Which is the smarter option?

Question

Hey all, first post!

I have a duplex in mind that I have seen and has current renters in that are currently paying $1300/mo. I ran two different analyses on the property. One was doing a house hack where my wife and I would live in one of the two units and the other of renting out both units. In the first analysis which included house hacking, the expenses far outweigh the cash flow and would result in me paying almost $600/mo for the mortgage and other expenses. To preface this, the property is listed at $299,900 in a very up and coming area close to schools and the interstate. I believe it is actually worth about $310,000. My second analyses which included renting both units for optimal price of $1400/mo. This created a CoC return of nearly 11%, profiting in about $700/mo. The issue that I am having is money. My wife and I just started saving our side hustle profits and do not have much saved, not enough for a down payment. So I have a few questions regarding this predicament.

First Analysis: https://www.biggerpockets.com/...

Second analysis: https://www.biggerpockets.com/...

1. Would it make sense to get an FHA loan and house hack for a year and then do a cash out refi and get another property and make this a double unit? (Currently we pay $1050/mo in rent, this would decrease our overall payments to roughly $600 while generating some cash flow and building equity.)

2. Would it be worth it to cash out our Roth IRAs with the exemption clause allowing no penalties for first time home purchase?

3. Could I get a private lender for just the down payment and get regular loan after proving enough or the down payment and rent out both units right away? Or do I have to use a private lender for the entire purchase price?

4. Do I pass this up and try getting into wholesaling to start generating more capital before attempting other deals?

This would be my first investment property so I am looking for any advice! Thanks in advance!

Scott Trench · Answer

@Adam Nesheim I think this is a very thoughtful analysis and consideration of your first investment.

Personally, the biggest thing that jumps out to me in your story here is that your personal financial position (capital) is not yet to the point where you can invest in real estate from a position of financial strength.

Regardless of the quality of the deal (honestly looks reasonable, but take that with a grain of salt not being in your market), your analysis, or your strategy (house-hacking is a phenomenal way to get started, you might want to just consider continuing the “grind” of preparing your personal finances before making such a large investment.

a great position to buy this property might look something like the following;

- You save $1000+ per month

- You have the down payment (3-5% for a house hack) plus $10,000 buffer saved up.

- you have excellent credit

This may delay your first purchase, but I think it will allow you to make longer term decisions that may give you better odds of success than a private capital play on this first deal.

withdrawing the contributions from the Roth may be a reasonable way to expedite this - the returns on a house hack can often dwarf what you can get in a retirement account! Not a good strategy in my opinion for most real estate investments, but I personally did not contribute to the Roth to fund my first house hack and I don’t regret it.

David M. · Answer

@Adam Nesheim

Maybe pass, but as I keep saying:  this is investing, not a job. With investing, you make money on the money you have to invest...

That being said, while I don't know your area and the other avaialble potential opportunities (especially in this market), but your best bet looks to be buy it with a FHA loan.  I don't know what you mean by refi'ing after 1 yr.  Do you think it will really appreciate in just 1yr to make it economical to refi?  Are you buying it way undermarket?  if so, refi after 6payments.

Getting a loan to finance the money down I don't think is looked well upon when getting a conforming loan.  You will need to disclose the source of funds...

I wouldn't really cash in on your Roth IRA's

If you buy it to live in, you at least will be saving on your rent and building equity in a home that is being subsidized by your tenant.  Work on your side hustles, keep saving up since your expenses will be lower, and you can grow into your next deal.

Hope that helps.  Good luck.

Will Kenner · Answer

@Adam Nesheim Based on the information you provided, I would definitely consider option 1. You'd get into a property with the least amount down and significantly decrease your housing expense, all the while having the tenant help pay down your mortgage and you build equity. In your analysis, you also include 8% management fees. If you're living in one of the units, you can disregard that cost since it would make sense to self-manage, which will bring you closer to break-even. When you're ready to move on to the next property you can then get an FHA for that as well and bingo, you have two rental units and a separate primary, both with little money down. For option 2, I would avoid at all costs. Yes you can withdraw from an IRA for a first time home purchase, but you loose out in tax-free compounding. Real estate offers many tax advantages as well, but keep them separate. You want to build wealth through multiple strategies. (You can eventually buy a property IN your IRA, but that's more advanced than where you are right now, but you'll get to that point in time.) I don't think option 3 is needed if you can get an FHA in option 1. Also, if you finance the down payment AND the rest of the cost, you now have two payments and chances are you'll be spending more on housing than you are currently renting. Lastly, since you are new to real estate and already have a side gig, and presumably a fill time job, don't get into wholesaling. That is a full time job in and of itself and will take a while before it produces enough income that you can live off of. The goal is get money working for you, not you working for money. With wholesaling, you're going to have to work for the money, and work hard. Hope this helps!

Which is the smarter option?

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