All Forum Posts by: Josh Young

Quote from @Mark Berge:

Hi all, my model tenant who pays on time and takes care of the house asked if he could possibly move out before the lease is up. He said he may buy a house or move in with his girlfriend. He's been there for a few years with his father who just passed away so he said now the house is too big for him.

The lease started on 8/1/2022 and ends on 7/31/2023. It is a good 3 bd/ 2 bath with new roof and new gas boiler and new electric water heater. He said he might want to move out 6/1/2023 to buy a house or move in with his girlfriend. I said ok, just make sure you don't move out in the winter when it will be hard for me to rent the house out. He said ok. The way the housing market is here in New Jersey, I know that I could probably raise the rent maybe 3-4% and easily get a good tenant in there. Any advice on this? This is my first and only rental property although I do rent out an extra bedroom in my house to room mates.

My advice would be to get the new end date in writing so you can start marketing the property before he moves out, this will reduce your vacancy, especially if major repairs are not needed. In my leases I put in an early termination clause, this makes it clear that the tenant can do this, but it requires a 60 day written notice and a 2 month penalty if they decide to terminate the lease early.  I have one tenant who is on her third year and she anticipated buying a house this year, so at the beginning of the term she asked if she could go month to month, I didn’t want to do that, so I offered to reduce the early termination penalty to a 1 month penalty but still required the 60 day written notice. She saw this as a win for her and if she terminates the lease early I have plenty of time to market the property and I make more than I would have otherwise, this extra income helps protect me against any seasonality risk too.

Investment Info:

Single-family residence buy & hold investment in Gilbert.

Purchase price: $218,000
Cash invested: $12,000

This is the 1st property that I bought, I bought it as my primary residence using a conventional 5% down loan. In 2020 it became my 1st rental property and it had gone up in value so much that the return on equity became too small, so in 2021 I did a cash out refi and pulled $130k out to buy another property.

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

This was the easiest way that I knew of to own real estate. The primary residence conventional 5% down loan requires a relatively small amount of money and is the best available rate.

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

I found it on the MLS they were asking $225k, it was in the market for 30 days so I offered $210k and asked for $5k closing credit they countered and we settled at $222.5k and $5k credit, but then it appraised for $218k, so we renegotiated and closed at $218k and $2.5k closing credit.

How did you finance this deal?

Primary residence conventional 5% down.

How did you add value to the deal?

Added French doors, updated faucet fixtures and a few other plumbing valves and updated some landscaping.

What was the outcome?

I lived in this house for almost 5 years then turned it into a rental that I still own.

Lessons learned? Challenges?

I should have turned it into a rental sooner than I did. I thought I had to afford two houses in order to buy my next, but I could have just put a lease on the house and used 75% of that income to qualify for the next house. I also did a refi in 2019 to get rid of my pmi and reduce the term to 20 year because I thought paying off the house was the goal, but later realized that my return on equity was too small and leverage is a key to RE as long as you have at least a 1.3 DSCR.

Hi Alden,

I live in Gilbert and have a few long term rentals, I like your idea of keeping as a long term rental. Repairs/Maintenance/Property Management/Cap Ex/Vacancy etc...  these vary a lot, so reserves are important, these might be 2-8% each, so you might be right with $200-500 per month. You also have a low interest loan so your principle payments on your amortization schedule are pretty strong, that is an important factor when calculating return on equity, return on equity is one of my favorite measures, obviously you need cash flow to keep the whole thing alive, but building your balance sheet is the ultimate goal in Buy and Hold RE Investing.  Rather than moving into a rental why don't you buy another property as your primary residence using a conventional 5% down loan.  You should be able to put a long term lease on your current property to help you qualify and there are a bunch of properties in Mesa for sale under $300k, so your payment will be about the same $2200, it probably won't be as nice as the property you are in now, but you will own two properties, rent will increase more over time, expenses will too, but not as much as rent, in a few years your cash flow will improve and your balance sheet will be growing.

