real estate is the get rich slow game.

The house hack is so powerful because it offsets your living expenses and should accelerate your ability to save for that next down payment. My recommendation for you is to pivot from the Real Estate Podcast to the BP Money Podcast. It offers a different perspective and even Scott and Mindy state that it is almost a prequel podcast to the OG real estate focused podcast.

Their first piece of advice is to learn where your money is going and start setting goals and making plans for whatever that next investment is. I believe that this podcast might help you clarify if you want to just continue to acquire properties over time or lean into a more aggressive strategy like BRRRR. You may just decide that you only need 5-10 properties to get to your own personal goal financial independence goal.

Best of luck on your investment journey! Reach out anytime.

Ty Ash · Answer

@Joshua Hughes

In response to this question:

"I am ready to start planning for my second house hack. Every one of my dollars has a goal otherwise it gets spent. so thats why I need to know exactly what to do with Rent checks..and how to go about my second purchase. I want to get two doors (duplex) for my next deal. Will all my rent checks go into my normal checking account?"

Sounds like you are just starting to get yourself organized for bookkeeping for your rental. The lean approach is to use a free software for rent collection (there are a lot of them out there, I used cozy/apartments.com my first 2 years) and a expense tracking system (Stessa gets a ton of positive reviews and I used it for my first 2 years). Now that you know what you're tracking results in your business, my recommendation is to separate your business and personal life. This can be easily achieved by opening a checking account specifically for your rentals (you may also need a separate account to hold deposits depending on your state's rules) where rents come in and expenses go out of.

Creating this separation will allow you to give a job to each dollar like you've done in your personal life. I love that you have a good stock position and some cash invested in a CD but you may want to consider changing your view of that to your personal investing fund rather than your emergency fund. If you have to liquidate your stocks to maintain your rental, there is a very high opportunity cost of losing the compounding of your returns over the life of your investment.

This is where @Paul Vail keeps reiterating the point of being conservative with a healthy cash cushion. Be certain that your personal emergency fund is in a good position (many will recommend 6-12 months of expenses). In addition to the personal fund, many investors will recommend a healthy investment capex/repair/emergency fund (covering major mechanicals and several monthly payments of rental's mortgage).

To give an example of this in practice from a novice point of view... In 2020, COVID enters, stock market falls (reducing your current stock emergency fund). Luckily the market bounced back but if a large repair or capital expense occurred while the market was still recovering, you would have lost money on your stock investment and missed on the potential growth over the past year. Many investors also ran into issues with residents being able to pay full rent, thus another chance of your stock investments needing to save the day. Having an emergency fund specifically for your business may appear to be "losing" you money while it sits earning <1%, however, it could keep you from needing to liquidate other investments that historically will build your net worth over time. As you get more rentals, many will agree that your per property reserve could be reduced as hopefully every singe roof and furnace doesn't go out at the same time and will give you the opportunity to replenish the fund.

To sum up, get your personal and business lives separated and plan your emergency funds based on your own risk profile for each. Once those are well funded, save the excess cash flow from your rental to accelerate your savings for that next investment and get ready for the snow ball. Best of luck!

Joshua Hughes · Answer

Alright we are definitely getting the overview of everything so thank you all for that :) - Describing my first deal might help with this too. So my first house hack was mad almost two weeks ago now. when i had the offer in and after inspections-long story short the TRR was filled to the brim, so I had gotten the seller to replace the roof, plumbing in the crawl space, new water heater- and a few minor/major things as well. My maintenance fund for the property should really only be about 2 months rents. I have 20k in stocks and another 5k still in my bank because of my CD acct is maturing. I have planned this buy for awhile so the total costs including after purchase like appliances and little things I'm all in about 15k. I could be beating a dead horse at this point with this question...

I am ready to start planning for my second house hack. Every one of my dollars has a goal otherwise it gets spent. so thats why I need to know exactly what to do with Rent checks..and how to go about my second purchase. I want to get two doors (duplex) for my next deal. Will all my rent checks go into my normal checking account?

Are there any special ways to buy your second house hack?

