2nd Multi Family in the next 6-12 months

[John Brito]

Hello,

    I have been on biggerpockets / listening to the podcast for about 4 years now which is crazy. I originally tried to purchase a 3 unit in Philly when I was living there but the properties on the mls did not cash flow and I had a couple offers accepted but too many major structural issues. So long story short I moved back home to Rhode Island since i felt like if I am going to buy a property in this expensive market let me do it where my family lives since I will always have to be around / come back. 

So I purchased a property in Pawtucket, RI with a Fannie Mae (and home ready) conventional loan at 5% of the purchase price + closing costs and no sellers assist so I got in for like 20K (the property was turn-key new mechanicals/ roof etc. and I wont have to do any major rehab on the property in the next 5 years hopefully.) I had been searching for a house for so long in Philly that I had saved up a large sum of money and now I have enough to buy a another house and do some substantial rehab on the property. 

My question is what would be the best strategy moving forward for me to get 3-4 unit multi in the Pawtucket/Providence, RI area? Since I used a conventional loan for my first purchase according to my mortgage lender who was my landlord for 3 years in Philly he said I can use an FHA 3.5% product to by buy my next home if it is my primary residence which it will. I also know that you make the most money in real estate using the BRRRR method so I want to know should do the following based on the info I provided:

* Buy another turnkey style home using FHA 3.5%

* Buy another using a 203K / other conventional rehab loan type product (feel free to point any out as I haven't researched enough of this option) that needs work. Knowing that 203K is slow to pay out sums I would use my own money and just get reimbursed by the bank so it moves faster

* Buy a fix upper using a hard money loan and then do the BRRRR method knowing I have never done any substantial rehab but I do understand how to manage contractors since I am a Civil Engineer and work with them on a daily basis.

Feel free to rip up my idea I just want to make sure i am making a good long term move. Knowing that that real estate is a marathon not a race and I would like to create a strong portfolio of multi-family holds before I finally buy a single-family in maybe 5 years or so and have to take things slower.  
 

[Anthony Thompson]

@John Brito first of all, congratulations for taking action! For many people getting over the hump of the first deal is the biggest challenge, so it's great you're looking for your second property.

I think that yes, in your situation getting a 3-4 family multifamily rental would be the next logical step.

Since you're still early in your investing career, I don't know that I'd recommend the third option you proposed, specifically using hard money to buy a rehab. Hard money interest payments can eat you alive if you're not careful, so I'd recommend getting some more rehab experience under your belt before you use hard money to fund a rehab.

So I think that leaves the other two options, buying another ready-to-rent (turnkey) property using the FHA low down payment, or doing a 203K rehab.

That's a tougher choice and really depends on your skill and comfort level with rehabs. There's competition for them, as there is for rental properties in general, but you are where you are and you seem ready to move on to your second property. So it's really a personal choice.

I will say, the easiest rehab you'll ever do (relatively speaking - none of them are easy!) will be for a property you're living in, even if you're rehabbing a different unit than your personal unit. So if you're committed to doing more rehabs in the future, I think rehabbing units in a building you're occupying is the best strategy for gaining more experience with it.

I say that because a lot of the work of rehabs is babysitting contractors and just consistently staying on top of the project to relentlessly keep driving it forward. And that will be a lot easier when the project is in the property you live in. For good or ill, you won't be able to escape it :) That may be stressful at times, but you will learn a lot and with less risk than if the project was further away.

Many light rehabs on the market today are getting bid up by owner occupants looking for fixer-uppers too, by the way, so I wouldn't necessarily expect a lot of "profit" or "sweat equity" to be left after your efforts.

Unfortunately, competitive bidding on such properties has squeezed a lot of the profit out of those deals. But if you go into it with eyes wide open, understanding the rehab needed, and look at it as a learning opportunity, I think you will still come out ahead for the experience.

I also think it's great that you're starting out with multi-family properties before moving into a single family yourself down the road. It's a lot easier to build an investment real estate portfolio when you start out that way, versus starting out in a single family and then having to downsize yourself into an apartment. It's do-able, but it's tougher, and even more if you have a partner/spouse/family to consider too.