Rental, flip, or primary? What's your opinion?

Question

I think I know the answer but thought I'd see what others thought/suggest...

I am renting my previous home in another state and living in apt now. My issue is I'm ready to buy a flip, rental, or rehab/rental, but I'm going to be buying a home next  Apr-June.  I really want to do a rehab rental but worried it may cause issues when buying a home next year when I already own 1 home.

Let me know if you want to know what i think first, but didn't want to sway responses.  Heck it may be best to stay in apartment longer and build rental property instead of buying primary.

My goal is the same as most... Get enough passive income to quit job and do full time until I reach my monthly goal of NET income.   Quit job is $4000 and "retire" is $10,000

Thanks in advance for your responses

Account Closed · Answer

I don't know what your local market looks like, but have you considered a small multifamily property?  With say a duplex, you could live in one unit and rent out the second.  This would allow you to accomplish adding a rental unit to your portfolio as well as finding a place to live.  When you decide to move out of the duplex, the unit can be rented out to a tenant, and you will have added another rental unit to your portfolio.

Best of luck!

Kevin Romines · Answer

Well you are talking about 3 different animals, so any one of them can be a good choice for you, or a bad one, it all depends. As far as buying a primary in a year or so, here are some things to think about? The lender will want you to have 6 months reserves on every rental you have, this could cut into the money you have for down and closing on your primary. You generally must show rental income on your tax return at least 1 year, some lenders 2 years, and they will do an average of that part of your income. If you have declining income, that could be an issue to you getting approved. I would definatley recommend communicating with a few key loan officers to get their company guidlines on the deal before you make a move?

All that said, Im doing close to same thing as you, however I use different techniques to avoid the debt, and yet still get the gain from holding the properties. I dont hold my properties for much more than 3 years in most cases. I do both selling on contract (thats tougher and more involved these days, thanks Dodd / Frank, but still do-able) as well as Lease and Options. Notice I seperated those two words out, never do an all in one Lease Option. I typically make between 12-32K per property over a 3 year period, and I'm always looking for properties. So I really dont get the upside from appreciation, but I get fairly consistent and repeatable results.

If you have the cash reserves I would do a light rehab / rental, you should be able to find great deals in that arena, and get appreciation, but I wouldnt be putting anything in thats real costly. I would follow most landlords leads and put in materials that will stand up over time.

My two cents!!!

Luke Moses · Answer

I guess you need to evaluate your goals and see how quickly you want to achieve your passive income #'s  You might speak with your loan officer and see if he thinks you buying a flip/rental in the near term would prohibit you from buying your future primary residence.

You could also buy a property that you think will be a good rental, make repairs, live in it short term, and then move on to the next house.  I think a lot of people get started this way (myself included).  Its easier to qualify for a loan if its your primary residence and your interest rate will be lower.  I think you can do this 4 times before the big banks start to shut you down.  Its not a bad way to get your first few properties.

Kevin Romines · Answer

By the way, @ Sean Yaworsky, post was a great tip.

Did you know you can buy a 4 plex as owner occupied with an FHA loan and only pay 3.5% down payment plus closing costs. Keep in mind you can negotiate the closing costs with the seller as well, and best of all you can get owner occupied rates of between 4.25 - 5% on the deal. Oh and if you need rehab money you can go with an FHA 203K loan which allows you to buy and rehab the property all with one loan and still only 3.5% down of the purchase plus rehab costs. Its a great way to build a rental portfolio. You can do it as much as once a year (you have to be owner occupied for 1 year per deal). I know investors that started this way, and have built a large rental portfolio. I used to do the loans for them to do it.

Kevin Romines · Answer

Well it may sound crazy, but I only spend 1.00 per property, I generally buy move in ready properties, so no money out of pocket there. What I do is find someone willing to carry on contract, I then negotiate and get a reasonable down payment, reasonable monthly payment, and at least a small discount from market value. I tell the seller up front that I'm an investor and so I wont close on the real estate contract until I find my end buyer / tenant buyer. Then we sign the purchase agreement. That gives me equitable interest so I can start marketing to find my end buyer. Once I find my end buyer I do a lease and option, notice I seperated those words, you need two different contracts, one a standard lease the other is an option. There reasons to do it this way, research will help you understand that. Then I make sure the option fee is more than my down payment, I try to get 5000 more, 3000 of which I put in reserves and 2000 in my pocket, then I try to get between 100-250 monthly spread on the payment, I also try to get between 5000 - 15000 in back end spread, or the difference in what I owe the seller at balloon time and the difference in what the lease and option buyer owes me. I generally make between 12-32K over 3 years, and I rinse and repeat. If I have a buyer that cant complete the deal for one reason or another, I can get them out and get a new buyer (I may have to negotiate a longer balloon period with the seller) but I get a new option fee and start over. Its better than renting as I get nice money up front. I dont actually come out of pocket for my own down payment, that comes from the option fee. If I cant sell it for whatever reason, I'm out 1.00 and my time, but I can usually pin point the issue and adjust to make it work. I get the typical landlord write offs on my taxes, so all in all not a bad way to go.

Rick Day · Answer

Thanks for responding.  Glad I asked now because you both brought up things I hadn't thought about.  I didn't know about the 6 month reserves or the rental needing to be leased  for 12+ months.  Every lender is different so I'll check into that. I'm just ready to get started before I miss out and interest rates go up and/or appreciation takes off.  However I need to make the best decision so I can snowball to my goal instead of crash.

@Kevin R. Do you use the profit to buy nicer and/or more properties?  My current plan is to get every property paid off as fast as possible.  Just wondering what your angle is.

Rental, flip, or primary? What's your opinion?

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