Which way to go

Question

So far all I can say is WOW. I've been browsing this site for the past couple days and learned so much. Like the 50% rule! Thanks all. Now I have a question of what you guys think about one of my 2 paths.

I am currently not sitting on much cash and working on freeing up some cash flow. I own my primary residence recently bought. My plan is to refi it and pull some cash out. I've gotten a surprising amount of equity and think that (at 20% of the appraisal) I could pull 15k out cash. But raising my mortgage by $200/mo. The goal is to have the rental pay back that $200/month.

I've been planning on a Single-family, but reading a lot about multi-family. So here's my 2-part question.

I was planning on taking that 15k and buying a house cash. Maybe one that is listed for up to 30k and sitting for some time. Hoping to get it rent ready within a couple grand. I'm in the North Atlanta area and I think I could get rent on a SF for $800/mo.
Owning free and clear, lets put T&I at $150/mo. minus the 200 for my mortgage. i'm at 450. Minus the 50% rule i'm at $50! (I previously did not count the 50% rule). My plan then was to stack some cash and shortly after refi that house for about 20-24k and buy another house cash and keep going like that.

Now, with this 50% rule it seems that once i purchase the 2nd house, i'm loosing $$ on the 1st. But say I rent the 2nd for $900/mo. Minus 450, 200(T&I) i'm at 250. The first house is now added another 200 for P&I and say is at -150. Totaling me to a positive 100 between both.

Questions so far, is it safe to let one rental make up for the other? Also, how firm should I take that 50% rule?

After reading I came up with another situation. Possibly buying a more expensive multi family and using maybe 10k of the 15k as a 20% down. So say a 50k triplex. Using a calc, lets say PITI is 270/mo. maybe at 600/mo per unit i'm looking at 1800/mo in rent. -900 for 50%. -200 for mortgage. - 270 for PITI. i'm looking at $430/mo profit which sounds much better to me. I won't be able to refi and buy another quickly. But seems to be making more $$ with one property anyway.

I'm thinking of looking into lower income areas. Maybe 50k range is unrealistic for a triplex? Maybe i'm looking at all this the wrong way? Maybe i'm missing something completely??

I'm sorry if EVERYTHING here has been answered before. I've done some searching, but maybe not as much as needed.

Thanks in advance.

Aaron Matassa · Answer

Thanks. Here's the info you asked about. It is a 100k mortgage. I bought it as a foreclosure. My neighbor just appraised for 146k and my realtor estimated about 130-135k based on comps. Zilliow (I know) has it at 175k. I scored a pretty good deal. Paid lower than everyone in the neighborhood. I think your right about scoping the deals. I have done so briefly. But not enough. I am making up some numbers. As for the adding to my primary mortgage. I forgot to mention it, but yes, I could pay for my increased mortgage as well as T&I on the rental with a 100% vacancy. I wouldn't want to. But if need be I can make it work. Thats a great point. I love your $75 over my $200. Here's how I got to my numbers. I paid 100k on a FHA. Got a lot of closing covered. I owe 97k @ 3.75%. Paying 745/mo including an HOA/taxes escrow and pmi. I estimated that I increase my mortgage to 112k if I appraise for 140k. = 15k cash. So a 112k loan at 5% interest is 747.mo. So after HOA (360/yr) lets say 777/mo. So wow. I think i did a little of that math wrong so i'll estimate a $50/moth increase. I guess i got carried away with over-estimating. Thanks! What I did forget to factor is the refi costs. So 15-4 gives me 11k. Sounds like I need to save up 4-6k in cash for this before proceeding. I do plan on managing myself. And thank you for clearing up the 50% rule. I plan on some time before the refi. By the time I planned do it, I would have owned the house around a year. I also plan on spending some money on this house to get refi-ready. paint, ect. So i think my homework is to look up houses, single and multi family, to see what current prices really are. And it looks like i'll be using the refi $$ to put on a down payment rather than paying cash. I'm thinking to try to steer more towards multi-famiy? Thanks

Jon Holdman · Answer

I think you need to start by figuring out what kind of deals are really out there. $15K for a place that will rent for $800 seems extremely unlikely. $50K for a triplex that will rent for $1800 also seems like a pipe dream. You're confused about the 50% rule. If rent is $800, you subtract $400. That includes taxes and insurance and a bunch of other stuff. So, if you own that house "free and clear", then your cash flow would be $400. If you manage it yourself, you can collect another $110 or so a month (on average) that would have gone to the PM. Now, I quote free and clear because you actually have a mortgage. Its just on a different property. So, if you're paying $200 for the money you used for this "free and clear" house, your cash flow is about $200 a month, more if you self manage. Now, your numbers on your current house don't make sense. If you're bumping up a 30 year loan by $15K at todays rates that should add only about $75 to your current payment. Now, when you do a refi, there are significant costs. If you're talking about bumping a $100K loan up to $115K, you should expect about $4000 of that to go to the cost of the refi. If you're talking about bumping a $300K loan up to $315K, then the costs will be that much higher. Also, if you've owned that house less than a year, you may have a hard time doing that cash out refi based on a new appraisal. But give it a little time and, assuming your income, credit and cash reserves are OK, you should be able to do it. However, ONLY do this is you are 100% sure you can pay back that loan without the rental. Otherwise you're betting your residence on the rental. Dangerous, IMHO.