Originally posted by @Michael Hyun:
@Johnny Hoang awesome, thanks for those examples. Your current situation is EXACTLY the situation that I'm looking for now. Its great to hear that my plan is being used by other people also. I am most likely going to take full advantage of owner occupied loans, while I still can. Thats awesome that you can cashflow on a bay area home on a 5% down payment! A couple of questions though:
1. The whole play here is the appreciation play, right? With that in mind, if I lived in the property for 2 years, and then moved to another home and live there for 3 years, then won't I have to sell the first home in order to not have to pay taxes on the cap gains (last 2 out of the past 5 years will expire soon)? What if the home prices are still going up? Why shouldn't I keep the first home still?
2. How much did your garage conversion cost?
3. Ideally, I wouldnt want to pay the PMI that comes with a FHA type loan. I can put down around 100k, which is around 10%. Is there a way to structure the payment so I won't have to pay the PMI?
4. Is it hard finding good quality tenants? Have you ever considered Airbnb?
5. What is your long term play? Do you just keep buying properties until you hit the FHA Limit? Then what? What do you do with all your Bay Area properties? When do you sell them?
6. How do you get a loan for the second home? After I buy one home, won't by DTI ratio be terrible? Who would give me a loan then?
@Michael Hyun
1. For my bay area portfolio, I plan to hold for the longer term( 5-7 years at least ). But I don't bank on the appreciation in the short term for them. I am going to just pull out my equity in the next years once I have a strong enough equity position then reposition my profits from there. But yes, living in the property for 2+ years will allow us to avoid the capital gains so that's definitely something I'd keep in mind. I come at it from more of an angle of: If I purchase the home for 950K with a 5% down, my cash out lay is roughly 60K after all said and done. Through equity acquired from loan pay down( about 13-15K a year and goes up every year as payment gets applied to principal more), and the ROI in reducing my living expenses + the cash flow I make from when I rent out all the bedrooms including the one I live in when I move out, I should have all my money back in about 4-5 year span. But as you know, bay area real estate has seen some steady climbs in the past year, so what if my property have appreciates to 1m+ in the time I've held it and gained the cash flow and equity pay down, while reducing my living expenses, then I can just reposition it and repeat the process over again. I typically try to reposition the equity in my bay area properties into smaller sub markets of like Concord, Oakland, etc.
2. I've done a few and they all range from 60K-120K depending on what you're doing. IE: creating 1 bed 1 bath vs 2 bed 1 baths, how many kitchenettes, tier 1 or tier 2 finishes etc. The standard garage conversion about 400 sq ft with tier 1 finishes I can get done for around $150 a sq ft or 60K.
3. Sometimes you can do a LPMI( lender placed mortgage insurance) where they basically give you a higher interest rate but wipe out the PMI payment or lower it substantially. At that point, if I am offsetting my costs by renting out the bedrooms, that piece doesn't matter as much to me. As long as I'm offsetting most of the cost.
4. I did airbnb for about a year when I first started investing. But I switched to long term tenants for more stability. And now that we have covid going on, I know the short term rental space took a big hit so I would not bank on it. Although, I did it few years ago for some time, my concern before was the municipalities that were being created from city to city that restricts airbnb'ers. That was enough for me to want to switch to long term, and now we have a new variable of covid into it, I personally would not like to do airbnb. Unless you have a few rooms rented out long term and maybe a garage conversion that you do airbnb, but not the whole unit as short term rentals.
-Most my tenants are undergrads or newly grads. And it's not too difficult to find tenants if you price your unit correct and are in a good location next to public transportation etc. I give some of my undergrads perks like financing laptops or school supplies then charging them a little extra in rent a month to keep them in my units longer and make my units more attractive. I typically use the simple platforms like zillow, trulia, criagslist, facebook marketplace( preferred because I can vet tenants easier with FB).
5. Long term play I plan to hold them 5-7 years. Really, just so I can to realize the gains once the market is strong and my equity position is in a good spot. I'll reposition my equity to smaller sub markets assuming the numbers work out but I plan to hold long term essentially. I've done a couple flips in San Jose, but then that was only reposition to buy and hold, don't really plan to do as many short term plays.
6. Not necessarily, depends on your financial position and if you have any debt right now. When I move out to purchase another one, the lender typically requires a lease agreement and a letter as to why I'm moving out. They look at the lease agreement and/or market rents to see if it will cover the mortgage and at that point they will assess if it is a liability. But if you can get it rented out before hand, you should be good to get more owner occupied loans. The reasons your moving and the numbers just have to make sense to underwriting.
