Keep equity for lower mortgage payment on primary v. buy cash-flowing invesements?

Question

Zach Lemaster · Answer

@Jon Dawes

This is a great summary of your goals!  Thank you for sharing.

I think your idea of getting into a house hack is a great way to add to your portfolio with low down payment.  Of course, this is a personal decision as well to determine if that is the right living situation for your family.  That is exactly how I started building my portfolio is with a house hack on a duplex.  It was a huge advantage for me to start my investing career and get into the game!

To your question about the two different options, I think you could likely do both of your scenarios based on the capital amount you have.  I'm happy to personally connect with you to discuss this further if you'd like to provide a lot more context around my opinion.  It really depends on what your ultimate goals are in the short and long term.  Ultimately it sounds like you looking to start and scale a portfolio over a relatively short period of time.  If that is the case, then I highly recommend trying to stretch your capital across multiple deals vs putting more than the necessary amount into one deal just to cash flow more on that one deal.  Owning more REI over time will allow you to build a more diversified portfolio and provide multiple streams of income.  The more overall REI you own will allow appreciation across all homes to build equity faster than in say just one home.  I do think you can create a net positive cash flow owning multiple properties and allow you to expedite the goals mentioned.  Using leverage is such a powerful tool to scale your portfolio beyond what other investment options offer.  That is the beauty of REI!

We certainly appreciate your interest in Rent To Retirement!

Just to clarify on some things you are considering, we currently have some excellent incentives on new construction properties that may be interesting to explore as you continue your research on what the best options are for you based on your goals.

Those incentive options include:

-An immediate price reduction of up to 5% of the home price to allow for immediate equity.

-Rate buy down to as low as 3.99% to dramatically increase cash flow.

-5% down payment credit where RTR pays 5% of your down payment allowing you to keep more of your funds for other investments and increase overall ROI.

-loan options that allow for as low as 0% to 5% on select properties that will also allow you to scale quicker owning more REI with the same amount of real estate.

Again, I am happy to discuss your goals and any of these creative options in more detail if you'd like just let me know.

I hope this was helpful!  Reach out any time.

-To your success!

The RTR team!

Here are some other posts that may be interesting to read as well as you continue your exploration!

https://www.biggerpockets.com/users/ZacharyCole/references

https://www.biggerpockets.com/forums/92/topics/765347-rent-to-retirement-review

https://www.biggerpockets.com/forums/92/topics/1116050-a-huge-win-with-cori-from-rent-to-retirement

https://www.biggerpockets.com/forums/850/topics/895660-my-first-investment-property-an-out-of-state-deal

https://www.biggerpockets.com/forums/88/topics/1047543-big-profits-from-new-construction-sfr-build-in-cape-coral-fl

https://www.biggerpockets.com/forums/92/topics/983659-first-investment-property-with-rent-to-retirement?

https://www.biggerpockets.com/forums/92/topics/1162779-rent-to-retirement-academy-experience?highlight_post=6630770&page=1highlight_post=5677176&page=1#p5677176

https://www.biggerpockets.com/forums/12/topics/1122318-quality-turnkey-companies?highlight_post=6413855&page=1

https://www.biggerpockets.com/co/RentToRetirement

Jonathan Bock · Answer

@Jon Dawes

I personally prefer liquidity and flexibility and like you said so many variables which is why it's never clear-cut in personal finance.

Maureen McCann · Answer

Hi Jon,

I consulted with a good friend of mine who is a lender and also a real estate investor. Richard Advani with Guaranteed Rate is not only one of the best lenders and strategists I know, but he and his wife are also investors owning 22 units.

Check out what Richard had to say about your question...

A couple things to note for this scenario

• It will be tough to get “primary home” financing on a duplex if you already live in a single family home. Typically underwriters find it hard to believe that a person will downsize and actually move in to a duplex. That being said, its not impossible. If the client is truly going to occupy the unit and the duplex is say closer to his work or family and the move itself makes sense, he very well could use primary home financing at 5% down to purchase an owner occupied duplex.

Do we, instead, put as low a down payment as possible (owner occupied financing) and buy several cash flowing REIs to cover as much of the new higher mortgage as possible, using the chunk of equity from the sale of the SFR?The overall goal is to do the traditional 'stack' over the next 5 years (duplex this year, double the number doors each year for 5 years, a la Multifamily Millionaire).

Implementing the above strategy isn’t quite as simple as his understanding. He could possibly put a low down on a “primary home” duplex however each subsequent duplex would require 25% down if done in the near term (assuming he sold his primary home which is the best path to accomplish his goals in my opinion). In order to use “primary home” financing repeatedly, the new purchases would have to make sense and be upgrades from the existing duplex. I.E. He purchases a duplex primary home this year and in 1-1.5 years he purchases a nicer larger 2-4 unit, maybe in a more desirable area – that would make sense and generally get approved with primary home financing assuming of course he was going to occupy a unit.

The whole strategy he plans to employ requires a “move-up” each new purchase and he already has a SFH which causes a big hurdle in the “move-up” strategy so once again selling that would behoove him.

The plan he didn’t mention which is really the only plan that will work in the short term is:

Sell current primary home

Purchase owner occupied 2-4 unit with 5% down

Purchase additional; 2-4 units with 25% down with the remaining proceeds from sale of primary

I am happy to make an introduction to Richard if you would like to discuss further. Just DM me and I will make it happen.

Jon Dawes · Answer

Thank you for your response. I think I miscommunicated or the details got lost along the way. The duplex purchase was for house hacking and we would live in it as our primary, having sold our current home. I was not saying we would use 'primary home' financing on the subsequent purchases. The fundamentals of the question is whether to put down a large downpayment using a big chunk of equity to have a lower payment and purchase fewer cashflowing rentals or put down a low downpayment and buy more cashflowing rentals. That was the question.

Jonathan Bock · Answer

@Jon Dawes

Yes, trapped equity in a primary can at times be challenging and expensive to access when you need it.   Every situation is be a little nuanced and as always "it depends" and that's what makes it fun.

Keep equity for lower mortgage payment on primary v. buy cash-flowing invesements?

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