Quote from @Tyler Quick:

Quote from @Josh Young:

Congratulations on buying a primary residence, that is the best way to buy your properties. Keep saving and learning, you don't have enough equity to make the refinance worth the increase in interest rate. Save until you can buy another primary residence with a conventional 5% down. If you need to put a lease on the 1st house to qualify you should be able to count 75% of the rent on 1st house against your DTI.

Why would a refinance not be worth it, if I were able to use the equity to put a 3.5% down payment towards another FHA loan(next primary residence)  and the first property would cash flow 300$ a month after the refinance, isn’t this essentially BRRRR’ing my primary residences ?  Isn’t this what investors do all the time ? Cash out on equity to buy next property ? I would definitely love to keep my interest rate I have now, as I know they will prolly never be that low again, but I’m not as worried about having a low interest rate as I am to getting started

The lender will only let you take out 75% of the value in the cash out refi, so yes you will be able to get the $15k but it will cost you $3k in closing costs to do the refi and it will cost you $300 a month for the life of the loan, so the effective rate on that $15k would be like 20%. You'd be better off getting a HELOC or even taking out a mortgage in second position, but if you can't save the 5% down payment I'd be concerned of getting over leveraged, you should be able to negotiate the seller paying your closing cost, that will help, if you can't in your original offer, I've had success negotiating it during the inspection period, even if you have to increase your offer to get it as long as it will appraise. Once you get over 50% equity in that 1st house it might be worth doing the cash out refi and that will buy you the next house or even two houses.

Rich Dad Poor Dad is the foundation that BP was built on. After you finish read his next book the Cashflow Quadrant. These are both about mindset and don’t really give specific direction, so after you finish those I really like The Millionaire Real Estate Investor by Gary Keller, he gives specific advise on what to do and how to do it. Like to buy a primary residence every couple years, this gives you the best loans with lowest down payments and he talks about return on equity which will allow you to eventually refinance properties to buy more. Full disclosure, I prefer audible.

Buy a primary residence using a conventional 5% down loan. You may need to put a lease on your current home to qualify with DTI ask your lender, but that's it, your 1st house becomes your rental. It sounds like you don't have enough equity in the 1st house to use any of it to finance the deal, so you will have to save, but 5% down should be manageable to save.

The rate on a conventional 5% down loan is usually better than FHA so I'd look into that for your primary residence. You can buy a primary residence every year as long as you move into it. Then just keep the property and rent it out, this is the easiest strategy to acquire properties with loan money down and the best interest rates you can get. If the rental income isn't on your taxes yet, your lender should be able to use 75% of the rental income if you show them your lease and a couple bank statements with rental payment deposits. If you are super close on your DTI then have your CPA put the rental into service on the date you started collecting rent and not before that if you bought and then took time to rehab or market the property, the fewer days in service and less expenses you claim on your taxes will cost you a few hundred dollars on your taxes but could make the difference on your DTI.

It can vary by market, so check out rental and sale comps of both in your market, just look on Zillow or the MLS to see what's active and what has closed recently. In my market here in Arizona I look for properties that have an office that I can market as an extra bedroom because the extra bedroom brings in more rent and sells for more. A lot of people will tell you being a bedroom means it has to have a closet, but the more important thing is that it has to have a fire egress.

Fallon, if you haven’t purchased a property yet I would highly recommend buying a primary residence using a conventional 5% down loan. Pick a property that will work as a long term rental because after you live in it for 12 months you can buy another primary residence using a conventional 5% down loan and rent out the 1st one.  If you want to hold these properties long term you can keep buying every 12 months, if they aren’t going to cash flow in your market because it’s so expensive then you might consider living in the property for 2 years then renting it out for 3 years and selling just before the 3 years is up and it will be tax free.  You can still buy investment properties in Orlando, but you have to live somewhere and these conventional 5% down loans for a primary residence are the best loans you can get and the easiest way to get started.

Congratulations on buying a primary residence, that is the best way to buy your properties. Keep saving and learning, you don't have enough equity to make the refinance worth the increase in interest rate. Save until you can buy another primary residence with a conventional 5% down. If you need to put a lease on the 1st house to qualify you should be able to count 75% of the rent on 1st house against your DTI.