Working towards our “why”

[NA H.]

Hi! My spouse and I are trying to figure out our next steps and would appreciate any advice. We are new to real estate investing and trying to figure out if it would be better to buy a home in our area or focus on building up an out of state portfolio. Our end goal and “why” is to be able to move our family to some acreage and raise our kids on a little hobby farm. One acre with a fixer upper is currently around $400k-$500k+ and the monthly payment for that amount just stretches us too thin right now.

-we currently own a home and have a $75k Heloc available to tap into. The mortgage is $1100/mo and will rent for around $1900/mo whenever we decide to move. 

Option 1: buy another “starter” home for around $375k and plan to live in it for around 5 years while renting out the current house. Hopefully by the end of that time frame, it will have appreciated enough that we can sell it and use the equity as a down payment on some acreage while still keeping the first house as a rental.

Option 2: stay where we are and use the heloc to invest in rental properties out of state like Kansas City, Cleveland, etc. Over the next few years continue to buy a few more properties to build up the monthly cash flow then use the increased income to buy our acreage property.

Our area is projected to continue to grow and appreciate fairly quickly so we are afraid of getting priced out of buying our little farm if we wait too long. What would you do in our situation? Any other ideas or food for thought? Thank you for your advice and taking the time to read this!

[Peter W.]

Let’s set expectations, rental properties are a 10+ year play and currently generate barely any cash. So if your strategy is to use rentals to cover the delta between your current mortgage and the mortgage of your dream home, you’re probably 10-15 years off from being able to do that. It also requires high income so you can benefit from leverage (which if you had you would probably just move into your dream home?). Regardless of whether you are in state or out of state.

Option 1: Without really knowing your market, family situation and financial situation my best guess is you should try to buy and move into a new 2-4 family or single family fixer with 5% down. Repeat as often as you are able (I think it’s yearly) but also depends on your debt to income. You’ll be significantly cash strapped during this time but will build significant amount of equity thanks to 20:1 leverage on appreciating assets.  After 5 years you’ll likely have accumulated an additional quarter of a million in assets. You can switch to paying down debt to try to make the properties cash flow (getting rid of pmi first and then paying off mortgages early) or sell all 6 properties to put a large downpayment on your dream home. The risk here is that each property negative cash flows when rented, so you might be learning to dumpster dive for your food. With this degree of leverage, a correction could easily put you underwater in your mortgage. If they are live in flips, selling and putting the money else where might reduce some of the risk associated here.

Option 2: Buy land without the house 100-150k set up a van/yurt/tiny home/similar temporary structure(50k). You’ll have to do some research to figure out what will work for your winters. Save for when you can build or buy the dream house. It sounds like you have close to enough equity to do this without financing now.

Option 3: there are folks who do creative financing (sub to/owner financing). I know nothing about it but on the surface it seems like you can do pretty well.

[Peter W.]

Just running some numbers on our 5% down househack.  There are a couple of quads on Malad St for about a million. If you offer list price + seller concession on 50k to buy down your rate to approximately 5.5%. Rent is probably 1700-1750/unit (you’ll have to live in one for the first year). Zillow tells me piti ends up at 7300 while rent ends up being 6800-7000/mo. So you are out a little more than 1k/mo assuming you do most of the maintenance yourself and you can avoid capital expenses and save for them later. Renting your current home can help make up for some and your job will have to make up for the rest.

But if you get 5% appreciation, you’ll gain 50k/yr in equity plus about 15k in loan pay down. After 5 years, you’ve gained 325k in equity and lost about 75k in negative cash flow (over 5 years and a little less than half comes from your renting out your current property) so you are sitting at +250k, enough between your two houses for your dream home. You’ll do slightly better because pmi will come off at some point (650/mo), the 50k should increase each year and you’ll get rental increases.

I will note you’ll probably lose one years appreciation on the front end due to closing costs for buying and approximately 1-2 years on the selling end so you are looking at 7 to 8 years hold to realize the quarter million. As I said previously, rental properties are a 10+ year ordeal.

I analyzed the first property I saw. You can hopefully find something which does better in terms of cash flow, but it at least gives you some numbers and shows why 5% down house hack can be such a powerful equity generator.

[Carrie Matuga]

@NA H. Figuring out your why is such a key first step. I love the advice and analysis you got from @Peter W. is terrific. 

Option 1:  Use your 75K heloc to buy a starter home, rent out your first and have $800 CF before taxes and insurance and put the remaining amount toward reserves or your next downpayment. House hacking can take multiple forms from buying a MF and living in one of the units to doing a live in flip for a year with conventional financing to doing a longer stay renovation where rather than staying in your next house for 5 years, can you find a new place where there is a value add opportunity to move every 2 years - that would all be tax free. In 5 years, you'd be able to do this 2 times and half way to doing it a 3rd time. 

Option 2: With your $75K heloc, you could be in a position to buy a fix and flip (with reno cost) included for up to about 450K assuming 85 LTC, but if you started with half that amount you'd have a better cash reserve if things go long. Once a property was stabilized, you could in the best situation pull all of that money out and repeat. You'd have to decide if this can be done in your market or if out of state is a better option and if you are comfortable with that. This way you are adding to your portfolio doing maybe 2 or 3 of these a year. 

[NA H.]

Thank you everyone! You have given me a lot of perspective and your replies are very helpful!

[V.G Jason]

It puzzles me why people talk this way, or have to make everything a process based venture. But **** it, I'll go with it.

You found your why. You want to raise your family on that little farm thing. Sell your house and take proceeds and buy into a little farm-- make sure its agricultural though. Boom, you are there. Why take unnecessary risk and kick the can 5 years down the road?

To get cute with being an "REI" and to hold a 3% rate? Quit playing with your food-- get your family situated and then if you want to get into REI later, go for it. You're prioritizing a 3% rate and being an "investor" over family planning-- this is what's wrong with society.

[Molly Arnott]

Have you explored the idea of purchasing that hobby farm you're dreaming of with a minimum down payment? Obviously it'll be dependent on qualifying but here's a scenario you could consider....

Buy the property for $500k with 5% down ($25k) using your HELOC or other funds if you've got them. Your mortgage is going to be around $3700. Use the remaining funds to fix up your new place and also build or buy a tiny home on the property. If you do it right, make it special, you can airbnb the tiny house as a unique experience on a small hobby farm. I've seen these in our valley make $1000-2000/mo depending on location and how it's set up. There's no reason you can't find a way to house-hack your hobby farm. The other option is looking for a property larger enough and set up for horses. Horse boarding can be very profitable and be another way to "house-hack". There's so many out of the box ways to get to your goals. Reach out if you want to sit down and grab coffee and throw some ideas around.

Also, as a new investor we'd love to have you join us at our local investor meetups. Last week we practiced underwriting 3 different kinds of deals together, often we're going over goals, or spit balling ideas. Would love to have you! We post them here, or if you find me on FB or IG I'm always posting reminders. Look forward to connecting!