My first home/investment property? How much should I spend?

Question

I am very new to this so please forgive my ignorance.

I would like to buy a duplex with an FHA and rent out the other rooms. This would be my first home purchase and first time getting into investing.

I live in DFW so everything here is sky high right now. I think I could still make it work but I need some advice. Is there a formula for how much you should spend on the house vs how much you should be able to reasonably charge for rent? I don't want to buy the house for "X" amount and then not be able to charge enough to break even or, best case, have some passive income.

I'll continue to listen to the podcast and read the forums but if anyone has any advice or suggestions, I would greatly appreciate it!

Jared Prevost · Answer

Hi Tyler,

I can tell you when I first started thinking about buying a house, I got way too focused on doing advanced underwriting on potential deals. Looking back, I realize that was unnecessary. Here is my step-by-step advice for you.

1) Get your income as high as possible with your W2 and pay off any 'bad' debt (unnecessary credit card, auto, personal loans). The goal is to increase your monthly income by as much as possible and decrease your monthly debt payments by as much as possible. This will allow you to have a stronger debt/income ratio and allow you to get lending on a more expensive property (read better area and better long-term appreciation)

2) Speaking of prequalification, find the best mortgage broker in town. If you have a good investor-friendly agent, they will know who this company is. This is critical because a seller's agent is much more likely to accept an offer from the #1 mortgage broker as they will be able to find you, the buyer, the best rates and the lenders most likely to close

3) For FHA you need to buy a place that's in good shape - even flaky exterior paint can cause lenders to back out. So, if you want the best deal, find a place with all major capital expenditures (roof, AC, furnace, siding, foundation) taken care of, but could use new flooring, interior paint, cabinets, and bathroom finishes. Essentially a move-in-ready place that has room for cosmetic upgrades. Use this model for your 'crystal clear criteria'. I would also highly recommend going after a small multifamily as you can get more rent for your lending capacity as previous rental income on the property can improve your debt/income ratio.

4) When you start looking at properties, use simple rules of thumb to see if it makes sense. Your agent should be able to quickly tell you if the deal makes sense on a cash-flow standpoint. From then, focus on the 'art' of real estate. Is the property in a neighborhood that's getting better? Is it a floorplan you'd like to live in? Are there any emotional aspects of the home that are highly appealing such as beautiful windows or beautiful old hardwood floors? These features will get people excited to rent and will make you happy to live in the home yourself. It's not all about the hard numbers, you need to get a property people will love to live in.

5) Set alerts on Zillow or Redfin for properties that fit your criteria and be prepared to write a lot of offers and look at houses as soon as they get listed.

That's it in a nutshell! I had a really good agent teach me all of these things, so let that be your focus. Find an excellent agent and get your financials in line and you'll get your first place in good time.

Saban Becirovic · Answer

Tyler,

This is truly something that depends on your goals. If I understand your post, you would like to live in the house while renting out the remaining bedrooms. If that is the case, I wouldn't focus on producing positive cash flow as much as I would focus on lowering your living expenses. I'm in the Tampa Bay area of Florida, so I can't give you exact numbers that would work for DFW. But take this for example - If you were to purchase or rent a house for yourself you would spend $1,200 a month. If you purchase a 4 bedroom duplex and have a mortgage of $2,300 per month, can you rent out each room for $700 per month? If you can, you will have $2,100 of your $2,300 paid for. Essentially, you are only paying $200 to live there while your roommates are paying $700. Also, you would be paying $1,000 less than if you were renting on your own for $1,200. While you aren't producing any cash flow, you are living there for relatively cheap.

Realistically, there is no formula that can tell you what you should do because house hacking truly depends on your comfort level and what you are willing to endure to lower your living expenses or produce cash flow. It's all about what is worth it for you. Also, think long term. Your roommates will literally be paying this property off for you while it appreciates!! In the future you can move out, rent your bedroom, and then you can focus on producing positive cash flow.

