What should I do with my 70k cash?

Question

Hi!

I'm new to this process so please excuse me if I sound ignorant on some parts. These are rough estimates, but thought it'll be a good idea to get some opinions on it.

I'm planning to house hack with 3.5% down using an FHA loan on a duplex that markets at around 700k in LA/OC area. After the closing cost, this home will probably cost me around 35k to purchase.

I'll have 35k left to do another investment. I'm not sure if I should buy another home or I should add the 40k to the duplex down payment.

But, can I even take out another loan to buy an investment home in LA/OC area with the 700k loan that I'll already have from the FHA loan? I'm worried I won't be able to take out a loan amount that's big enough to purchase another home in LA/OC if I already have a 700k loan...

I know that the home prices in LA/OC are outrageous, but I've heard numerous times that I should invest in areas where I live close by. Even if I'll live in this duplex, I plan on only living in it for a year. Then moving out to another home in LA/OC using an FHA loan.

This is my grand plan... let me know what you guys think! Thank you!

Chris Winslow · Answer

@Jane Kim Congrats on saving 70k, that's a great start! It'll be tough to get into a pure investment in your area for 35k but here are a few options:

- partner on the second deal

- if the numbers make sense and you could get more cashflow then you could look at a higher price point but my guess is this will be difficult to find

- Buy your first property as planned, and save the 35k as reserves and/or just keep it for the next down payment on another FHA after a year

- find a place that needs some work where you can use that money to fix up and force appreciation to the property

Personally, I would look at those last 2 options where you have the cash on hand ready to deploy for the next down payment or rehab costs if needed. I wouldn't add it to the down payment unless it is necessary for cashflow, because the tenants will pay down the mortgage for you.

Charles Renn · Answer

Hi @Jane Kim,

Welcome to Bigger Pockets! You have the right idea to get your investment portfolio off the ground. There are a number of questions I have for you but first, have you already been qualified for an FHA loan? Technically you can only have one FHA loan at a time, and you must live there for at least one year. Other thoughts are in reference to your expectation. You are correct that prices are high, it's also good to know that 2-4 unit properties are extremely popular at the moment. There are deals out there that roughly fit your price point, but I'd love to talk with you more to dig deeper. A better expectation is to find a 2 unit property, live in it a few years, then refinance and buy your next property here in SoCal. Of course, there are a ton of other options like out of state investing.

Hope this helps!

Theresa Harris · Answer

How much will the banks lend you?  To buy a home for yourself, and you also rent out, you can do a FHA loan.  But once you bought that home, do you have enough to buy a second one?  You won't be able to do a FHA loan for a second home at the same time that is a rental.  For a rental, you need to put 20% down.

If the banks will lend you $1.4M, then you could buy a place this year, wait at least a year and then buy another one for you to move into and repeat, but the banks will ask why you are moving.  So if you are moving to another place in the same area, you may have to answer questions.

I'd buy the first place, see how it goes and if it goes well, buy another down the road in a year or two.

Account Closed · Answer

I would lend your money right now, considering we are at the top of the market, and there may be 20% more upside, but there is unequivocally 80% downside. whereas if we were at the bottom of a market its the inverse.

Lane Kawaoka · Answer

@Jane Kim

Thinking about a low down payment FHA loan for a pricey place in LA? Here’s the lowdown:

Pros:

• Low Down Payment: You only need about 3.5% down. Super helpful if you don’t have a ton saved up.
• Easier Approval: FHA loans are more forgiving on credit scores and debt-to-income ratios.
• Gift Money Allowed: You can use gift money for your down payment, which can be a big help.

Cons:

• Mortgage Insurance: You’ll have to pay for mortgage insurance upfront and monthly. This can add up.
• Property Standards: The house has to meet certain standards, which might limit your choices in a competitive market like LA.
• Loan Limits: There’s a cap on how much you can borrow with an FHA loan, which might not cover the higher-priced homes in LA.

My Take:

If you’re set on buying now and can handle the extra costs, FHA could work. But, remember the added insurance costs and potential property restrictions. Make sure you’re comfortable with all the terms before diving in.

Eliott Elias · Answer

Put a down payment for a HML on a flip property

Jane Kim · Answer

Hmm that's true. I probably would have to do a more accurate estimate. Thank you for the heads up!

Jane Kim · Answer

Oh! That's quite the smart move. I'd have to do some research on this! Thank you for your advice!

Erik Estrada · Answer

If you are using a conventional loan on the second home purchase they will consider the mortgage on the FHA loan, so you will run into issues qualifying with your DTI, unless you have enough income to support both mortgages. Also if you plan on only living in it in a year and then renting it out, you will most definitely need to refinance that FHA into a conventional loan or else you will be doing mortgage fraud.

If you are looking for an investment property loan that does not consider DTI, you will need at least 20-25% down.

What should I do with my 70k cash?

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