Next Investment: A Primary Residence or Long Term Rental?

Question

Hi all! My name is Katie and I am a fairly new investor. My husband and I purchased our first house hack, a duplex, in Coraopolis. We live here currently. We are coming up on a year of owning the property (purchased with an FHA loan), and we will have around $25-$30K saved up in the next month or two to purchase our next one. We are trying to decide what to do next and would love advice from more seasoned investors.

A.) Do we buy a small starter home in Sewickley that we can rehab and add value to? We currently have our eyes on a property that we'd hope to get for around $200K (4 BD, 1 BA with room for a second) and hasn't been updated in a long time. This is an expensive market, and a desirable one, so it is rare to find a property at this price.

B.) Do we buy another small multifamily rental and stay in our house hack for another year? It is worth mentioning we do not currently have kids, but plan to start a family sometime in the next year. Our unit is 1 BD 1 BA so we will likely (hopefully) need more space by Spring/Summer 2024.

I know there is probably no one right answer here, but would love to know what others would do in our situation. Thank you!

Leo R. · Answer

@Katie Case as others mentioned, there's not enough info here to provide really specific feedback...so, I'd suggest doing two things:

1. create multiple financial models for each approach (including "worst case scenario" models that involve unanticipated capex, extended vacancy, etc., etc.).

2. Then, make a list of all the pros and cons of each approach.

Once you do those two things, you'll  have a much better idea of which approach fits you best.

Things to consider when you make your list of pros/cons:

-How easy/difficult will the property be to manage? For instance, what's the tenant pool like for each property, and how easy will it be to find high quality tenants? (this obviously depends on things like the location, the grade of the neighborhood, the grade of the property, etc.).

-What would the rehab entail, and how much experience do you have to do that type of rehab? I've done live-in rehabs before, and (no surprise) living in a construction zone sucks! Would it be viable to do the rehab before move-in?

-Right now, it's relatively easy for you to move to a new property (since you don't have kids)...presumably, it will become much more difficult to move to a new property once you have a kid (so this might be one of the last opportunities you to move to a new property for a while).

-What effect does each approach have on your DTI and your ability to qualify for more loans in the future?

-What's the outlook for appreciation with each approach?

-What (if any) value add opportunities do the two approaches provide?

-What are the pros/cons of the various financial models you created for each approach?

-What exit strategies are available for each approach?

etc.

Good luck out there!

Aaron Ray · Answer

@Katie Case definitely house hack again! My wife and I are still house hacking here in Coraopolis with a 3 month old baby!  We'll be on the lookout for the next house hack soon.  Whatever you choose to do, you and Nathan need to stay close so I can have someone hold me accountable, I have not been consistent  getting to CrossFit MindFire for awhile now!

On another note, if you're not already, I would strongly recommend working with @Jeremy Taggart and his team!  I can also confirm his lenders above, I used Tony Feola for his 10% down on our current house hack.

Joe Norman · Answer

I would be looking at this more from a personal/lifestyle perspective than I would from an investment perspective. If you plan to grow your family in the next year, and you know you'll need the space, then I would be looking to upgrade my living situation sooner rather than later.

If you start looking now then you will have plenty of time to find "the one", and to renovate it before the baby comes. If you wait until you need the space (e.g., you get pregnant) then you're going to be rushed and feel pressured to overpay.

I don't have a full financial picture of your situation or these properties, but it sounds like Option A is the way to go. Buy it under market, put in the sweat equity over the next year to make it "yours", and enjoy the space as you grow your family.

Good luck!

Elise Bickel Tauber · Answer

Hey Katie! Is there a reason you wouldn't want to just purchase a flip and turn it quickly? We have a great lender who will lend up to 90% of the purchase price and up to 110% of the rehab costs so you could get in, turn it, and get out while the market is hot this spring/summer and have even more cash to work with regardless if you go with another single family or multi unit.

I will also say I have a lot of investors I work with who are moving from house hack to house hack and it is really working well for them. I have a young couple who have gone from nothing to 12 units in 3 years.

Bill Brown · Answer

@Katie Case I recommend not doing a live-in flip involving pregnancy or a new baby unless you can get the work done before you move in. I gutted our house in two phases; the first time while living in it. We moved out for the second phase while pregnant, and it was not ideal logistically or financially. Also, don't know if you guys have access to more money, but renovating a 4 bd house in Sewickley will be expensive. You would be able to refinance or get a Heloc when it was finished, but your money may be tied up for a while.

Ryan Thomson · Answer

@Katie Case run the numbers and compare to your goals and priorities. Without knowing those it is very difficult to give you advice. But I think if you did those two things you would have your answer.

Katie Case · Answer

Haha yes, we have missed you at MindFire! We plan to stay close so we can keep going there as well! I think the investor side of me wants to house hack while the practical side of me doesn't want to keep moving/deal with people living on top of me.

Katie Case · Answer

That's a great idea! Thanks, Martin!

Martin M. · Answer

@Katie Case

One thing you guys will want to consider if you haven't already is how much you'll be able to borrow to buy that next property.

If you plan on hanging on to your existing place for example, that may lessen the amount that you can borrow for the next property because the mortgage on the existing place contributes to your monthly debt. The higher your debt, the less you can borrow with many loan types.

On the flip side to that, the rental income from the existing place may count as income for you,  depending on how long you've been receiving it and various other factors the lender will look at.

There's a lot of factors to it, but the gist of what I'm getting at is maybe see first what types of loans/financing you can qualify for...  then consider which properties may work best for you based off of that.

Draft up the types of properties that you're interested in, then have a chat with 5 or 6 lenders to see what your borrowing power is... and don't be shy about talking to them or feel like you're wasting their time... that's all part of their job. Good luck!

Next Investment: A Primary Residence or Long Term Rental?

Most Popular Reply