buy small multifamily now or save more for future ?

[Dylan Badinghaus]

hi everyone so sorry i don't have a pic posted yet but i will soon.

so i am 26 years old and newly married as of may 20 (yippie) . we are currently renting a 4 bedroom house for $700 a month paying no utilities and we don't have to mow or do any lawn care. i am wanting to get into small multifamily 2-4 units to start out but i'm not sure what to do just yet . i keep hearing people say how we are at the top of the market and now is the time to sell not buy and a correction should be coming . so i have a couple questions do i keep saving and wait for prices to fall and buy at the bottom ? (who knows how long that may take though ) do i look into buying one now with 20% down and keep renting since its so cheap , Or do we house hack and buy one with an FHA loan ? im just not sure on what route to take i would like your thoughts on this subject. i have $25,000 saved so far to invest with .

i want to get started right away but every time i hear people say the market is going to bottom out again it makes me nervous to get my toes wet . so that makes me think if i save money now i will be able to buy more then if it goes down. but then again interest rates are so low it would be a shame to pass that opportunity up.  

one downfall to the house hacking is we both live in the country now and would hate to move into the city for a year under the FHA loan . i understand its only short term and would set us up better for the future i just have to get the wife on board with the idea .

My long term goal would be to get enough units to replace my income and  buy a 100-200 acre farm and build on that property

 any thoughts would greatly be appreciated 

[Jonathan Twombly]

@Dylan Badinghaus I'm one of those people who believe a correction is coming soon, so I think the thing to do is keep saving and being patient and wait for the correction to happen, when values are much better.

That being said, if the cash is going to burn a hole in your pocket if you don't invest it, then here are some things to think about.

First, how long is your holding period?  If your plan is to hold for 10 years or more, then time will generally correct a lot of sins.  You won't make as much money as you will if you wait for the next cycle, but you will do alright, as long as you do not have to sell or refinance a property you bought at the top of the market when the market is at its bottom.  That's the fast road to foreclosure.

The second thing is that the property must absolutely be cash flow positive when you buy, covering all expenses including a reasonable vacancy allowance, which for a smaller property should be at least 10%.  Preferably you build in a margin of safety so that it is cash flowing at at least 8% or so after all expenses, reserves, etc.  This protects you against a downturn.  If you are making your return, and the property suffers a loss on paper but you don't have to sell or refinance, you don't really care, right?  It's not a realized loss.

I really cannot emphasize this point enough, though.  Absolutely do not buy anything that is not going to put cash in your pocket every month.  If you buy something only for appreciation right now, the chances of getting badly burned are very high, because you will be paying out of pocket every month for a property that has lost value.  If anything happens in your life that requires extra money - a new baby, for example - and you suddenly can't afford to be paying out of pocket for your "investment" (i.e., gamble) property, then chances are you are going to walk away from it and lose your investment.

So, focus on cash flow, cash flow, cash flow.