All Forum Posts by: Jed Haslam-Walker

@Nina Granberry Hi Nina,

Congratulations! Good job on the first purchase :)

If you bought your first purchase as an owner occupier - am assuming you did from your description - you would need to check your lender's residency requirements that will be what limits you - normally it's a year.

If the product that you are using for your first purchase is an investment loan you could apply for an owner occupier FHA immediately and as long as you could qualify based on your own income you would have no impediments theoretically. You would however need to be able to carry the mortgage for the first and the second property on your own income because once you own your first rental property you have to prove the rent as income after a year on your tax return before they will consider it.

The fact that you are buying with an owner occupier mortgage means you will have to fulfill your individual lender's requirements for you to be resident in your new purchase for the length they specify - if you do not it is considered occupancy fraud.

So again it's the 2 limiters...residency requirement and income verification..

If you buy a house-hack you will need to use your own income to verify it even if you plan to rent it because it is an owner occupied product.

If you buy with an investment loan product you can use the income predicted on the property but only 75% of the income will be allowed as income verification so for example:

You are buying your second investment property and the mortgage payment is $2000 per month. You house-hacked the first one and your cashflow from it is $500.

The income from the 2nd property is $2000 per month. they will use 75% of your income prediction so $1500 towards the verification of the mortgage amount - your salary or other income would need to make up the other $500.

Let's take that example a bit further..you want to use your income from your first house-hack as the extra $500 make-up amount - they will only allow you to use that income from your first house-hack if they can see it on your tax return - sometimes as @Corby Goade said for 2 years but some lenders will accept 1 year in my experience.

In addition they will require about a year's worth of experience as a property lessor or full time work in the Real Estate industry as experience as part of their underwriting protocol.

Hey Zack,

Great question - it's all a bit confusing to start with but in a nutshell:

FHA Loans are the ones that you have to live in for a year - they are provided by FHA Approved lenders and backed by the Federal Housing Administration insurance . They are a product designed (nowadays anyway) to help lower income Americans, who have a lower down-payment access the housing market and support the economy. Their down payment amounts are as low as 3.5% but they require mortgage insurance to be paid for the life of the mortgage if you provide less than 10% down. They have specific guidelines like you can't use them for investment properties - at least not at the outset - it is perfectly legal to rent a property out that you originally bought with an FHA loan but only after you have been resident for a year and they check that you are fulfilling the residency stipulation. You can then go on to secure another FHA loan whilst still owning a property with an existing owner occupant FHA loan but there has to be a specific reason to request a new FHA product - like you have had to move for your job or you have an extra child and need another bedroom etc.

A conventional loan, a product provided by a general mortgage market lender like a bank or a credit union etc. will provide you with a mortgage which, once set up can then be sold to Fannie Mae or Freddie Mac who pool them together and sell them as Mortgage Backed Securities ( MBS) and other products like CDOs but don't mention CDOs on this site - it gives us all the heebie-jeebies because CDOs contributed to the crash in 2007/8.

These conventional loans can be offered with down payments as low as 3% but they require mortgage insurance (PMI) to be paid with the mortgage until you reach 20% equity in your property. You can use these loans as investment loans but if you apply for the loan as an investment the lender will typically require that you pay 20% or more often 25% if you're new to investing.

People get round this by house-hacking - that is living in the house first and renting out portions of the house. Each product will have different residency requirement and it may not be a full year so that is what you would need to check before structuring a strategy.

You can have up to 10 mortgage products before lenders start getting uncomfortable so in principle if you house-hack your way through your first 10 triplexes you could get all of them on low rate, low down payment mortgages.

Hope that helps.

Hey Abraham,

Firstly Congratulations and good job!! It's awesome that you have managed to get so far first time!

To try to help with your question - here are some points I would suggest:

• Transition time - the transition from previous owner to new owner occurs at closing not before so if you were my client ( I'm a Realtor) I would advise that you do your best to ensure that any disruption caused to the tenants during the transaction period be kept to a minimum - your Realtor can assist with this - request that contractors that need to work on the transaction - inspectors, termite companies, roofers etc. visit at the same time. 
• I always try to get my clients' prospective tenants some kind of gift if they are inconvenienced by the transaction like I'll get a Starbucks Gift card or a couple of movie tickets if they've got children for them to take their children to the movies while the work/inspection is going on. This can start the relationship well. I often find when I show kindness and respect ( as I would to anyone!)to the tenants they respond incredibly warmly and begin to share information about their experience of renting the property that they either find positive or negative- they are normally feeling very vulnerable whilst their home is being examined and scrutinised so they need someone to attach to during that process - they will tell me about the area from a renter's perspective etc. it is an incredibly helpful thing to do for everyone. For example, I recently had a tenant share that there was a gap under her door where snakes could get through -there was one she had seen in the garden so we requested the seller fix this prior to closing - now the tenant is delighted and feels cared about and positive about the new owners.

