Multi family owner, advice on how to reinvest?

Question

Hello, this is my first post so thank you for reading. I am a new investor looking to make connections, especially in the Cleveland area.

I am a contractor/carpenter and I do my own rehabs. I was recently pre-approved for a loan of $70k. My tentative plan was to buy a single family semi-permanent home for myself and rent out the second half of my duplex which I currently live in. I could refinance my current home and pull $12-15k out of it (only been in it for 3 years) based on estimated value, not considering the updates I’ve done. My long term goal is to buy a second multi family home ideally later in the year, and eventually many more. I have about $12k in savings but I’m sure it would be wise to avoid using most of this.

What would be the best step for me to move forward with those goals in mind? Would it make sense to refinance and use that for my down payment? Would it be better to just get another multi now because prices are going up in my area? I used a conventional loan with 20% DP on my current house but I’m looking at FHA for the next loan to keep more cash reserves. I could also get an equity loan on my double. Or I could put most of my savings into my next house and then refinance both? Help! And thank you :)

Scott Jensen · Answer

Do you know what your current house would sell for and what it would rent for? If it's a good candidate for a rental property I would rent it out and buy another primary residence. The down payments and interest rates are awesome for owner occupied homes. Also, a home owner can pull permits himself while an investor would have to work through a GC. That depends on the state and local laws though. I would leave the equity in the first property (don't refi or get a HELOC). That will give you some time with higher cash flow and lower debt service which is especially good as you start to figure out landlording and build a good investing base. Don't leverage up when you start... That's where a lot of people get burned.

Your next buy needs to be 1-4 units in order to qualify for the residential financing. Make sure the numbers work with it without you living there.

$12k isn't really a lot of cash to get started. I'd try to cut expenses and work extra in the short term to beef up reserves.

Your next buy needs to be 1-4 units in order to qualify for the residential financing. Make sure the numbers work with it without you living there.

$12k isn't really a lot of cash to get started. I'd try to cut expenses and work extra in the short term to beef up reserves.

Account Closed · Answer

Can anyone else share what they would do in my position? Please and thank you

Account Closed · Answer

I wish I could say I did. It took me years to get to save this much and to me, $12k is a fortune. I had another $12k saved which I used to make a 20% down payment on my current house 3 years ago. Looking back, it might have been better to go FHA and keep building my cash reserves. But I know there are positives to going the route I did. I feel like if I were to save a couple more years, the market will probably be more competitive and prices will be up and it could be a waste of time. With what I have, I could potentially get $15k cash out plus $12k savings. I paid $50k for my current house, if I bought another for around the same price and my mortgage doubles, I’d still be cash flowing around $4-500/mo. And with an FHA loan I could still have a good amount of cash reserves. I’m just not following how saving more will benefit me much over acting now. I understand that if I can buy without a loan there is less risk, but the financing route doesn’t really seem very risky to someone in my situation. And low prices in Cleveland. Unless there are other things I’m missing/not considering. And thank you

Account Closed · Answer

Thank you. I have no intentions of selling my current house and was planning on keeping it for a rental. I think it could sell for $80k. Rent will total $1400 for both units. What are the main advantages of leaving the equity in the house vs. reinvesting it into a cash flowing rental? I can make $12k go a long way, especially with an FHA down payment. And I would be doing most work on it myself.

Account Closed · Answer

That route seems more risky to me, to buy a house and put money into it in hopes that it will sell at a profit. What if the market is even more competitive and the prices are higher in two years? That’s what’s making me consider just trying to get another double now and hold it because at least that’s guaranteed income

Account Closed · Answer

Thank you for the response and recommendations. I will definitely look into those. My overall plan / long term goal is to have my own home and as many rental units as possible. Starting with doubles / multi family. I want to be financially independent and start my own business, but not have to rely on that for income. If I buy another house and move into it, I will be bringing in $1400/mo. for rent on my current house and my mortgage+escrow is $430/mo. Most houses I am looking at are between $60-80k. What type of details would help? I know a few of my options are- using some of my cash reserves ($12k), cash out refi ($12-15k), or HELOC. I want to figure out the best order of operations moving forward. Thanks!

