Need help with Investment Strategy

Ben Curtin · 2015-06-26T21:28:44-07:00

Hello BP,I'm a relatively new member here, but I've been interested for a very long time, and especially making money with real estate. I'm 24 yrs old with a beautiful wife and a soon due baby, and I have a day job as an airline pilot. I'm renting an apartment right now for a pretty costly $1200/mo.My 10 year goal down the road is to be living in a single family home, and own a bunch of rental properties creating income for me in the Seattle area where I live. Now, I'm making pretty good on my plan so far, taking the necessary steps to obtain my first rental property. And I'm sort of at a standstill right now because of the sellers market. I have been looking at getting into a fourplex/triplex, and using an FHA loan to live in one unit, while renting out and managing the other units for a few years before buying my first single family home. But there aren't a ton of fourplexes/triplexes getting added to the market currently so the pickings are slim.I've found this duplex which needs a little roof work, and overall I wouldn't want to live in the area which it's located due to the distance of my daily commute. But it seems like it has potential. it costs about 110k and it's a short sale, and it would generate about 1400-1500/mo in rental income. And I was wondering if buying this duplex as a NON owner occupant and learning how to manage a property without living there, is a better way to start as opposed to getting an FHA loan on a triplex or fourplex? I suppose it's all in the numbers, and the duplex+single family home for us to live in seems to make financial sense, but I'm nervous about getting into two separate properties as opposed to waiting for one bigger property to come on to the market to get it wrapped up in one mortgage. What do you guys think?

Steven J.

Urbana, IL · Member since 2012 · 1k+ posts · 425 votes

11y

I'll have to agree with many of the other members here that if its an area you wouldn't live in you shouldn't invest in.

I would instead suggest that you send mailers to 2-4 unit buildings, that are not on the MLS due to your hot market, inquiring about purchasing the property and use the FHA financing for that in an area you want to live in. You may get lucky and find a good deal on the MLS. Perhaps its a bit out of your area but its a good way to get in.

Keep in mind, that with FHA financing the Mortgage Insurance on the loan eats a lot into your cash flow. I looked at a few properties in the past to do this and although they were okay deals the insurnace on the mortgage tended to really be a factor I didn't want to be stuck with for the life of the loan.

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Ben Curtin

OP

Kent, WA · Member since 2014 · 17 posts · 0 votes

11y

A problem I foresee with mailers is that usually owners do not live in their 2-4 unit buildings, so mainly their tenants would see them. But it's a good idea that I havn't considered yet. Also, I've seen that FHA PMI cost to be an issue as well on these properties for owner occupying. My mortgage guy says the only way I can drop the PMI is when I reach 20% equity, then I'd have to refinance to a conventional mortgage (costing a few thousand dollars as well).

The question I'm having a hard time with, is: since I'm a renter, I don't know whether to invest in my primary residence first (single family house) and then look for real estate deals, or if I should try to get my foot in the door with a 2-4 unit first.

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Christopher Telles

Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes

11y

Originally posted by @Ben Curtin:

A problem I foresee with mailers is that usually owners do not live in their 2-4 unit buildings, so mainly their tenants would see them. But it's a good idea that I havn't considered yet. Also, I've seen that FHA PMI cost to be an issue as well on these properties for owner occupying. My mortgage guy says the only way I can drop the PMI is when I reach 20% equity, then I'd have to refinance to a conventional mortgage (costing a few thousand dollars as well).

The question I'm having a hard time with, is: since I'm a renter, I don't know whether to invest in my primary residence first (single family house) and then look for real estate deals, or if I should try to get my foot in the door with a 2-4 unit first.

@Ben Curtin

I have a simple view of where I invest. I buy properties that:

1. Have a gain at closing

2. Earn above average yields

I don't care where they are located, who does or doesn't like the area, and whether or not I would or wouldn't consider living in the area. To be candid, I wouldn't live in the area of most of the properties I've own nor would I take my kids with me to these areas. But I don't own properties to enjoy lazy afternoon bbq's at the properties. I own them because they pay me the greenbacks.

Now, IMHO, you are better served by buying a good investment (one that has a nice gain built in at the closing, and earns above average yields) to get the passive income flowing in while your young family is, well, still young. These earnings can be used towards buying another investment property, and then another, and another, and then a home somewhere in between these roll up acquisitions.

Of course there are personal wants and desires in making this choice to buy an investment property 1st Vs a home for your family. You and your wife will need to be comfortable with the ultimate decision you make. Keep in mind, if you do buy a strictly investment property 1st, your kids will not 'need' to be in the family home they're going to grow up in for another 5,6-7 years. Longer if you send them to a private school.

