"Live-in" BRRRR - Sound Strategy?

Question

Hi all - I am aiming to invest in my first property in the coming months, and I'm looking for feedback on my plan. My long-term goal is to invest in multi-family properties that favor cash flow over appreciation. My short-term goal is to minimize my living expense while still living in a decent area. I am currently living in Los Angeles, but plan to move to Las Vegas to invest.

Here is my plan:

- Purchase a distressed SFH using a conventional loan (5% down)

- Live in that property for 6-12 months while rehabbing it

- Cash our refinance

- Purchase another SFH as my new primary residence and plan to live there for 3-5 years

- Rent out the initial SFH and cashflow a reasonable amount

- Continue to save money from working + build equity in the initial SFH

- Leverage a 1031 exchange to sell the initial SFH for a distressed multi-family property (using my own savings to supplement the down payment)

- BRRRR that multi-family property and keep repeating from there

Here are my questions:

1) Would I be better off forgoing the two SFHs altogether, and continuing to rent an apartment until I have enough money saved up to buy a multi-family property as my first investment? *Note: After speaking with a LV real estate agent, I have ruled out house-hacking a duplex/triplex/fourplex due to the location of available inventory (one of my short term goals is to live in a decent area/home)

2) Would it be best to use a conventional 30 year mortgage to purchase the initial SFH and then refinance with that lender, or would I be better off looking for a hard money lender initially and then refinancing with a 30 year mortgage after the rehab?

3) Are there any restrictions to using a 1031 exchange to go from a SFH to a multi-family property?

Any insight here is much appreciated!

Marc Rice · Answer

Here are my questions:

1) Would I be better off forgoing the two SFHs altogether, and continuing to rent an apartment until I have enough money saved up to buy a multi-family property as my first investment? *Note: After speaking with a LV real estate agent, I have ruled out house-hacking a duplex/triplex/fourplex due to the location of available inventory (one of my short term goals is to live in a decent area/home)

I would still try for a multi-family if you can....otherwise I'd still go with the single family approach. Just make sure they'll cash flow once you move out.

2) Would it be best to use a conventional 30 year mortgage to purchase the initial SFH and then refinance with that lender, or would I be better off looking for a hard money lender initially and then refinancing with a 30 year mortgage after the rehab?

You should use your owner occupant low money down loan options first, you can always do another hard money deal after. Its harder to get low money down owner occupant loans once the banks see you buying a ton of rentals as @Austin Steed alluded to.

3) Are there any restrictions to using a 1031 exchange to go from a SFH to a multi-family property?

No, you can use it for any real property including land or a sky scraper.

Megan McClung · Answer

On the renting front: I live in Franklinton (west of downtown Columbus, and not in the "arts district," read that as "on the wrong side of 315"). Just on my street alone, two SFH (each recently rehabbed) just rented for $1500/mo and $1750/mo. The $1500/mo is 600 sq ft, 1bd 1br. The $1750/mo is 1100 sq ft, 3bd 1.5br.

Also on the 1031 front: FWIW I've heard First American Title is a good QI for 1031s.

Bill B. · Answer

I love the idea, it’s basically what I did to get started, 5 times in 5 years.

But….

I don’t think you find many/any distressed properties to choose from, and certainly not in decent neighborhoods. Our properties are so new it’s hard for them to get very distressed.

You’ll have to live in it for 12 months (you said 6-12 so you have this under control, but you’re going to signs. Piece of paper saying you will live there for a year when you buy it.

You say after this time period you’ll do a cash out refi to buy your next Property. I think you’ll find that the most you can get is 75-80%. So even if you add 15-20% in value you won’t be able to pull anything out with a cash out refi.

Then you say you’re going to rent it out after that cash out refi for a cashflowing rental number 1. This isn’t going to happen. If you have a loan for 80% of the current on fire prices, at the higher than origination cash otu refi rates it’s not going to cashflow.

All that being said, good luck and get started. Just have a backup plan for 1 year down the road when you can’t get any cash out and you can’t rent it as a cashflowing rental. If you’re ready for that you’re ready.

Bill B. · Answer

I still think you’re better off buying than renting if you can swing it. Moving to Vegas should save you money on almost everything. Do you have any friends/relatives/co-workers who would move with you and rent a room? (Even $500/mo which would be a steal for them would could have life changing affects.  (Also part of how I got started.)

If you make a reasonable amount of money the lack of income tax should be big. Gasoline, insurance, utilities, it all adds up.are you paying enough in rent that mortgage payment is the same or less? Definitely try to swing the sfh over a condo to avoid an Hoa from crushing your rental plans.

GL.

Brian Walters · Answer

@Branden Drebing HOA costs are big given how much they can fluctuate,  even for similar type properties in the area.

Branden Drebing · Answer

@Austin Steed - I can relate to that last piece. Quickly running numbers on deals from Redfin has me thinking I found a gem until I realize that I'm not including expenses for capex, vacancies, HOA, etc...

Branden Drebing · Answer

@Bill Brandt - I appreciate your insight, and I had a feeling that expecting to add enough value to be able to pull money out with a refi was a long shot. Given your experience with the local market, if I were to buy a SFH now and not do any rehab/refinance, do you think that it would cash flow 12 months from now? I'm wondering if I should continue renting an apartment until things cool down or if it would be worthwhile to take advantage of a low interest rate + start building equity in a property.

Branden Drebing · Answer

@Brian Walters - it looks like you're right about the location of multi-families, so a SFH seems like my best bet. Good to confirm the 1031 piece, as well.

Austin Steed · Answer

@Branden Drebing I would consider starting off with a Multi family property. The same favorable owner occ financing can be applied to single family or multiple units. I've done this a few times with VA loans in Columbus OH.

With the VA they started to catch on and would deny me for "building a rental portfolio". On the first property they don't care at all though.

Also my first property was a SFH in Lemoore CA and I probably would have kept it if it were multifamily. My mortgage was a few dollars cheaper to the rental amount. Rookie me thought I was in the money... haha

Brian Walters · Answer

@Branden Drebing don't think you will find too many multi family units in great parts of town. If that's the road you're going to take it's going to be C neighborhoods at best from what I've been told.

For the 1031 exchange, everything I've read and heard doesn't limit what type of property. I don't believe going from single to multi would be an issue so long as the other rules around 1031 are followed, such as timing.

Good luck

"Live-in" BRRRR - Sound Strategy?

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