Hopping from SFH to SFH

[Kyle Carrington]

Hello,

Sorry if this has been answered before but I wasn't able to find a similar post.

My wife and I just bought our first single family house that we're living in while we renovate with the intent to turn into our first rental property. We did a conventional, owner-occupied mortgage with 5% down and PMI. Based on the rental comps we found when purchasing this house, we should be able to cash flow decently after PITI, PMI, maintenance, etc.

Has anyone here accumulated SFH rentals by getting owner-occupied financing with 5% down then moving into the next house every 2 years and renting out the previous house?

Thanks!

[David Faulkner]

Yes, I did this and now have a nice portfolio of cash flowing SFRs in SoCal. A few pointers:

1. Do as many as you can before you have kids, because having small children will absolutely kill this strategy, bless their little hearts.
2. You are smart to buy distressed property at a discount, then put some sweat equity in to fix it up. This not only gives you hands on experience so you can intelligently hire it out later if you chose to, but also gives you multiple exit strategies. When you buy, think and act like a flipper, as well as a landlord. Run your numbers both ways. If both ways work, buy it. Then you have hold as a rental as plan A or sell at a profit as plan B. The the forced appreciation will help out your cash flow too, and all the stuff you fix like new won't break for awhile as a rental (if you did it right), so they compliment each other.
3. I prefer to put 20% down to get out of paying PMI and get the best rates and terms. Plus lending criteria are looser on things like inspections so you can get more distressed properties at higher discount. Finally, cash flow is better and risk on that one property is lower since you have a larger equity cushion.
4. If you both work and either can solely qualify for the mortgage, put it under one person only. That effectively doubles the number of mortgages you could get under freddie/fannie guidelines ... 10 for you and 10 for your wife.
5. For DTI, banks will normally take 75% of rents minus PITI and credit you with that income. So, if they cash flow well, more properties should help your DTI to qualify for more loans, not hurt it. Some banks are different about needing "seasoning" as a rental though ... some will accept just a signed 1 year lease while others will want to see 6 months-1 year of rental history to apply this. In this way, you don't need to depend on just your W2 income to qualify for more mortgages.
6. More mortgages are not necessarily riskier, as long as you maintain an equity cushion and positive cash flow (with margin) on each property. If  the market tanks, you hold what you have as cash flow positive rentals and go out and buy some more. If it really hits the fan you have some equity cushion to sell if you need or choose to without bringing money to the table, short selling, or getting foreclosed on. If the market shoots up, you gain equity and rent growth, you can cash out refinance to buy more or save up the extra cash flow to invest when the market softens. Heads you win big, tails you win small, but the house always wins, and you are the house. If you can't stack the deck in your favor in this way, then hold off on playing the game.
7. If you are able after paying the mortgage and renovation costs, save for your next down payment ASAP. An alternate would be to cash out refinance your next down payment, but this will hurt your DTI more, increase your risk, you'll need to make sure it will still cash flow under the refinance.
8. Buying the next place works best in a down market. Most people need to sell before they buy their next place, so they get locked into the RE cycle in that they may sell high, but then they have to buy high too. Or they may buy low, but they need to sell low first. It is harder to get ahead that way. But your strategy enables you to decouple the sell and the buy transactions, so you can buy low, then later sell high; or better yet, buy low, buy low, buy low, and never sell.
9. After you get a few of these rolling you can do some really fun stuff to accelerate your growth, like cash out refinance a rental and boom, there's a down payment on another rental. Cash out refinance or save cash flow to buy something all cash, then you can buy a place at the courthouse steps, buy a REO that can't qualify for financing, etc. where you knock out 80% of your competition from retail buyers and only need to compete with other investors so you get a bigger discount. BRRRR it to pull your cash back out and away you go. 1 turns to 2, 2 turns to 4, 4 to 8, 8 to 16 ... this is how I like to count, and you will to ...
10. Yes you can buy a duplex, triplex, 4-plex and grow your number of units and short term cash flow faster, but I always preferred SFRs. They appreciate better, hold their value better, better rent growth, are easier to sell if you need or choose to, better class of tenants if all other things are held equal ... lots of advantages. Some of these things are market specific, though, so YMMV.