What should I do with heavy mortgage for my primary residence?

Question

As many people in the SF Bay area, I am a software engineer. Bought a house last year so each month I have about 4k that needs to go into mortgage and tax. I would like to do some real estate investment but with not much salary left each month what I can leverage is only about 100k cash in hand. So here is my question:

1. How much mortgage can I get with 100k cash but very limited monthly flow? Does it change things if I can present a sound plan for renting the property out?

2. If I am investing in cash, would it be a good idea to start buying a SFR in the Midwest?

3. If I am able to get mortgage, should I try to find opportunities in Sacramento-ish area that I could get access myself or it is okay for me to by remote property and leave it to property management? Running the number both makes sense but maybe there are some pros/cons I have not thought of.

Here are several different ways that I can think of:

1. Buy 1 SFR in the Midwest with cash, leave it to property management company and using that property to get another loan. This can continue as long as I can always get property there under 100k.

2. Try to get another mortgage and make it 400k in total. Then invest in a condo in East Bay. The money probably won't look too good and with my primary resident in San Jose the risk is high.

3. Try to get another mortgage and make it 400k in total. Then invest in a duplex somewhere. Leave it to property management for a while until I am tired of the Bay area and move there.

Could someone please help me with some answers and suggestions?

Chris Mason · Answer

Hi @Tian Zheng,

0) Purchase cashflow positive real estate, and your borrowing power is limited only by your down payment funds.

Mike H. · Answer

I think you're looking at extremes on both ends - either california where the prices are higher but the appreciation play is greater OR midwest where prices are lower and you're only going for cash flow.

To me, I would suggest that you leverage your 100k to buy as many houses as possible. Find an area where the houses will cash flow reasonably and appreciate reasonably and where you can get some discounts.

You don't want to pay 100% of retail.  That 100k won't go far.

Texas is a great area for growth and landlord laws. Very competitive from what people on here say but so anywhere else. You may not be able to get stuff for 70 cents on the dollar but maybe you can find stuff at 80 cents.

Buy, rehab, rent. Then do cash out refi to 75% and pull as much of your cash back out of the deal to do the next one. I find that houses with ARV's of 125k to 175k seem to work the best. Stay with good schools and decent areas.

Ideally you could spread that 100k out enough so you could get 7 or 8 houses that way. I'd rather have 7 or 8 houses cash flowing 100 to 150/mo net profit and worth 140k apiece (total of around 1 million in ARV) then buy one house somewhere else.....

Chris Mason · Answer

Hi Fernando,

When folks say that 75% of gross rents is added to income, that's owner occupied math. Probably ~80% of the time, people (including LOs) apply this more conservative calculation incorrectly to non-owner occupied properties.

For non-owner occupied math, done correctly, that 75% of gross rents can be used to fully offset the PITI of the property in question. If it's cashflow positive, then there is no hit to your DTI at all, and the positive cashflow is added to income. If it offsets all but $150 of the $3000 PITI, then that's counted as a $150/mo liability, not a $3000 liability. <--- this latter one is what we more commonly see here in the Bay Area, but surely you can see how a $150/mo "hit" is much easier for your day-job income to absorb (about $333/mo of 'extra' day-job income will do it) than $3000/mo (about $7k/mo of 'extra' day-job income will do it).

Most REI say that the Fannie math, as generous as it is, is still too conservative relative to the numbers they actually see and/or expect to see, but $150/mo v $3000/mo still moves the needle enough to do the trick almost always.

Armand Farr · Answer

On your 3 strategies:

1. You could buy a property in the Midwest - being afar and using a PM would hit your returns a bit. Not a bad thought, be sure to pick the right market that's on the upswing and find a great agent to be your ground mane.

2. I wouldn't do the East Bay condo. Not in this market, will likely suck cash (or be in an awful area).

3. Same as #1, but with a duplex instead of an SFR.

But my take:

I have a lot of engineering friends in a similar position. We decided to pool out funds together and co-invest in Bay Area multifamilies. Have you considered of this?

Feel free to reach out - happy to share more about what we're doing and how.

Sam Shueh · Answer

Suggest you just watch the market and economy this is very much the peak price but some regions may be slower than others.  If you do not have 6-9 months of reserve you should not venture too far out.

Alpesh Parmar · Answer

You can also get HELOC to pay down your mortgage faster. Reach out to me and I will explain you how. I am using the same strategy while acquiring properties in Mid-west.

Jay Hinrichs · Answer

you may want to look at the debt side.. less risk and consistant returns as you save more money buy another note.. keep doing it for 20 to 30 years and you will be where you want to be.

that's another option.. takes the tenant risk out of the equation.. also don't have to travel to the markets that takes up 1/12 or more of your annual cash flow.. and if done correctly you won't have that bad turn over or extended vacancy.

What should I do with heavy mortgage for my primary residence?

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