Brainstorming Next Move After House Hacking

[Art Maydan]

You guys were a big help in getting me into real estate with a house hack and I'm hoping you can help me brainstorm what my next move should be. I bought a duplex in McKinley Park in Chicago 6 months ago. It was a gut rehab I found off the market and bought at $270K (5% down conventional). Put in ~$10K. It's a SFR converted to a duplex, so the bottom is a 2B/1B and the top is a giant 1B/1B. Bottom rents for $1,500. Top will probably get $1,700 when we leave. No serious problems with the tenant or house so far. I was thrilled with it at first and just pretty happy currently. Buying, owning, and managing the property has taught me a lot and I'm about ready to move on to the next one.

About us: I’m 24. My wife is 22. I’m a non-CPA accountant and my wife’s a special ed teacher. We make $85K W-2 income together and I just started a business that’s making ~$2K/month so far. That’s still just an experiment. We have ~$20K saved up and growing.

Goals: I want to quit my job and focus on real estate, businesses, etc. Anything where I can run things myself. That’s where I thrive. My wife has another year on her teaching contract and wants to work in nonprofits or education admin after. We want to have a kid in the next ~3 years and I plan on staying home with the kids while doing entrepreneurial stuff while my wife does her career stuff. We want to move to the NW suburbs of Chicago or potentially Colorado. Longer-term, we want to be financially independent and have “passive” income to travel and pursue interests. I’ll probably always have a couple irons in the fire though.

I’m primarily interested in 2-4 unit buy and holds or BRRRs and eventually apartment buildings and commercial. I do like the Chicago market a lot and I think that the weather and our misunderstood crime stats keep a lot of people away, which is good. It’s also pretty safe from natural disaster and water/heat issues. Tenant laws aren’t the best, but I’ve been lucky, so I might change my mind one day. I am very open to investing out of state though in the typical “turnkey states”. I especially like Texas and I especially dislike Florida. Just because it’s a gross swamp and half of it is going to drown. I like property management but will self-manage as long as it keeps making sense.

The options I’m considering:

• 1) Start looking for another cash flowing 2-4plex to buy with 3-5% down and move into in 6 months. Rent out our current duplex completely. Now I have another house hack and an investment duplex. Pros: Lower cash down, lower rate, I’m mildly experienced here. Cons: Wife is not thrilled about having neighbors. How quickly she forgets how we were sharing a twin bed, sleeping head to foot to fit, less than a year ago. Also not adding any value, which is where the quicker money gets made.
• 2) Buy a multi-unit HUD home while living in my current duplex. I'd look at SFRs too since that'd be a less steep learning curve on the rehab. Hire a GC, do a rehab, rent it out, stabilize, refinance what I can out, hold it and move on to the next one. I'm leaning toward this option, but it also scares me a bit as I have zero rehab experience. I'm reading a book on flipping currently and will read a few more to become more familiar with the territory. I'm only interested in holding or 1031-ing though.
• This is the option that offers the highest potential returns on paper, but also has a lot more moving parts. I feel there’s less certainty with holding than if I were trying to do a flip though because time heals all wounds. It’s not like the contractor I hire will make the house worse. Worst case is I overpay for the house and I overpay to fix it. Fine, that’s a lower return in exchange for some lessons.
• Risk aside, my other concern is that I run out of money. I'd need 20% down to buy an investment property, from what I understand. The HUD homes I'm looking at are $30-$100K. So that's ~$10-$20K down. So then I need to save cash for a while longer to pay the contractors. But if they go over budget, which they probably will from what I hear, I'll need to take a loan or keep the rehab going on my credit cards. Lot more risk and uncertainty. I'm emotionally very comfortable with taking risk. I just want to be sure it's a smart risk first and I know all the probable ways things can go wrong.
• 3) Buy a turnkey in a market I like. I’m considering this as a sort of “buy some time” move that beats cash sitting in my bank account making 0.9%. I’m leaning toward this option over the continuing to house hack option. We wouldn’t have to move and I can get into a turnkey in a good market for ~$20K (20% on ~$100K). A house hack in Chicago in a market I like would cost ~$300K, so the cash down wouldn’t be too different. Rate would be a bit higher with the turnkey. Cons is that the return is capped since you aren’t adding any value. But it’s still real estate and I’d be able to leverage my cash 5X and reap all the other benefits of owning real estate. If I do this, I’d be studying rehabs more while we save cash for the next one.
• 4) Buy a personal residence SFR in the suburbs of Chicago or in Colorado. This is one we'd prefer personally, but I'm struggling to find a way to make it a good move financially. The only reason we'd want to stay around Chicago is to get help with future children, but that's a pretty good reason. So we'd but a SFR, rent out the duplex completely, and continue saving money and investing in real estate. This would be a big quality of life improvement and I would like to set up a more permanent home base and raise some chickens. But I'm afraid I'm being hasty here and will look back on that move as a setback.

Are there any strategies that work with my goals I haven’t considered? What do you guys think? What would you do?

Much appreciated!