Method to get started?

Question

Greetings,

My wife and I were about to start looking to buy our first property. Our plan was to buy a duplex and house hack by living in one side and renting the other. A few years ago this seemed like such a good method, but with rates, prices, and supply where they are currently, I am not sure we can afford it or if this is our best option. It seems like we would be paying decently more even with the rental income than we would be just renting an apartment. Now we are questioning if there is a better method or if we should just rent an apartment for another year or two.

Option 1: buy a duplex or small multi-family and house hack. Live here for a few years before buying the next property. However, would rents (if we want to move) cover our mortgage and expenses? I am also wondering if we would feel stuck there, if renting both units would result in negative cash flow. Should we just be patient and try to find the right deal?

Option 2: We could just buy a single family home. Do some rehab to increase value. We also have a small family property in the mountains where we spend some time during the summer. We could potentially put our new Single family home on Airbnb up to approx 90-days a year. Then eventually turn it into a long term rental (or full time airbnb depending on local regs) when we buy our next property.

Option 3: Rent an apartment for another 1-2 years and wait for rates to drop and supply to increase. We could invest the approx $2000/month we would be saving by renting over buying.

Just looking for some opinions from people who are more knowledgeable about this than us. Are there other options we should consider? We need to stay in the greater Denver area with our jobs, but can do some remote work. We are also not looking to become full on real estate investors, but would like to try to have a property or two for future passive income.

Thanks!

James Carlson · Answer

@Hayden Clark

Welcome to the forums. I tell my clients all the time that real estate is not nearly as complicated as books and seminars would have you believe. And you've summarized the dilemma faced by a lot of Denver buyers (and buyers in a lot of markets, truly).

Some thoughts on your stated options:

1: You're not wrong. Duplexes (and triplexes and quadplexes) in Denver and Colorado Springs, both markets we invest in and work in, are tough to make work, cash-flow wise. But if you're going to live there anyway for a few years, as @Michael Smythe said, rents will likely have increased enough to at least get to even by the time you want to move out.

2. Nothing wrong with the straight-up SFH buy. It's the Levi's 501 of real estate purchases -- never goes out of style. And heck if you buy in one of the Denver 'burbs that allow for non-owner occupied Airbnb/STRs, then you could run it as a short-term rental when you move out. (Have a few clients doing this.)

3. I'd push back on this one. Rates may drop (and likely will drop throughout 2024), but with that will come more buyers who've sat on the sidelines, meaning more competition and higher prices. The basic dynamics of real estate across the country are pretty set for the next few years -- too many buyers from the Millennial generation (bigger generation than baby boomers) who are hitting peak buying age, not enough new construction, older homeowners not selling as soon. It all leads to lower supply, higher demand and rising prices. I'm not saying make a dumb decision -- do your homework -- but then make a buy and know that you'll hold it for 10-20 years and be just fine.

My two cents, at least. Good luck!

Anne Lu · Answer

@Hayden Clark

Congrats on starting the journey of looking at your first property!

Duplex & Small multi-family in the Denver market are getting harder and harder to cashflow, but house hacking is still the easiest and most cost-efficient way to get started if you are looking to own a property. Another option that you can consider is house hacking a single-family property, living either upstairs or downstairs, and renting out the other half. To increase the chance of having more cash flow, rent out by the room for the rooms you are not using.

I hope you find this helpful!

Michael Smythe · Answer

@Hayden Clark Going to challenge some of your assumptions.

1) If you buy in the right area, after 2-5 years rents from both units should more than cover the mortgage PITI.

2) Why can't you do all this with a 2-4 unit property?

3) There's a significant shortage of housing in the USA currently. So, how likely do you think the chances are that property values will continue to increase and at best you'll be treading water by waiting to buy?

Only YOU can respond to our challenge questions:)

Wale Lawal · Answer

@Hayden Clark

Choosing the right real estate strategy requires careful consideration of your financial goals, risk tolerance, and lifestyle preferences. Each option you've outlined has its own pros and cons. Here's a breakdown of your options:

Option 1: Buy a Duplex and House Hack:

Pros:
Opportunity to build equity through property ownership.
Potential for rental income to offset living expenses.
Experience in real estate investing and property management.

Cons:Market conditions may make it challenging to find a duplex with positive cash flow.Limited flexibility if you decide to move or expand your real estate portfolio.

Option 2: Buy a Single Family Home with Airbnb Potential:

Pros:
Potential for property value appreciation through renovations.
Airbnb income could help offset mortgage costs, especially during the summer.
Greater flexibility in terms of future use (long-term rental or full-time Airbnb).

Cons:Airbnb regulations and demand can vary, requiring thorough research.The seasonality of Airbnb income might not provide consistent cash flow.The initial cost of renovations and potential difficulties in property management.

Option 3: Rent an Apartment and Wait:Pros:Flexibility to wait for more favorable market conditions.The ability to save money for a larger down payment or other investments.No direct responsibility for property maintenance.

Cons:Potentially missing out on current low-interest rates.Renting doesn't build equity, and rent prices may increase over time.

Additional Considerations:Market Conditions: Keep an eye on the local real estate market trends. If you believe prices might drop and supply will increase in the coming years, waiting could be a strategic move.Financial Goals: Clearly define your short-term and long-term financial objectives. Consider how each option aligns with your goals for passive income and wealth building.Lifestyle: Consider your lifestyle preferences and how each option aligns with your current and future plans.Risk Tolerance: Evaluate your comfort level with the potential risks associated with each option, such as market fluctuations, property management challenges, or regulatory changes affecting Airbnb.Financial Adviser: Consult with a financial adviser or real estate professional who can provide personalized advice based on your specific financial situation and goals.Ultimately, the best option for you will depend on your unique circumstances and priorities. It might be helpful to create detailed financial projections for each scenario to assess the potential return on investment and cash flow.

Nathan Gesner · Answer

I see nothing wrong with taking a little time to think this through. Make a solid plan of what you are trying to achieve, that you both agree on, and save like crazy so you have the finances to make it happen. If you can rent and save $2,000 a month, do it! That's an extra $24,000 a year towards your next investment.

I know some investors that have millions in equity but they still choose to rent because it gives them some flexibility and freedom they wouldn't have as home owners.

Method to get started?

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