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Patrick Britton

Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes

11y

@Ben Curtin

Hi Ben, one big thing that might change your plans dramatically is the fact that FHA loans require owner occupancy. If you get an FHA loan on a multifamily and therefore state you intend to live in one of the units, but end up not, you are committing mortgage fraud. This is a pretty big thing these days.

If your mortgage guy says that the only way you can drop your existing PMI is after you reach 20% equity - that is not correct. All you have to do is a refinance and choose a rate such that the lender credit can pay off your private mortgage insurance in one lump sum.

If you need further clarification feel free to send me a private message. I don't like broadcasting anything that could be considered professional advice, considering I am a licensed loan officer.

And onto the mailers of multifamilies... Well that's an easy fix. Don't bother mailing to the property address, mail to the owner's address.

And I will say that there is probably no better real estate investment start then to purchase a fourplex and live in one of the units using an FHA loan. Sure, the FHA mortgage insurance will hit your bottom line, but you only have to put down 3.5% versus 25% (on a fourplex). As well, and this is something people forget, interest rates on FHA loans are typically lower than conventional loans. To give you an example, there's something called the loan level price adjustment, which in layman's terms means that those who will not owner occupied, have a less-than-perfect credit score, higher debt to income ratio, etc., pay a higher rate.

For conventional loans, a standard loan-level price adjustment for investment property is between 0.75 and 1%. Since an FHA loan can only be for owner occupied, you do not have this sort of hit to your rate.

hope this makes sense.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Patrick Britton

could not agree more... especially west coast investors.. like one post above were the OP is talking about neighborhoods he would not take his kids etc.. we all know what that is code for... this young man would get eaten alive trying to buy that kind of property...

Start with the 4 plex.. live in it legally.. .refi it .. buy another FHA 4 plex live in it legally refi .

Do this 4 times over 6 years and by the time he is 30 he will own 16 doors using his 4 mortgage slots and in the uber stable NW market and probably have some appreciation and huge tax bene's do this while your young and can make it work

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Aaron Montague

Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes

11y

@Ben Curtin

I'm with @Christopher Telles for the most part on this topic. I don't invest in War Zone (D) properties, but the C or better neighborhoods don't bother me. I just adjust my expectations and returns accordingly.

I'm going to want to be making $150+/door/month AND 20% Cash on Cash in a "C" neighborhood. I know I'm going to chase my tenants each month for rent. I'll have lots of interactions with my property manager about crazy excuses for late rent. So I need to make more to deal with the extra aggravation.

If the Duplex is a good deal, go buy it. You'll need 25% down, maybe 20% if you find a local bank. 110k and $1400/month in rent is going to be a tight deal. But it might work. I'd post the numbers here and have it picked apart. At a minimum you'll need to make sure the tenants are paying ALL the utilities if you want to make any money.

REI is a good thing. Investing time, energy and money into becoming a better investor is a good thing. Training yourself to be a landlord on a small property is a good thing. Bear in mind... doing a deal to say you've done a deal is NEVER a good thing.

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Patrick Britton

Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes

11y

@Jay Hinrichs

if at all possible, do exactly what Jay describes. buy a fourplex, live in it for a year, then buy another. rise and repeat as often as you can (up to 10 financed properties of course).

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Patrick Britton

I always say 4 mortgage slots because most folks can do that I know there is 10 available but it does get tougher with cash reserves and such. To me personally its by far the best thing for young west coast investors to do starting out.. safest and will be the most profitable in years to come.. even if they never make cash flow and just break even and let the tenant payoff the mortgage.. by the time they are 60 they own probably 10 million worth of RE free and clear.. sure beats the risk of low end C and D investing in my mind.

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Ben Curtin

OP

Kent, WA · Member since 2014 · 17 posts · 0 votes

11y

Thanks for all of the replies guys! I really appreciate them all! I think for the time being I'm going to try to stick with finding a 3-4plex and utilize the FHA loan to it's full potential while I can.

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Kenneth LaVoie

Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes

11y

I think it's a great idea to start with a 2-4 unit owner occ. Keep in mind, you'll get pestered more "living on your rental property" than if you live across town and they have to call you. Your very presence will remind them of that question/problem/favor/etc. I know this because I have a few sweet old lady tenants who NEVER call me, but God forbid I stop by the building..."Mr. LaVoie, could you come here a minute!"

BUT, if you've never done this before, it could be less stressful being right at the property all the time. You don't have to sneak over at night to see where the pot smell or noise complaint is coming from, etc. And tenants will probably be on guard with behavior even more with the landlord living in the building.

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Need help with Investment Strategy

Need help with Investment Strategy

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