First Timer - Single Home or Owner Occupied Multi Family

[Matthew Hanrahan]

Hi Everyone! I'm brand new to the Bigger Pockets site, and I wanted some advice on what to do first. I'm interested in buy and hold investing, and I'd like to buy my first property in the next 120 days. I'm in the Minneapolis/St. Paul market and I'm trying to decide if I want to purchase a single family home or if I want to purchase a multiplex of some kind, and live in one unit and rent out the rest. I definitely see some pros and cons to both but I wanted to know what you thought would be a better idea for a first timer. Also, are there any books/resources you would recommend on owner occupied multiplex rentals? Thanks for the help in advance!

[Logan Allec]

@Matthew Hanrahan If you do nothing else in real estate, you will have succeeded by getting into a fourplex as a young man with only 3.5% down. Assuming the rents cover your expenses, in 30 years and the mortgage is paid off, and you’ve done the smart thing by raising the rents over the years, you will be sitting on a multi-million-dollar asset that cash flows thousands of dollars per month at the cost of a measly $20k or so out-of-pocket when you were 20- or 30-something. I can’t think of any better way for young people with limited resources to prepare for their future so early on in life with so little cash out-of-pocket. Run the numbers and see for yourself.

One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 85% (75% in some states) of the sum of the market rents on all units (including the one you will be occupying) need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. I put together a spreadsheet here to help potential house hackers quickly analyze whether or not a property qualifies. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets.

Good luck!