All Forum Posts by: Josh Young

You can get $1800 in rent, so it will cash flow with 25% down, it's brand new and will have no cap ex for many years. This is in a growing market, so it will appreciate too.

@Shaheen Ahmed

Check out Phoenix and the surrounding area, our prices start around $300k for a single family house and taxes are usually between 0.3 - 0.5%, I just bought a house for $620k and the property taxes are under $2k per year. New builds that sell for $300k have property taxes of around $1500, but the insurance is usually less than $500 per year.

@Ashley Anderson

Typically a HELOC and HEL are second mortgages and they can be a good way to access capital to invest, but the problem with using them is the interest rate is typically even higher than the debt you can get on the new purchase, so they might not be a great idea unless you plan to aggressively pay them down when you use them.

Why don't you buy a new primary residence using a 5% down payment conventional loan and turn your current house into a rental? If you don't have the 5% down payment then you can do a HELOC on your current house to do it, but it will at least be easier to pay back compared to a 20% down payment on an investment property. If you buy a house that's a little nicer than you are in currently then it could make moving a lot easier.

Multi-family is tough right now because a lot of new supply has come online, so rents have been soft. Rental rates and vacancy rates on single family have been a lot more stable.

@Chander Sri

Austin (and surrounding area) is in a correction, but has good long term fundamentals, so keeping it as a rental could end up making you a lot of money, it just might take a few(5-7) years. From what you said it sounds like a short term rental could be a good move, and the tax benefits could be significant if you look into the short term rental tax loophole.  I personally like long term rentals, but it sounds like the numbers don't make sense and if you cant afford to or can't justify covering that much negative cash flow then another strategy is renting by the room, that works well if you have or can convert to at least 4 or 5 bedrooms. 

I know you are probably bummed about this and feel like you made a mistake, but if you can figure out how to hold this property and buy more properties and hold them then you will end up making significantly more money in the long run; you don't build a real estate portfolio by selling.

@Johnny McKeon 

Thank you for providing the details that make this easier to think about and answer. I don't think I would add extra cash into the deal to buy down the rate, if you have extra cash I would consider doing a 25% down payment, that will usually get you a better rate/terms. I do like the idea of using the seller concessions to buy down the rate though since you have a 3 year PPP you probably aren't going to refi within 3 years, so you will hit the break even and this will give you a hedge against the risk of rates not declining (they are expected to decline, but this seems like a "free" hedge). If you do plan to refi at or around the 3 year mark when the PPP expires I would also ask your lender about a temporary rate buy down instead of / or in conjunction with a permanent buy down. In either case I probably wouldn't add extra cash into a buy down, but using seller concessions could be a smart move.

@Jimmy Leaton depending on your situation you might want to leave the equity in the first house for now and just go buy another primary residence using a 5% down payment conventional loan. Get seller concessions to buy your rate down and pay your closing costs, so you can save your cash. In a few years when that first house gets to over 50% equity then you can think about doing a cash out refinance to buy a third or even a fourth by then. If you don't have the cash for a 5% down payment then doing a HELOC might make you over leveraged, but everyone's situation is unique, having access to it might help you to have access to more capital if you needed it in a pinch. Generally speaking HELOC rates are higher than a conventional loan on a primary residence though so I prefer to leverage the new purchase with 5% down payment conventional loan.

@Drago Stanimirovic thank you, and you are right I will probably do cost segregation studies at some point, but so far I have still been able to get to a loss on my taxes using the straight line 27.5 year depreciation schedules, I will probably do the cost segregation studies once I can't show a loss anymore, which will happen at some point as the rents increase and the amortization schedules shift to more principle and less interest.

@Raju Pothuraju we have moved into a nicer house each time, so moving isn't too bad. We know the area very well and only move a couple miles at the most, we actually just moved into a house in the same neighborhood as our first house. You are right 5% is very low, that's why we use this strategy (minimal cash out of pocket with the best available rate), you are also right that we have to pay PMI, but the PMI is minimal on a conventional loan if you have great credit, it's only about 0.2% of the loan amount per year, so I pay $72 per month on this one. The house I just bought last week with 5% down was $620k purchase and the PMI is $108 per month, so pretty minimal in the big scheme of things; I would't pay the extra $93k to save $108 per month, that's only a 1.4% premium.

@Albert Hasson no doubt any strategy you pick will have pros and cons, that's why most people never end up investing in real estate, they just focus on the negatives. Personally I don't mind moving into a nicer house every couple/few years, the house we just bought and moved into is super nice.

@Gregory Schwartz thank you, it's amazing the people I talk to who say they don't want to move. I like to ask them, "if someone gave you $40k to move would you? because that's basically what's happening with this strategy". That usually gets them thinking.

@Denis Ponder it's a great way to build a portfolio, even if you only do it a couple times it can be a powerful strategy. I like the idea of adding value as long as you don't spend too much cash and/or plan to do a cash out refi at some point to keep your cash working for you and getting a good return on equity; the biggest advantage with this strategy is the low down payment with the lowest available interest rate.

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $480,000
Cash invested: $24,000

Purchased using a 5% down conventional loan. I bought this home and lived in it with my family for a few years before moving and turning it into a rental. The cash flow is okay, it's not great, but the principal pay down on this loan is over $10k per year, and this is a great location, so the property value and rental rate will continue to appreciate over time.

What made you interested in investing in this type of deal?

I have used this strategy several times, I buy as a primary residence and keep it as a rental when I buy another house and move a few years later. This strategy only requires 5% down, so I save my cash for reserves and other investments and it gets me the lowest available interest rate. Living in the home with my family also ensures that it's in a great area and allows me to make small improvements while living there.

How did you find this deal and how did you negotiate it?

I found this deal on the MLS and paid market value, I even increased my offer to get a concession from the seller to reduce my cash out of pocket and buy my interest rate down. I have found that over time the location and the terms are the most important things, the price is also important, but the location and terms are more important.

How did you finance this deal?

5% down conventional loan with seller concessions to cover my closing costs and buy my rate down.

How did you add value to the deal?

I made a few small improvements to the landscaping, I bought a few new appliances, updated a few fixtures, added blinds to the windows, minor drywall repair/paint, and marketed the property as a 4th bedroom that would make great home office/den instead of a 3 bedroom plus office/den.

What was the outcome?

This is my 5th house in Gilbert and I plan to continue with this strategy until I get 10 houses.

Lessons learned? Challenges?

About a year or two ago I pivoted and started flipping and finding alternative strategies, but I have realized those cannot replace this strategy, they can be in addition to it, but I need to continue buying, moving, and keeping as a rental every couple of years because this really is the best strategy for building long term wealth.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I am an agent and property manager, so I represent myself and manage my own properties. I also love helping others, so please reach out if you have questions or if you want help.

@Kathy Creighton-Smith

You need to calculate your Return on Equity and then figure out if you can get a better return investing the money in something else.  Personally I would look at doing a cash out refinance to buy more property instead of selling, but a lot depends on your specific situation. Here is a link to a post I did that might help you. 

https://www.biggerpockets.com/forums/12/topics/1108744-how-t...

@Andrea Finkelstein

I'm not sure I would view your tenant charging for parking as sub-leasing, some businesses charge for parking, that's just running their business.  If it was me I would allow the tenant to handle the situation, but since you are asking the question, I would say an addendum is probably a good idea either direction you decide to go in, just so it's clearly spelled out to everyone.