Residence or Rental?

Question

Hello everyone!

I am looking for some advice on my next investment (that's what we are all here for right?!) and I imagine people on this forum will have better hindsight on this situation than I do.

For some background, I am a 23 year old public accountant working in Seattle, WA. I own a single family rental property in Phoenix/Scottsdale, AZ that I purchased with my friend/business partner (who lives in Phoenix). It is cash-flowing a few hundred dollars per month, which we use to pay off the mortgage at an accelerated rate. As of now this is the only real estate I own (50% ownership). I have come to a crossroads of what to do next. I have around 60-70k that I feel comfortable spending right now however in a market like Seattle, this doesn't get you too far.

I wanted to see what the community's opinion is on two scenarios:

1) Investing on another property out of state in the near future (on my own w/o my business partner)

2) Saving up for a house further down the road in an expensive area around Seattle.

In regards to option 1) I could move back in with my parents in Seattle or continue to pay rent, and use the money (60-70k) I have saved to buy another property in Phoenix or Kansas City, KS (two areas I have been looking to purchase my own rental). Ideally I would like to find a duplex but these seem to be overpriced and rare findings in these cities - I am all ears on other areas. I pick these because I have connections here.

With regards to option 2) I am fine living in a less desirable area with a further commute for a couple years while I fix the place up, possibly rent out to friends, and build up some equity at the same time before moving to something more appealing to me and turning this into a rental. I just need to save up for a while longer to afford the downpayment.

I would love to hear the groups opinion on this situation! Are there other markets for rentals people would recommend? Some days I feel like I find an answer and some days I feel so far from it. I need something convincing that compels me to commit to one or the other. I am reading the Bigger Pockets book: Long Distance Real Estate Investing but would love to hear any relevant book recommendations as well. This is my first post on BP and I am looking forward to any additional feedback on how I can create a more concise post too! Thank you all so much for taking the time to read this!

Michael Haas · Answer

The magic of an owner occupied house hack is the ability to put 5% (or even less, down to 1%!!!) down. With cash flowing assets leverage is your friend, and you can finance a 4-6x higher purchase price on an owner occupied property vs an investment property. I vote house hack in Seattle, all the way, but do it now, not later! Every investor I know would rather buy 4 properties with 5% down over waiting to buy 1 with 20% down.

We’ve done this with 6 properties around Seattle and it’s been fabulously profitable when factoring in cash flow, loan pay down, tax savings, and appreciation. I’m sure you know the math though as an accountant & investor :)

Let me know if you’d like to grab a coffee and chat more about your options. Cheers!

Joseph Cacciapaglia · Answer

A $60K down payment will get you a decent duplex in a lot of markets. I'm partial to San Antonio, but there are a lot of options to choose from. With a decent local team, owning rentals remotely can be pretty passive. I'm a fan of renting where I live and owning rentals. I just prefer having the flexibility to move, without having to sell, and my wife likes to pick a place to live that isn't necessarily a great investment area. I know a lot of people disagree with this view, but it works for us. I originally got into the business by house hacking, but if you're in a market where the property won't cash flow when you decide to move out, that's tough. If we're voting, I say #1.

Marc Edwards · Answer

Hello @Alexander Knox,

First off I believe you are in a decent spot or at least better then most that jump in to investing in Real Estate. You are also at the right place as there are so many knowledgeable people in this forum. Seems like you already know what you want to do since you are wanting to invest now as opposed to waiting to save for a more expensive home down the road. Option 1 seems to be where you are heading but you have to do what you feel in your gut no one is going to be able to make that decision for you but there is nothing wrong with picking peoples brain on your scenario.

I think it all depends on what you want to do and if you want to actually move or not. I don't believe either option is a bad idea. Of course the first option has a little more risk involved as it is out of state and option 2 as Jake stated you could house hack a duplex but not sure of Seattle's market to know how affordable it is to purchase a decent one as you stated it might not get you far there. I'm form Kc and our market is getting very hot for out of state investors as your money goes way further then in some big markets. As you probably were already informed by your connection here. Hopefully your connection has a good network here to help you with everything that you need to be comfortable with investing out of state. I wouldn't mind being a connection for you here as well and answering any questions that you may have just send me a pm. I do know that in Kc,Ks you would be able to put that down on a nice duplex and it could be cash flowing well or you could buy a SFH out right but then you wouldn't have any leverage with the bank just a home with equity and cash flow. Just depends on your overall goals cash flow, leveraging to acquire more properties sooner or buy and hold for long term.

Hopefully you get some more responses that help and hope this helps. At the end of the day you have options and it's always good to have options. I just recommend sleeping on it and take the advice given and then trust your gut and jump!!

Jake Alger · Answer

Hey @Alexander Knox,

Welcome to BP! As you mentioned, most of us are here because we love Real Estate and all it affords.

Both of the scenarios you put in front of us are each different in their strategies.  The first being that it would be solely an investment property, thus requiring a higher down payment and in turn, you'd receive a return on your money in the form of cash flow and appreciation.  Obviously being a CPA, you realize that you'd also have a tax implication for the income.

The second scenario, you open up many other lending programs which give you the ability to purchase a home for less money down.  Doing this you could "house hack" your way into a stronger equity position by renting out rooms, or if that's not your thing, at least you're investing the principle each month into something you own and is likely to appreciate over time.  This beats putting money into your landlords pocket at a 100% loss rate, instead of the partial principle pay-down you'd have paying a mortgage.

Depending of where you'd be willing to look for properties, $60-$70k down would be more than sufficient (depending on what loan program you use and the price of the home).  Areas south of Seattle that are booming like Kent, Renton, Des Moines can trade in the $400k+ range.  North, you can find some properties in Shoreline, Lynnwood, Bothell, etc. at lower price points as well.

That said, strategy and willingness are everything.  The market has been heating up in our region since January and with the Fed cutting rates today, it's likely to get crazier (more buying power for buyers).  We are also sitting on record low inventory once again, so the supply/demand imbalance is once again present.

Colleen F. · Answer

An owner occupied property in your area that can be converted to a rental or sold for appreciation would be your best bet. it offers a lower mortgage rate, no rent, lesser down payment. It has the Possibility to rent rooms either to roommates or  Short term rentals if allowed.   If you were planning on moving out of the area short term then get an out of area rental might be the better option.

James Wise · Answer

I've always felt that the 1st roof an investor should buy is the one over their own head. You're already paying off a mortgage to live somewhere. Why let that mortgage holder be anyone other than yourself?

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