Buy Primary Residence vs. Fix and Flip vs BRRRR: Best First Step?

Question

Hey there! I'm just starting out so pretty much a wannabe investor, and looking for advice to make sure I'm on the right path.

I'm actively looking for my first investment property.

Right now I prefer the fix and flip strategy to increase my cash options (see my future plans below), as well as provide flexibility, but reality is I need to figure out if I should first buy my primary residence vs. buy a fix and flip vs buy a property to rent out (BRRRR)  to start .

Here's some personal background:

• I'm leaning toward living in the NW Twin Cities metro as that's where my family is.
• I'm temporarily living in Northwest Wisconsin about 2 hours from the Twin Cities. Current rent and housing expenses are super cheap at about $600/month.
• Cash on hand: $158k
• Available Investments: $65k
• Available IRA: $113k
• I have no debt besides my living expenses
• Also, I took the last 2-1/2 years off of 'work' so I could take care of my elderly parents. I mention this because I work for myself, have no W-2, and won't be able to get a conventional loan.
• My future plans include continue traveling around the U.S. in my RV, buying an airplane, and continuing my flight training. ;)

Any advice on what my best 'first step' might be?

Spencer Kelly · Answer

Welcome to the community!It seems you're in a very unique position here. Lots of capital to start but no regular income. Very rare to see that on here. One thing to consider is that a commercial loan may be possible due to less stringent requirements. However, that is a question for a lending specialist or agent and I'm sure one will chime in here eventually. Based on your very specific situation, I think you should consider starting with one multi-family rental property to buy and hold...here's why. Multi-family rentals tend to generate the best income and typically, the more units, the better. Now, because you don't have income, that will hurt you for conventional mortgages which offer better rates than commercial loans. So, for you're specific situation, getting a "regular income" is, in my opinion, a need. So, what you should look into is starting a single-member LLC (consult with a CPA and an attorney to make sure you set it up properly and to minimize your tax burden). Once you have that set up, use that LLC to hold you're first rental. Generally, I use individual LLC's to hold each property to limit the liability to each individual property (again, a question for an attorney). That LLC, lets call it Nalty Rentals 1 LLC, is going to hold your first rental property. Now, the rest of this is going to be very generic and random but just to give you some numbers...You buy a duplex for $350,000. 3 bed, 2 bath on both sides, 1200 sqft per side. A commercial loan will require 25% minimum so the down costs $87,500.00. Lets say, out of pocket with closing costs, it's $95,000. Now, based on market conditions in the Twin Cities right now, a duplex in the NW metro or northern metro is going to require some cleaning up. This is completely based on the property but for the sake of these numbers, lets say it's $5,000 for cleaning and minor repairs. You're in $100k with the rehab. Now, once you're property is cleaned and fixed up, in the NW metro you can garner rents anywhere from $1600 to $1900 depending on variety of factors. Neighborhood, layout, size, garage stalls, etc. For your purposes, lets figure a bit conservative and go $1700 per side giving you $3,400 gross income per month pre-expenses. Now some math...$350,000 - Purchase25% down = $87,500.00--------------------------$262,500.00 - Commercial Loan amount with a (apprx) 4.0% interest rate = $1,250.00 - Mortgage+ $300.00 - Taxes+ $200.00 - Insurance--------------------------= $1,750.00 - MTI+ $250.00 - Utilities (you can choose to have tenants cover some utilities. Best to cover water and electricity)-------------------------= $2,000.00 - ExpensesNow, a lot of people on here will grill me for not including cap ex and setting aside repairs...but this is about getting you an income to help your investing down the line. $3,400.00 - Total Income on the Property- $2,000.00 - Expenses------------------------

$1,400.00 - Net Income (Also, 14% Cash on Cash ROI which is pretty good)

Now, what you should do is take the money being generated by the property and use a good majority of it to pay yourself a distribution or a salary (again, check with CPA). If you take $1,200 of that income and call it your "regular income", while it isn't a whole lot, you are in a better position to qualify for conventional financing. The fact that you have an income generating property, no "consumer debt" like credit cards or car loans, no student debt (I'm assuming) and you have an income, this should qualify your for conventional financing. You have assets, no or very little debt (unsecured) and an income. As long as your credit is above a 700, the low income shouldn't be a huge problem. (Mortgage agents should weigh in on that)

Now, you've got your first rental generating you income. You'll be able to learn quite a bit about the process through this first deal and you'll be on your first step towards real estate investing.

