Newbie from Dallas, TX - buy a duplex or a fourplex?

[Andrey Grebenetsky]

Wanted to post this to introduce myself and run my logic past people who have more experience than me.

Feel like I don't know what I don't know yet so it would be good to see holes poked in my logic here:

Hi everyone! I'm a newbie real estate investor and have been living in the far north Dallas area (Carrollton) for the past 3 years. 4 years ago, my wife (then girlfriend) and I moved to Dallas for work and 3 years ago, we bought a new condo with 5% down as first time home buyers. We didn't know anything or really consider anything about it from an investing perspective. We just knew it was new, and a condo, so we wanted minimal headache and upkeep at the time. Monthly payment including HOA is around $1550.

Flash forward to 2018 and we are very grateful to have discovered biggerpockets and have really jumped into learning about real estate investing and all the possible strategies available to us.  Really excited to learn and absorb as much as possible here as well as connect with like minded people.  I'm really grateful we have discovered this community in our 20s because it opened our eyes to all the creative ways to both gain wealth as well as passive income in real estate.

We came to the conclusion that a great first move for us as real estate investors would be to house hack. Luckily, our condo has appreciated about 25% in these 3 years. Also, we routinely overpaid on the principal because we weren't thinking of doing anything else with our money at the time, and before we decided to house hack, we made a sizable principal payment in order to get a larger HELOC to use for investing purposes. We changed our minds and decided to go for the house hack first and to sell our place since the equity would be better used elsewhere and plus since we could only get an 80% LTV on a HELOC, we'd rather pull out 100% of our equity in the condo towards buying a place to live in.

The intended goals for the house hack:

- minimize our monthly payment out of pocket so that we are effectively reducing our own living expenses as compared to living in our condo now.   Rather than focusing on positive cash flow off the bat, we want to first minimize our monthly expense.  If we move out of the place we house hack, it will cash flow.  The low monthly payment also protects us in case of hardship.  I figure we should cover ourselves in the worst case scenario that if the sky falls, at least our place is nearly free to live in.    

- gain equity through loan paydown and hopefully appreciation and be able to use that equity later to help with future purchases/rehabs whether we want to flip or to BRRRR and whether we want to focus on long term renters or airbnb, the more equity we gain on the primary residence, the more resources we will have to use through HELOCs or home equity loans.

- continue saving up as much as possible through our regular incomes

Now, since we are going with conventional financing and looking for homes to live in,  the two best opportunities we found are new duplexes in Buda, TX (through a company called Duplexes of Texas) and new fourplexes on the northeastern tip of San Antonio around a town called Live Oak (through Clark Realty).

Wholesalers would be out since we're using conventional financing.

For our primary residence we also continue to lean towards new constructions with a builder's warranty (this is an emotional aspect of the purchase, but we have not been able to get personally interested in any older duplexes/4plexes that are out there). Also based on what I'm finding on MLS, the new constructions in desirable areas are competitive on price and return with older properties needing upgrades if we're talking about areas we'd want to live in. It seems hard from both an investors perspective or a primary residence perspective to consider an older property with older appliances, HVAC, roof and needing cosmetic upgrades to be competitive with a brand new one of similar size when the prices and rents aren't that different.

Considering we live in the Dallas area and are considering a move to Austin and San Antonio, we would be making a bet on appreciation and not expecting to hit the 2% rule for cash flow or anything like that.  But by minimizing the monthly payment, we would be making it safer for us in the case of hardship and free up more money in the future.  

That takes us to the two options - a duplex for $370k or a 4plex for $565k.  Both would tie up a lot of money via a 25% down payment, but the fourplex would tie up a good amount more ($92k vs $141k).  

We would expect to gain equity faster through loan paydown and appreciation in the fourplex because it is more valuable to begin with and a larger loan.

After accounting for PITI, HOA, vacency, capex, property management, utilities, and maintenance, the 4plex would cost roughly $576 per month and the duplex would cost $1076 a month out of pocket in the first year (not accounting for yearly rent increases and expense increases). If we were to hypothetically rent out all the units on day 1, the 4plex would get about 3.2% cash on cash and the duplex would only get 1% cash on cash. But since its a turnkey property and if we're betting on appreciation and living there, the low potential cash on cash return seems OK.

So both options would tie up a lot of money but we're OK with that because of our savings rate, lowering our monthly expense, and a future HELOC to use.

The 4plex would be perhaps the largest and most valuable property we could get other people to pay for in effect.

We are leaning towards the 4plex, but also considering the extra cash it would tie up and if that cash put elsewhere could more than make up for the higher monthly payment , lower equity accumulation, lower tax savings of the duplex.  The duplex would be a little bit nicer to live in but we are willing to overlook that for a better investment in the 4plex.  

Also has anyone worked with either Duplexes of Texas or Clark Realty?  What was your experience with them?  

Please feel free to poke holes in my logic.  I'm sure there's quite a bit I'm missing here being a newbie at this.  

Thanks so much!  Really appreciate being able to connect and learn here.