PS:

@Paul Vail I know exactly what you mean. I've for sure had problems come up randomly throwing me a curveball. I have money set aside for a rainy day type situation. Moving forward with income is what I am focusing on now.

Danielle Jackson · Answer

Congrats on your first deal! What an accomplishment. As far as what you are reading on here...you are getting the highlights. Very few will tell you about the grit it took to get to where they are and leave out the ways in which they did!

There is no rush in securing your 2nd property. Make sure your first one is performing/cash flowing and purchase the next when you are in a capital position to do so. Congrats again.

Paul Vail · Answer

@Joshua Hughes - Maybe what I wrote doesn't make much sense.   So I'll try again.   I do not know your current financial situation (nor is it any of my business, nor am I a CFP/CPA).  I am simply guessing from the first post that you have successfully closed on your first SFH investment and you have it rented and there is currently positive cash flow.   If I'm wrong on any of that, then kindly clear up my thickheadedness.So the part that gave me concern (because I've made mistakes in the past and I am fiscally conservative) is where I interpreted that you don't have any cash cushion.  THAT's what has me nervous for you and why I suggest building/rebuilding something that you could fall back on if a pricey surprise on the current property (or your own property) comes your way.   Could be a massive roof leak, hot water heater, hvac, or the tenant leaves the upstairs bathtub runneth over for a few days before noticing.  For one (or more) of those, I'm inclined to start building a CD ladder as a dedicated emergency fund.  Even if that means throwing much or most of the + cash flow into it until you have your buffer.   Is that buffer $2k, $5k, $10k?    Only you know your comfort.   No, CDs don't pay much (0.8% presently for me on 60mo note), but they pay better than any other easy-access account.  They can be cashed out early with generally painless fees (6 months of interest only in my example).  Only their interest earned counts as income, so unlike Robinhood/equities, there is no added tax tracking pain such as short-term or long-term capital gains -- or potential for capital loss because the moment the bathtub disaster strikes might be the week after the stock market 'corrected' 50%.  FDIC insured accounts protects you in boring and wonderful ways.BTW, my personal opinion is just that: not a fit for anyone else.   I like investing in the stock market (very diversified ETFs for equities, and for bonds, and for REITS).   I like US Treasury I-bonds and TIPS for conservative inflation hedges.  I like BRRRR (five R's or 4?).  I haven't BRRRR'd yet, but I will.  All of these tools are great and make for terrific balance.  All in on one or the other toolset seems -- limiting?  Money is not evil -- how it is used and abused is.  Unsecured debt is evil.  :)   I think everyone should do all of the above with smart financial moves and avoid usury debt products like student loans and credit cards.  Everyone has their own model.  If we were sharing a beer, I'd ask pester you about your risk tolerance, stress levels, how much can you do or leverage out on before it adversely affects your family life or sleep... and then buy another round.    That's an excessive amount of prattle out of me.  Have a good Monday.

Joshua Hughes · Answer

Thank you all for the advice and comments so far! One thing i didn't mention was that I have tried a lot of other "savings/investments". Which i mean like Paul Vail mentions about CD's. I acquired a CD account and it grew at 2 percent which was better than any other high yield savings account but still doesn't make much of a difference. Losing opportunity cost and of course inflations killing the spread. I also have about 20k in a robinhood account. which is making higher gains but still nothing to shake a stick at. This is why I'm so adamant about getting more cashflow through rentals. That could be considered an Emergency Fund although when my first house hack costs came out of my checking acct it definitely shook me, so idk how risk averse i rlly am. Does anyone have both Rentals & stock investments and if not at what point did you decide to go "all in" on one or the other?

I am hearing a lot about BRRRR's in the comments...Is this really the only way to accelerate the process? Then using the equity somehow through 1031 or Helocs? I am pretty much doing this all on my own so far because my family is really on the other side of "money is evil" type of mindset.

Do you feel more confidant after getting your second or third property or even a PM? As you can probably tell i am filled with questions..so any real advice would be extremely helpful

Thank you!

How do I buy(set up) buying House Hacking#2

Most Popular Reply