Account Closed · Answer

Does anyone have other advice? I am looking into talking to an independent financial advisor. As far as a single family home, a permanent home for myself which I love and really feels like “home” is more important than a home run great investment. But as for a multi family investment property (which I may move into if I go that route before a single), making a great investment and finding a good deal is more important to me. Should I use FHA and a smaller down payment for a single for myself and then I still have most of my money in the bank to use toward an investment property? Plus potentially the money I can get for a cash out refi.

Don- Also, I’ve had people tell me not to look to my loan officer for advice on my best options. They are looking out for themselves first and their job is to sell loans. You say multi families are in short supply but there seem to be a good amount on the market and for not much more than most singles. Definitely not double, so that cash flow of another double before my own single is enticing.

Account Closed · Answer

Thanks for the reply. Not necessarily looking for the “easy route”. I don’t mind putting in a lot of work, I can do most of it myself. There’s probably more to be gained doing a full update over just TLC/paint/ carpet if I’m going that direction with intentions to sell fairly soon. I want to make smart investments and hold them, but if it makes sense to do one or two flips I’ll do whatever it takes. I’ve talked to multiple loan officers. They both were pretty much like “I can advise you on anything on the mortgage side but I can’t really advise you on the best ways for you to spend your money”. I’ve seen a lot of multi families for sale in my price range. If they are in high demand I’m sure they will be more so in a year or two with the way things are going. And it seems that a lot of doubles in Cleveland really aren’t much more than most singles, for almost twice the income.  Plus less risk with two tenants over one. I’d much rather have a semi permanent home over something I know I’ll sell in a couple years. I’m a woodworker and would like to establish a home/garage shop. As much as I’d like my own single, another multi family just seems like a much better investment. But that’s why I’m asking for advice 😆 Much appreciated

Scott Jensen · Answer

Account Closed I hope I am not coming off cold or snobbish in saying that $12k isn't much; $12k is a lot of money.

It does seem to me that you have an income or expense problem and that investing in real estate with your only $12,000 that it took you years to save is very risky. Not that it can't turn out well, it very well could. You are, however taking a huge risk by doing so.

Of course I don't know your situation or much of anything about you, but my advice would be to do whatever you can to increase your income. ie, Side hustle, any sorts of training or apprenticeship programs or maybe get into a better career path. Invest in your education. Spend time reading books that make your skills more valuable. And of course, the flip side is to cut out any expenses you have. It shouldn't take several years to save up $12k.

The risk of over leveraging is why so many investors went bust in the crash last time. And if you're a contractor there's a good chance that if the market drops you could be laid off or have to take a pay cut at the same time you lose any equity you had in the properties. To me it is pretty easy to imagine a scenario where things go wrong. ie a market crash, layoff, and eviction or major expense at the same.

Again, I am not saying this can't work for you. I'm just saying without reserves and a high enough savings rate to prop things up when the economy gets rough, you could end up in a bad situation.

Scott Trench and Gary Keller put it better than I can. Read their books.

Scott Jensen · Answer

Account Closed Those numbers make it seem like your primary residence would make a goof rental. The main advantage of leaving the equity is that it reduces your risk. Since you are a "New Investor" it is hard to recommend you add additional risk by leveraging up and using reinvesting your equity into another rental.

One strategy that could work out nice in your situation, however, is refinancing your house and pulling all the equity out and putting in cash offer on the next house. Then you'll have one property that you're renting out with a mortgage and one that you are living in and renovating without a mortgage. That would be a lower risk way to leverage the equity in the first property than having a mortgage on both properties.  You can keep repeating this as long as you qualify for additional loans and can find additional properties that fit your criteria.

I would still encourage you to get a lot more cash on hand than $12,000. It just seems really low to me.  Do you have other savings or investments along with the $12,000?

Does that make sense?

Multi family owner, advice on how to reinvest?

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