Investment egg - 1st House Hack + 2nd property?

Question

I had a bumper crop year during the pandemic with my online retail business and have 130K to invest as a first time home buyer. Online spending went crazy over the past year, I easily made triple what I had in years past, so theres no guarantees the future will bring the same/can't expect that for future ventures.

Wanting to make the most of this egg and put it all into some serious real estate cash flow. I'm in Portland, Oregon, home prices are soaring.

I'm really struggling with how much to put down/what kind of setup to go with. All 3 scenarios, when I number it out, I seem to only break even, no cash flow. Early stages of loan applications, decent credit (655).

20% on one house - house hack duplex or 3BR+ where I rent out all the rooms. Realistically expecting to pay 350K-400K, which is a bargain here. I would break even on the mortgage/tax/insurance. (and not have to pay mortgage ins) Any repairs would be from other income.

OR

5-10% on 2 houses, living in one. Adding up comp rents, still only covers additional monthly mortgage payment + mortgage insurance. Maybe a hair extra

OR

5-10% on house hack triplex/quad. Same - Adding up comp rents, still only covers additional monthly mortgage payment + mortgage insurance. Maybe a hair extra

A lot of what I read implies my numbers are off or I'm not finding good enough deals. Somewhere in here it seems like I should be able to setup a better cash flow. Should I wait till the market calms and get house #2 then? I don't want to wait on #1 and keep pouring money into renting.

Quite honestly, I'm a little uneasy about NOT paying 20% down. 5-10% means a lot to be on the hook for if any problems arise, non-paying renter, big repairs. A big part of this uneasiness is that I haven't had my hands on this much money before and want to be very smart with it.

Not looking for a cheerleader per-say, but more seeking advice on things I might be missing/alternatives I should explore. I have considered just buying one house hack duplex, then buying a 2nd house when the market is more stable, possibly in out of town in a less expensive area investing in an Airbnb vehicle.

Brad Hammond · Answer

@Logan Loughmiller, it is difficult to get offers accepted right now but not impossible.  While putting more money down does help, sellers are really looking for a high offer price, an appraisal gap (you covering all or a portion of the appraisal doesn't come in as high as your offer price) and waving all or most repairs.

If you are going to get an owner-occupied loan, you will need to live there for 12 months to satisfy those terms.  I think you should wait at least 6 months to get a handle on owning a property and managing tenants.  You learn a lot the first time you turn a unit.

I do see things calming down a little towards the end of the year but it will be a hot seller's market for a couple of years till interest rates rise.

Tim Delaney · Answer

@Logan Loughmiller you say that none of those options give you any cash flow, but don’t forget to account for the fact that you are not paying anything towards the mortgage. So if you are currently paying $800/month in rent and then you are paying nothing with a house hack you in reality have increased your personal cash flow $800/month.

Any option works, it’s about finding what you are most comfortable with. Personally I’d try to get as many doors for as little down as possible. But you mentioned wanting security so then do one with 20% down if that helps you sleep at night.

Logan Loughmiller · Answer

Thanks so much for the replies!

@Brad Hammond - I marked the master class down on my calendar, I'll be there. That makes sense. I wouldn't have expected rents to raise that quickly, I didn't do the math for the 7% allowable raise year to year, that checks out.

Do you think 5% down is reasonable in the current market? With the intensity of competition in Portland, does it weaken your offer position to have a down payment of 5% vs 10% or 20%?

So 6-12 months is a reasonable amount of time to go in for a 2nd property? Is that just the time necessary to qualify for another mortgage?  lol...That's about what I was thinking for the stability of my focus anyways. Potentially enough time for the market to be a little more stable, but I don't want to bank on that. There's no guarantees it will calm down at all anytime within the next few years.

@Tim Delaney - This is true. For a while at least, till it reaches a considerable amount, I would allocate that to a repair savings. And regardless, it would become additional cash flow once I moved into a 2nd property. It will be a challenge to find a deal good enough to break even month to month at 5% down in this market! (but they do exist) Would have to be under 400K for it all to balance out that way.

All around that seems to be the most universal recommendation - As low a price as you can, as little down as you can, as many properties as you can. A little more intimidating, but leaves a LOT of opportunity for 130K if I'm putting 5% + closing into each investment. Don't want to get ahead of myself, but down the road that could mean 3-4 properties.

I do also plan on raising value/getting a better purchase price with some light rehabbing as well. Specifically seeking out properties with bad paint and outdated/shabby (but functional) kitchens and bathrooms. From my research those seem to be the points where the ROI towards a better appraisal value works out.

Investment egg - 1st House Hack + 2nd property?

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