Which investment type to start with in Utah?

Question

William Hochstedler · Answer

@Thomas Bailey

Typically you can apply 75% of the additional rents as income.  Talk to your lender about what this looks like with actual numbers.

You will not be able to use all of the income from the Bountiful property for two reasons: The fifth unit does not comply to conforming 1-4 unit guidelines for conventional and FHA loans.  What is a non-conforming mother-in-law other than an illegal unit?

These are pretty different and geographically disbursed.  Would you live in any of them?

In the future, to get our attention, use the @ sign before our names and select it from the drop down list.  That way we will get a notification that you mentioned us.  Like so: @Aaron Smith

William Hochstedler · Answer

Hi Thomas,

Welcome to BP!

There is no question here.  Go for a four-plex, hand's down.

Here's why:

• With interest rates at an all time low, you want to use the favorable owner-occupant loan terms to lock in a fixed rate mortgage on the biggest asset you can afford
• As far as appreciation, there is not much difference between 4-plexes and duplexes
• You will get the most experience landlording
• Most loans (including FHA) will allow you to use income from the property toward your debt-to-income ratio, further increasing your purchasing power if necessary.
• You will spread risk among a greater number of units, so you will always have income even during vacancies
• Multi-units are less vulnerable to the vagaries of the market and won't be as volatile in down markets (they also don't appreciate like single family's)

The problems with the other options:

• Duplexes are also a great start, but you can afford more.  
• Duplexes don't cash flow as well because there are more owner occupant buyers for this size property.
• Properties with mother-in-laws or accessory dwellings do not sell for more than their comparable single family because many buyers in Utah have larger families and want to use the additional space for their nuclear families.  When you move out, you are, in fact, limiting the buying pool.  These work great for someone who wants to live in the property for a very long time and is okay sharing a roof to lower the overhead.
• So to answer your question, a duplex is a much better investment than a house with an accessory unit because you can rent it as two units when you move out.  Otherwise you need to find a tenant with an actual mother-in-law who is willing to pay a premium for the separate space.
• A large single family home may be great (and fun) with a bunch of roommates, but will be highly exposed to the inevitable market downturn in the coming years.  What will be the exit strategy here?  Generally larger properties do not cash-flow well when rented to a single family.  Moreover, how much work will need to be done on the property to sell it after several years of dorm-like use.  Finally, many municipalities have occupancy limits and 5 unrelated adults are generally prohibited.

I know a bunch of people 5, 10, and 20 years on who's first purchase was fourplex.  All of them now have a great investment property because of this strategy.

Good luck!

Rosston Smith · Answer

Buy a nice duplex. In a area you will tolerate. Get a duplex over the other because it will be more valuable to rent in the future.

Aaron Smith · Answer

@Thomas Bailey just Google it.

There may also be local real estate offices offering meetups as well.

Aaron Smith · Answer

@Thomas Bailey I can't speak to the financing aspects as I'm still new to this myself, plus i am concentrating on the commercial side of real estate.

If you want to check rental rates, check Craigslist and KSL for similar properties in the area and see what they're renting for to give you a baseline. You can also use Trualia's Heat Map (Google it) to give you an idea of what the average rate is per bedroom.

Remember, just because you CAN get more, doesn't mean you should. ESPECIALLY if you're going into the SFH arena. Unlike MFH, where your risk is spread over more units, if you lose a tenant in a duplex or single home, YOU eat that mortgage until it's filled again.

In order to know how much income a property may produce, use the BP Rental Property Calculator tool. It will give you a great place to start. If your a non-Pro member, you'll only have access to five reports. But even if you just plug one of the ones you listed above, you'll have an idea of what to look for.

As I'm still learning, I THINK I have this right when I say, there's an inverse relationship of Cap Rate to Price (or NOI). Basically, the lower the cap rate, the higher price the property, and greater appreciation. The higher the cap rate, the higher the cash flow, but less appreciation. SLC in particular has low cap rates right now. With such low unemployment and hot RE market, the prices are high (in my mind), and rising. And with that being said, don't be afraid to look outside the state. AZ, MI, FL, TX, TN.. TON'S of places with cheaper prices and decent cap rates.

I can't stress how important it is to start consuming as much reading/podcasts/youtube vids/etc as you can, especially in whatever niche you're going to focus on.

Thomas Bailey · Answer

Aaron & William, thank you for your replies!  Its way cool to hear from local investors!

Mind if I bounce a few properties I'm looking at?

http://www.utahrealestate.com/1396277

•  4-plex with nonconforming MIL in Bountiful!
• Listed at $497k... How much does rental income bump up my max loan amount?  Is it realistic to get an FHA to get me to that amount (my $320k prequal is for conventional, I think FHA will give me a little higher yeah?)
• Listed 7/26/16... Meaning it could be overpriced and I can offer 5-10% off?
• How do I find out market rent price?  How much income does this property produce (or should produce, if landlord hasn't raised rents in a long time)?

http://www.ksl.com/homes/listing/40083096

• 4-plex in Fair Park
• According to areavibes.com; this is a below average neighborhood (high crime)
• 6.31% cap rate (I've read online average in SLC is 7.2%?  Thoughts? 6.31% seems low...)

http://www.utahrealestate.com/1390380

• brand new 4-plex in Herriman!
• Absolute pipe dream... listing price is $795k (Theres no way I can finance this right? I see max FHA loan in Salt Lake county is $601,550...  Could I use alternative financing for the $193,450 the FHA won't cover?)
• 7.2% cap rate!

I would love your guys input.  What do you think?

Aaron Smith · Answer

Hey Thomas! I'm right down the road from you in B-town! :D

Since you're looking at these options, I'm going to assume commercial is out for you (5+ units)?

The answer to your question is, it depends. If you go with a big house, how okay are you having people living right there with you? And then you have to consider what happens if things go south and you have to evict someone? Personally, I can't stand having another stranger in the same house as me. That's just me. Too many things to go wrong.

A house with a MIL apartment, at $320k... Maybe in Ogden, or here in our area. Maybe. B-town is nuts right now and prices are a bit on the high side as people from SLC, with higher prices, are finding out you can get a lot more for the same money here.

Duplex's are a dime a dozen, and a good way to start. Once you have a good amount of equity built up, you can pull that out, rent out the one you're in, and move onto another one, and so on.

It all boils down to you. And don't be afraid to look in some of the outlying areas. WVC and Ogden both have decent areas. You're just going to have to dig a bit.

Good luck!!!

Aaron

Which investment type to start with in Utah?

Most Popular Reply