How do I Scale from Here

Question

I have done 2 house hacks. They have decent cash flow, but cash flow isn't super important important to me in my investing journey right now. I'd like to build up some equity, but I'm struggling to find value-add properties (and get offers accepted). I don't have enough money to buy all cash, and I don't have enough experience to partner with someone. What should my next steps be? Here are the options I thought up:

Option 1: Save up money for a few more years until I have enough to buy a place all cash from a wholesaler

Option 2: Aggressively pay down one of my mortgages (~$440k left at 6%) and cash out refinance in a few years to buy a place all cash from a wholesaler

Option 3: Buy another house hack

All 3 of these will require me to put my value-all dreams on hold for a few years. Does anyone else have suggestions of other options I could pursue? I'd prefer to keep my investing local to Chicago right now.

Jonathan Greene · Answer

Of your choices, #3 makes the most sense, but it doesn't have to be a house hack. Just buy a third property when you have the downpayment and reserves set aside. Why do you think you have to buy this third property in cash? To win? Buying from a wholesaler with only two properties under your belt could be a real problem as their ARV is always too high and repair costs too low, depending on how much you know to date.

Alecia Loveless · Answer

@Andrew Katz I’d continue to house hack. You can continue to get low money down loans for a new property every 12 months or longer if it takes you more time to save up the next down payment.

I would 200% be doing this if my current partner wasn’t so averse to moving frequently.

It’s one of the best ways to expand your portfolio.

If possible buy 3-4 unit properties as you should be able to apply 75% of the income towards your DTI to qualify for the loan. Most banks will require leases to be in place first as opposed to month to month tenants. But you can always ask for new leases to be signed.

Caleb Brown · Answer

I would buy another house hack or continuing to make offers. Value add properties will always be in demand so you will have to compete but one will be accepted. Saving up or paying down the mortgages won't make a ton of sense with where you are at currently

Toyin Da-Silva · Answer

@Andrew Katz

Thanks for asking this questions. I have house hacked 2 times in last 3 years. I am currently looking to buy my next property and do a live in flip. I have learned a ton on these forums though I’m posting for the first time.

what does not get  mentioned enough is that if you want to scale slowly using low money down FHA/conventional loan approach and live in there for 1 year, at a time, you should not write off all the rental income on your most recent tax returns for the existing rental properties. If you do, the lender is not able to use the rental income to help the DTI ratio and have to use what is in scheduleE - in most recent tax returns.

I didn't know this was the case until my lender informed me. Now as I’m researching on the BP forums, I found a couple comments about this.

I will either have to wait till next year after filing 2024 taxes, to apply for low money down with FHA loan or find another way to make this work.

Just wanted to post this so it may help someone else not make same mistakes. This is an important enough detail that is quite impactful if missed.

John Warren · Answer

@Andrew Katz all investors run into this problem eventually, and house hacking is a strategy that only lasts so long. I would continue house hacking as long as you can get a loan for it. You will need to really start playing the long game though and focus on securing assets that have good underlying fundamentals as you will need to get more creative with the financing if you want to keep moving quickly. The alternative is to save up 20-25% down and do more traditional investing. That is really not that bad of an option to be honest as it forces you to be more conservative and to build your portfolio strategically.

If you want to invest without partners and do value add deals, the path forward is private, bridge, hard money or DSCR (which are all sort of the same thing). I have been in the commercial investing scene since I started as an agent since I didn't want to buy in the same arena as my clients, so I have never had the luxury of 30-year fixed debt. Once you start thinking about how properties will perform in year 5 or 6, you can start thinking of your initial financing as more of a bridge to secure the asset, which allows you keep growing.

Too much of the initial advice here on BP is all about year one. That is good for a first-time investor, but actual investing is long term and is more about year 5 or 10 than year 1. As you referenced, you shouldn't need the money back for a while.

Tramaine Robinson · Answer

@Matthew Porcaro congrats bro🔥🔥.

I did not to far from the same.

House hacked a triplex with my lady, then she got a duplex that was house hacked and bought time we was done we was able to pull equity out of both and buy another rental and our dream home that we fixed up and have a lot of equity in (bought for 450k worth 850k now)

That dream home allowed us to borrow against and put 20% down on our next rental and every year we plan on doing the same refinancing the rental we bought a year ago as a long term brrrr.

Came to the reality that it’s really a marathon and not a race. None of the methods you purposed are bad, just gotta commit and run it for 5-10 years at a time.

Matthew Porcaro · Answer

Buy another house hack, or even just another house. But this time, focus on it being only a fixer upper. Purchase with a Fanne Mae HomeStyle - put only 5% down and get all the money to purchase and all the money to renovate and to create equity. Like you I did two house hacks to start, but they were both renovations with 203k loans. So I just parlayed the equity and added cash flow from the value add into my next flips and holds. Right now Im renovating my "forever home" that I also bought with a Fannie Mae homestyle. We picked the property up for $615,000, and wrapped about $200,000 into the mortgage (in NY) ARV is around 1.2MM right now. Use the banks money to purchase AND renovate. And the low down payment makes the ROI huge if you focus on only buying fixer uppers or value adds. I also urge you to look off market. We found our forever home in the neighborhood we wanted by driving the entire neighborhood, adding the properties using DealMachine, and then sent them all handwritten greeting card letters stating that we're a new family looking to move into the neighborhood and if they had any interest in selling to please call us. That allowed us to get the property at an even deeper discount in a really competitive area of NY.

Jonathan Klemm · Answer

What's up @Andrew Katz!  My first question is why don't think you have enough experience to partner with somone?

It sounds to me like you are currently making offers, but they just are closing...in my opinion that's all you need to keep doing.  If you continue to write offers (10-20) and NOTHING is still landing, you may want to go back and look at your underwriting or, better yet, have a more experienced Chicago investor take a look at it.

Where and what type of properties are you making offers on?

If I HAD to pick one of your 3 options, I'd probably go with option 3 because it's likely the one that you can achieve the quickest... especially if you aren't concerned with cash flow.  I'd look at doing an FHA 203k or a homestyle renovation loan to add some instant equity on your next purchase!

Eudith Vacio · Answer

Hey Andrew👋🏽, it sounds like you're leaning into Option 3 - buy another house hack, and based on your situation, that seems to be the best option for you until you can build up enough equity to buy a deal cash - also consider that if a property is distressed, you can also do a hard money loan and they will give you the money to rehab the property, too. Something to consider for your future endeavors! best of luck 😃

Melissa Justice · Answer

Hey @Andrew Katz - How do you feel about Turnkey rental investment props in the South Bend, Indiana area - about 1.5 hours from Chicago, close to Notre Dame U, workmanship is beautiful and about 4% rental appreciation annually and purchase price under $200k. Private message me and I can send some along your way.

Wishing you much success!

Melissa Johnsen, Investment Strategist

Rent to Retirement

How do I Scale from Here

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