For your situation, I personally wouldn't recommend doing a fix and flip because it doesn't solve your income problem and flips can turn upside down QUICKLY if you don't have experience in construction or you haven't done flips before. Fixing rentals first that you plan to hold (and BRRR) is a good way of learning the process of rehab.

Also, since you're trying to move to the NW metro, you could also consider "house hacking". Buy a duplex and living in one side while you rent the other. The tenant ends up covering a handsome portion of your mortgage allowing you to live at very low cost. Eventually, when you're in a better position, you buy a home for yourself and rent out the side you moved from.

You said you "worked" for yourself. I'm curious what it is you do for work.

Alexander Szikla · Answer

Why not combine primary residence and BRRR?

Also, the tax breaks on a primary residence are the best ($250k capital gains exemption if single and $500k if married)

Spencer Kelly · Answer

Boy...this is some seriously good advice. I learned plenty myself. You're absolutely right about the multi family stuff right now. The prices on mediocre props is outrageous.

Jay Lohn · Answer

Welcome to the community, I would be happy to help you with any questions you in regards to investments.  Just send a DM, and I am a NW metro guy too.

James Hamling · Answer

@Christopher Nalty

So cutting right to the meat of things, I am "the" NW metro guy.

@Spencer Kelly is kind of moving in the right direction, you need to show an income and if you don't have one to show, well, then we make one. Although I would strongly suggest a completely different direction there, especially multi's, not gonna happen, not at a # that makes any money, multi's are priced to ridiculous levels so if you need better than a 5/6 cap, no multi's.

Commercial lenders will not fund a new investor without existing income, not even at 50% LTV, not a legitimate lender. Commercial lenders bet as much on the operator as the investment, without a track record to show, well you view on paper as a no-brainer "pass".

Flips, not gonna happen in this market, unless you have your own operation to source deals directly, MLS will not be a flip source, not for a new investor, far too much risk factor.

I have one program in NW metro that I think could be a good fit. I call it "AAA" Strategy. We would have to tweak it a bit for your exact situation but I think it would be best fit.

Short-short version, 1st deal we get in all cash. i use that positioning to negotiate best discount on deals. We get it leased up ("AAA" rents on average $2k-$2,500) or better known as Rent Stabilized, I will lend you a few banking contacts to hit up to open discussion on over-all game plan, and what they can do to assist. ideally we are set with liquid cash where we secure a second "AAA" all-cash and rent stabilize during these lender meets.

Next we move into "rinse & repeat" where we secure best mortgage financing on these units. This will start as a portfolio loan, probably at lower LTV point given net-free cash flow, they like to see contingency and good math (I will equip with shnazzy spread-sheet with #'s and data galore, enough to delight the most stringent underwriter). Now we secure yet another, discussing expanding leverage options up too ~65% LTV. At some point there probably going to discuss doing a wrap around into a singular commercial mortgage, that's fantastic and exactly what we want. Despite what some say I yet to hear anyone say they got 1.8% on there mortgage, and yes i have seen that with commercial mortgage clients, my own eyes, fact. At start of relation may take a minor hit on % but thats just that, at beginning of relationship and as roll things up that will adjust with time and track record/portfolio growth.

Now the big + to all this is "AAA" also grows equitable returns at a huge rate, ridiculous rate really, so at these finance and re-finance steps will be reaping benefit of appraisal over purchase price, amplifying purchasing power going forward.

