When are you ready for the second property investment?

Question

I have purchased my first property this year in February. It is a duplex that I am house hacking. I have had a steady paying tenant  for 7 months. Despite the small preventative maintenance and home owning surprises ( hornet nest, leaking AC, sink clogs) it's been pretty smooth sailing, and now I'm itching to get another property. I am eager but still want to be smart when I grow to get a second property.  I'm not yet in the positive with this first purchase.   I am still about $13,000 negative. I think it may be due mostl to me house hacking that I am not seeing my cash flow first hand. I'm currently saving for the next down payment and cutting down my debt tree to bring up my credit score. However, would any information with the first property make a difference with when I should go for the second property?

John Leavelle · Answer

Howdy @Eva Henry

Congrats on getting the first one.  Did you go into the first property knowing you will be Cash Flow negative?  It is normal to be negative when House Hacking a Duplex (even Triplex).  Is the $6,500 after Vacancy, CapEx, Maintenance reserves and mortgage payment?  Or are you not withholding for those?  ~$541 per month Cash Flow would be incredible for an FHA mortgage.

The reason I am asking these questions is it directly pertains to your basic question.  @Joseph Gozlan hit the nail on the head.  You need the down payment and cash reserves to accommodate the 2nd property and any unseen future expenses with the first.  It’s like driving across the dessert on bald tires and no spare.  Not a good idea.

You really should have at least some reserves to handle any CapEx or Vacancy issues.

Todd Dexheimer · Answer

@Eva Henry buy the 2nd property as soon as possible. Once you start buying it becomes easier. Of course buy deals that work, but don't hesitate to bring in partners

Joseph Gozlan · Answer

@Eva Henry it should be about financial readiness.

If you have enough cash for the next down payment (25% because it'll be an investment property) plus 3-6 months of BOTH mortgage payments (your current one and thonly next one) then go for it. No reason to wait.

If your not financially ready, then it becomes a risk tolerance question. Let's say you have enough money for the down payment but no reserves for mortgage payments. Do you take the risk that you will lose your current tenant and the other property needs a furnace replacement at the same time?

Life happens, you just need to be ready for that.

And congrats for buying your first one and house-hacking it!

Leslie Voegtlin · Answer

WELL DONE!!!  I'm following b/c I'm curious of the answers.  I've purchased and am doing major renovation, but would love to hear the answers that follow.  Thx!

Alex Shaughnessy · Answer

keep knocking out that debt. then I would consider fha and move into another duplex or home that way you can have a low down payment and rent your current unit out while house hacking again.

Jeff Kehl · Answer

@Eva Henry As to your question, I'd say expand as fast as you are comfortable with from a risk perspective. Like any business, if you expand too fast in REI you can get into trouble. But if you expand too slowly you may miss opportunities.

Not knowing how risk-tolerant you are, let me give you a few general pieces of advice.

1) Make sure your existing property or portfolio is performing well operationally and financially before expanding it. If you're not currently getting positive cash flow you should work on that first. I suspect you are but it's hard to tell from what you posted. See below for more thoughts on that. If it is performing well financially, also focus on the operations. Are you doing the management? If so make sure you have all your processes down, how to advertise for and screen tenants, leases, rules, rent collection, late charges. I know this may not seem like a big deal now but think about and research these things now while you only have a single tenant so you can grow effectively.

2) Make sure to have your finances in order before expanding. Sounds like you are working on your credit which is good but also think about reserves and future capex needs. You should be setting aside a certain amount of funds for big potential expenses. If your duplex is brand new you could maybe skimp on this but if not you should look at all the major items like roof, hvac, plumbing/sewer, electric, driveway and evaluate there useful life. Determine how old they are and when you will likely need to replace them and start saving for that.

In addition you should have a cash cushion 'just because'. Think about what would happen if you bought the next property using every bit of your savings. Then imagine your furnace goes out, your tenant stops paying and you need to repair your new property to make it move-in ready. Do you know how you would pay for all of that?

When you say your current property is -$13000 ROI I suspect you are mixing a few things up. How your property performs financially on a month-to-month basis should be evaluated by the ongoing rent - ongoing expenses. It sounds like this is $2600 annually without your unit but would be $6500 if your unit were rented. That's your return.

To figure ROI you divide that by the total amount of cash you put in. I don't know that number but let me assume you put in $15,000.   That's about a 17% ROI without including your unit or a 43% return counting your unit. But in reality it's probably not that good because you should be saving half or more of that to pay for future repairs/vacancy.

But I'd say you're doing pretty good and could start looking for the second. Keep in mind if you're using a low downpayment owner occupied loan for this you should be staying as long as you said you were going to when you signed those loan documents.

Eva Henry · Answer

@ Kurt Jones the -$13000 is the roi net. Since I am househacking I will only cashflow about $2,600 this year. But the building would cash flow about $6500 annually with the current rent market if I wasn't living in the biggest unit.

Kurt Jones · Answer

Are you referring to $13k negative  as in ROI net? Or cash flow ?

When are you ready for the second property investment?

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