There was a gentlemen on episode 560 on the Podcast a few months ago - Sam Wegert. He is all about purchasing houses and utilizing them as co-living spaces where people rent out rooms and have some type of common area. He doesn't necessarily live in them, but he does have some great ideas for investors who are looking to rent out bedrooms. I would highly recommend you listen to this if you haven't already.

Finally, try not to share with the other people that you are the owner of the property unless you have to!

Good luck!!

Chris Seveney · Answer

Welcome to BP. My recommendation is to continue to read forum posts and find some books on underwriting your deals. Every deal is very different and the first thing to consider is how much house can you afford? That is a starting point and should be the MAX, then determine what you are comfortable spending. This will give you a price range of where to be, and you can start looking at what types of income those properties could generate. Be patient and make sure you understand all the risks, real estate is not as easy as some make it sound

Jaron Walling · Answer

@Tyler Immeker Use the magnifying glass in the upper corner and search for "running numbers", "excel spreadsheets", and "underwriting deals". It's imperative to understand the numbers behind an investment property. Creating a timeline and trying to follow a strategy is key. You can't reinvent the wheel. Every strategy, hack, and remodel has been done by someone else. Financial creativity = risk. FHA loans are not that great. Screen agents by asking how many duplexes do they own. If they don't rental experience what value do they bring?...

Aim for the cheap/ugly houses with bad roofs in the C/C+/B class neighborhoods and hit the ground the running. If you can add some value (equity), collect rent, and live for as cheap as possible for a few years you'll be ahead.

Lucia Rushton · Answer

@Tyler Immeker first get your financing in order, select your lender get pre-qualified ( the letter lasts for 4 months so be strategic on your timing ) and pick your investor friendly Realtor. This is a team sport. Best wishes.

Michael Haynes · Answer

Hello Tyler Immeker, you should watch the Reventure Consulting youtube video, Home Buyers Disappear in Dallas, Phoenix, Atlanta and others. Nick actually has youtube video showing which neighborhood in the DFW area are safe and profitable bets.

Michael Sassone · Answer

First I'd make sure your credit is in tact. What's your debt to income ratio?

If you're looking for a multi family FHA loan (or even conventional) you're going to need to make sure your odds of approval are good.

If you have a 775+ FICO credit score and low debt to income ratio (total monthly expenses divided by monthly income  = <20%) I'd say you have a good shot. They are also going to want to see money in the bank. Typically if you have great credit and low debt to income and qualify for an FHA mortgage you can expect to be able to put 3.5% down

You can contact a mortgage lender and get a pre-qualification (DIFFERENT THAN A PRE APPROVAL). Typically pre-quals will go over what I mentioned above and maybe a little more without doing any hard checks on your credit versus a pre-approval where they do a hard credit check to determine how much you can afford.  Which leads to the next step.

Figuring out how much you can afford is a balancing act of how much risk you're willing to take, the condition of the property, how much do you need to put into the property, how much can you put down, and some other variables such as what's the average rent in your area versus the expected mortgage payment?

The list continues. There is a plethora of info on this forum about this topic and can be incredibly overwhelming via information overload. The best thing I think you can do is start by writing down your goals. Organize your current finances. Figure out your current credit situation and your debt to income ratio. From there start looking at some properties and play with some mortgage calculators to get an idea of what your monthly payment would be. This would give you a VERY ROUGH estimate of what to expect.

If you want some help feel free to message me and I can try to give you some guidance.

Logan Webb · Answer

These are great comments on this thread! I liked the one saying how house hacking is made profitable by what you can put up with basically. Sure, maybe there is a magic deal out there where you will cash flow and have your own space. However finding that deal right now is tough.

I got into real estate myself with this method and actually ended up opting for a single family home where I rented out the bedrooms and Airbnb’d the basement as it had its own entrance. Many creative ways to make things work, just need the insight to see it and or an agent who can help see it.

Eliott Elias · Answer

Don't spend your life savings. Spend enough that you're comfortable losing. Real estate is one of the safest investments one can make, don't over think it

My first home/investment property? How much should I spend?

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