• When you become the new owner it might be useful to think about how distant you hope to be from the tenants - are you going to manage the property yourselves or have a management company deal with tenant relationships -if you aim to deal directly as it sounds like you are - establishing a positive relationship at the outset is worth it's weight in gold in my experience. If you have decided how you are going to deal with enquiries from them - like will you attend a blocked toilet or call a plumber straight away? Will you collect rent personally or have them send it? Once you have decided how you want to run things - it might be useful to contact them and either go and meet them in person and discuss the new management style or if you would rather keep your distance then write to them - perhaps with a welcome gift/token to say I'm glad we will be associated and I look forward to a positive/friendly relationship. Leading with a warm open stance, backed by a clear direction that you have pre-agreed will help you to feel in charge and positive if they ask questions or express anxiety as they probably will. They will be worried that they will be dislodged and could be feeling defensive and ready for a fight if they think you are going to come in and kick them out.

In terms of the lease - normally you would be deciding about whether to continue the current tenants before offering as this will probably be specified in the contract you have signed - it is in FL where I operate so I would check to see if you are already committed to the tenants in the standard contract - there's a clause about transferring current tenant leases normally.

Normally the lease they have signed will transfer directly to you as the new owner - you need to check with your Realtor about your state's law to know for sure what your rights are but in FL you can if you choose transfer leases at closing - or specify that you wish to alter the lease upon title transfer so that may be something you need to resolve swiftly...

I hope this helps in some way and again really well done!

"It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time."

                                                                                                                                 Churchill 1945

@Janani Kalpathi Hi Janani, 

I am not sure if you researching US Cities or European ones but your agent might be able to provide you with a neighbourhood report. 

I give all my investors a detailed report on population demographic, income levels, renter vs owner percentages, school ratings, local industry diversification, business sector employment levels/percentages, local employers, local utilities etc. If you have established a relationship with a Realtor who works with investors they will be able to help you a great deal with that kind of information.

@Brenda Otero You are awesome. Good for you!

@Calvin Lin Great message Calvin and you're absolutely right - you can't time markets you can make educated guesses but it's always a guess and incurs risk. By having a reasonable, risk-adjusted investment strategy that involves discipline and patience you can invest wisely in any market. Great to hear your story- good for you.

..I had to respond to this one..really great question: 3 key pieces of advice:

1. Cash-out refi at the end of the Hypersupply phase before the occupancy rates hit average levels so you need to know when recession markers are coming for your neighbourhood - watch the rental occupancy averages - once your neighbourhood occupancy rates hit the long-term average you know you're heading for a recessive period. Stash the cash for the bumpy ride ahead.

2. Keep your units as upgraded as possible during the Hypersupply phase so that in the recession your units will be amongst the most attractive in the market - this will protect your vacancy rates.

3. Keep your cashflow saved and keep your equity at healthy levels - have reserves ready and an exit strategy with key markers to trigger exit if necessary and remember recessions end.

Investing during recession is the same as investing during the other phases of the cycle - if your NPV is greater than zero you're making a profit :)

@Michael Gabin Hi Michael,

It sounds like you are getting ready to jump and that you have already done a good deal of legwork - people have already identified the key categories: Single Family Homes, Multi-Familys 1-4 for residential investments and 5+ for commercial, Retail property and commercial properties - and then there are the specialist areas like Hotels and Mobile Home Parks etc.

Some general guidelines are:

• Decide on your ultimate income requirement per month or per year - tax benefits and appreciation are often factored into these calculations but if you want somewhere to start that would be a good place.
• Once you've done that you can then start to work on the cash-flow per unit - a good rule of thumb is $200-$400+ for a SFR and $100-200+ for a unit in a multi-family ( that's Cash flow after expenses)
• If you plan to diversify within your Real Estate portfolio then you would be looking at a mixture of those cash-flows to make your required income
• That leads you to think about how you would like to manage the properties - do you want to engage management or manage yourself - this is another piece of the puzzle to decide so you can get started
• Once you've got a clearer idea of the overall shape then you would decide about the best way to organise the investments in terms of capital outlay...
  • Basically you would either;
    • Pay cash outright - NOT a great plan financially probably don't need to go into that!
    • BRRRR - this gives you maximum leverage and is great if you can find a good way to find deals below market, if you have a good agent to go after deals for you quickly and skilfully and if you have a good contractor to do the work etc. There are several ways to get this done but it is more labour intensive and the payoff is you get your equity without having to put the money in yourself
    • 20% down and rent straight away - this ties up your capital but it's quicker and simpler than rehabbing and you'll find deals more easily - you can still aim for good deals or you can turnkey but you won't be as restricted as you would if you need to BRRRR but the downside is you won't have as much protection against losses as you would if you had BRRRR'd the equity into the deal
    • Then you would drill down to think about the actual numbers you need within your time-frame to be able to achieve your income goals - for example I need 1-3 units a year @ $x per month cashflow for 5 years to get $X per month 
    • Given that I have $150K and I plan to (insert financing strategy)I would need to buy 3 units a year at $X purchase price.
    • Then you can decide on your three market areas. I always advise that you research 3 areas and get to know them - then your knowledge accumulates over time . there are plenty of areas to invest in you just need to choose your 3 and stick with it - at least until you have got your feet wet. 
    • The other route is to scale up to syndicating straight away - personally I always advise my clients against this route if they are a new investor - you need experience and market knowledge to do this well and the risks can be significant.
    • Other quick points are 
    • SFRs tend to have less turnover but can have higher vacancy costs, 
    • Multi-familys can be more management intensive
    • When you get going you can often need a minimum of 1-2 years landlord experience to get financing on investment mortgages
    • There are a raft of more issues but as an answer to your general question that would be the general shape of how to think about how to structure your beginning...
    • Hope that helps :)