The cart before the horse or the horse before the cart?

Question

Seeking advice for someone in my current situation.

I’m looking to be a first time property investor with initial intentions to purchase a multifamily property quadplex owner occupied.

I’m preapproved for a conventional loan and FHA loan at this time.

I have about 15-25k cash to put into my investment.
After networking with a few people I’ve been suggested to start with a single family home ranging from 180-250k. (Owner occupied) to refinance and rent after and move on to the next investment.

Why does this idea kind of make sense but sort of makes me worry I won’t go on to further investments in the future (money wise). Well as soon as I would want? Would this have to be a BRRR method?

My main question is .. why do they suggest this route for someone like myself? Is it better to still pursue the multifamily route as I initially wanted or should I start with a single family?

I’m from south Texas, quads can be found ranging from 300-800k.

At this time I’m having my realtor look at a few single family and multifamily homes. just hope to make a good decision here in a few weeks or less.

Thank you !!

Chris Seveney · Answer

There is no right or wrong answer, but just be aware real estate is the long game and one should look at it as a 5-10 year plan on scaling and not a 1-3 year plan. Many will recommend a single family first to understand being a homeowner, its not as easy as it sounds (or not as hard as well). Owning a MF unit can be daunting, especially if self managing it. It will also depend how much you are approved for but with only 15-25k in cash if it covers your closing costs having ZERO money for reserves is a recipe for disaster, what if the HVAC goes out and its $12k to fix, what if a tenant destroys a place and you have $5-$10k in repairs. During a turnover of a unit expect to pay $1-$2k in turnover costs. Also if you are living in the property it most likely is not cash flowing (Granted you may be able to live rent free).

Buying a multi with no reserves is the most likely reason why people are noting to go with the single.

Drew Sygit · Answer

@Gilda L. Sauceda First, understand that most people will give advice based SOLELY on their personal experiences.

So, you should ask those recommending you go the one-unit route how much experience they have with 2+-unit properties!

If I had to start all over again, I'd look to acquire a 2-4 unit property with an FHA low-down payment mortgage.

Getting it under market value would be a bonus.

So, would using an FHA 203k renovation loan, which would allow me to buy something unqualified for a standard mortgage, which would weed out a lot of competition and push the price lower.

Hopefully, I would increase the value of the property in 1-2 years and be able to refi out of the FHA mortgage. I'd also learn a lot about maintenance and managing tenants.

Then, with my hands-on experience, I could decide if I wanted to repeat the process or target 5+ units - which my experience would help with lenders.

Good luck with whatever you decide to do!

Another thought - AFTER (so you don't screw up your mortgage qualifications) you buy, either get a personal line of credit or open a few credit cards to make sure you have access to $25k of credit to handle any surprise maintenance issues.

Wale Lawal · Answer

@Gilda L. Sauceda

You can use Rentometer.com to have an idea of what the property
will rent for.

If
you don’t have access to that then use 90% of whatever Zillow
Rent Estimate is.

For example, if Zillow says it will rent for $2000,
then 0.9 x $2000 = $1800 will be the most likely rent.

That
been said, the best comparable is the one you get from an Agent
because they have MLS access with a lot of data that will provide you
the best result.

Goodluck!

Nathan Gesner · Answer

If you don't intend to occupy one of the units, you'll need 20% down for a strict investment property. That means $60,000 - $200,000 for fourplex in your market. And as Chris points out, you better have a reserve because there's an 99% chance you'll be spending some big money in the first 3-12 months to deal with an unexpected problem or a bad renter (or several). It can be a steep, expensive learning curve for someone starting out.

Bruce Woodruff · Answer

@Gilda L. Sauceda You will be fine! You have the right attitude and that is the most important, you can learn the rest. Start off small and slow and learn everything you can as fast as you can. Do your own renovations/repairs as much as you can to learn, hang around the jobsite and watch everyone.

Gilda L. Sauceda · Answer

Thank you @Wale Lawal very much. Will keep this in mind

Gilda L. Sauceda · Answer

@Bruce Woodruff

I want a STR one day! That’s one of my goals

Gilda L. Sauceda · Answer

@Bruce Woodruff

You’re very right, I know what I want in my future and I know I will continue to pursue my investments. Maybe I’m overthinking the situation. I think I may go the SFH to get my feet wet as a newbie. They’re being nice and giving me real life experience advice .. I was just trying to find more insight and rational behind their suggestions. MF deals come a dime of dozen right now unfortunately. I might luck out! I do know I have a great realtor as of now who is looking out for my best interest.

Gilda L. Sauceda · Answer

@Nathan G.

Hi Nathan,

Well if I go the single family route I was going to use FHA 3.5% down owner occupied.

If I went the MF route, I would do the conventional route 5% down. Therefore, my budget on a MF would be less than 350k.

Conventional 5% would allow me a better chance for a MF due to the competitive market I’ve been told.

There’s no way I’m ready for a 20-25% down unfortunately.

Also, my lender said I could use FHA one time only. I believe this is false?

The cart before the horse or the horse before the cart?

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