I havn't ran the numbers because, well i am busy typing this, off the cuff I believe this will settle at a standing off liquid funds noted of somewhere in the $5-7k net monthly, post debt service & all. That's a really raw estimation of assuming a certain flipping up of funds on unit counts.

In "AAA" our vacancy rate is sub 3%. general demographic for tenant is $75-$100k+ annual income with ~700 fico. Cap-ex and maintenance is intensely low, single digit % and some utilize 0% for first few years (BEFORE anyone poo-poo's this it IS solid planning for these specific properties),

It's key to remember your STARTING in REI, that means Risk Mitigation should be your #1 focus, you need to get experience in safest possible REI vehicle, BRRRR's and flips are not that, in this market multi's certainly are not.

In moratorium MN anything under A-class tenants for a new investor is inviting problems, big problems that could cost dearly.

And that brings up my other suggested direction; if your patient to get going and jump on a deal, you could get established with someone like myself and my team as a "Rescue Pocket Buyer". That's where we have all things set to jump on a rapid purchase, within 24-72hr if need be, and for those random rare deals that fall out of a closing, or have a situation, you can jump in and swipe a solid deal. I just did a multi with this strategy, got an awesome deal for clients.

Those are 2 best directions. Again, I know what the books and programs say, there wrong in this market today in the NW, multi's are at uber premium because novice persons are pricing it up over feasibility. Development is a solid path although you need on average $2m to even consider that direction.

Christopher N. · Answer

@Alexander Szikla

Re: Primary Residence and BRRRR

This is definitely an option, and a parallel path I’ve been pursuing.

So far I’ve gotten outbid on the houses that would fit my criteria as solid and livable but in need of updates.

One thing I’m unsure of is if I were to take on some kind of hard money, the financier would expect a quicker turnaround, therefore potentially limiting my ability to live there after repairs are made, before getting a renter in place.

I’m not sure how that scenario would need to play out to be successful.

James Hamling · Answer

Yeah it's interesting times. A HUGE point I can't stress hard enough for all those trying to get into MFH is condition, condition, CONDITION! If on paper it's a, say 10 cap, and it has 10yr+ old flat roof, 10yr+ laundry machines, no updates since 90's/80's, worn carpets, old boilers, aged entry systems.... your NOT buying a deal, your buying a maintenance time-bomb! Seller is selling you deferred maintenance. AND it means more than just improvement costs, it will cost you in tenant class degradation which as a person who has reclassed a community before I can say 1st hand it's a brutal, long, difficult, expensive road, it is NOT like flipping a SFR.

Multi's are not "easy", there are force factors there not present in other unit types. Can MFH make great $, of course, so can a laundromat, car wash, SFR, and it DOSNT mean they ALL do good, at ANY price.

The 3 commandments of REI are, always have been and always will be:

You MAKE $ when you buy (and I'd add "....when you buy RIGHT")       You AMPLIFY profits when you reno/update      You REAP profits when you monetize (this can be sell, rent, re-finance, heloc, many more ways to reap profits than just selling)

If you buy WRONG, over-priced, you just bought a boat full of holes, you will be bailing water while trying to repair those, there is 0 way to "sail right" in such a ship. There is mitigation measures, and that's all it will be, mitigation measures to stop the bleeding and leverage time to return to profitability.

The #1 most important LASER FOCUS need be on how you buy, full stop.

Christopher N. · Answer

@James Hamling & @Spencer Kelly -

Thanks so much for your replies. They really got my creative juices flowing and seeing a bigger picture. This is exactly why I posted. I don't want to paint myself into a corner when there's a world of opportunity out there.I am a business consultant. I help companies with improve their leads, sales process, and bottom line by improving their online real estate.  James, You're right that the market can be tough right now. I know when I've run the numbers often there isn't enough margin to improve the property and get out with a profit.BTW: you've given me a lot to think about. I'd love to talk more.

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Buy Primary Residence vs. Fix and Flip vs BRRRR: Best First Step?

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