All Forum Posts by: James Orr

There are some unusual exceptions to the one FHA loan at a time. For example, I believe you can get another FHA loan if you move more than 100 miles or if you inherit a property with an FHA loan, but these are rare exceptions and probably not practical for implementing a house hack or the Nomad model.

FHA is good if you're doing duplexes, triplexes or fourplexes, but if it is a your first property and it is a single family home, there are 1% down conventional loans that you can use to owner occupy, live there for a year then convert to a rental. For subsequent owner occupant purchases, we typically model it with 5% for each of those.

Thanks @Solomon Oh.

I assumed:

• Interest rate of 4.5%
• Property taxes were .75% of the property value each year
• Property insurance was .5% of the property value each year

Vacancy there is MUCH higher than we have here, but we start looking for tenants 60 days prior to the property being vacant, so that might be a difference too. At 3% vacancy, here's the breakdown of expenses.

And, here is the appreciation, depreciation, cash flow and debt paydown benefit each year if you live in it the first year.

It looks pretty good if you repeat the process and buy a new one like that each year, live in it for a year then convert it to rental and repeat until you have 10 rental properties. I made some assumptions on appreciation (I used 3% which is what I believe inflation will be). I have some charts on that too if you'd like to see them.

@Solomon Oh... OK. I was going to run it through a calculator I use to see how it might look with putting 5% down, moving in as an owner occupant for a year then converting it to a rental. What might the $300K properties rent for?

@Account Closed...

OK. I used $80K and $800 per month and ran it through a calculator I'm writing that models buying them with 5% down, living there for a year then converting each to a rental after living there for a year.

I estimated your taxes and insurance, but you can adjust those. I tried to link to it but BP won't let me. Wonder if I can send it you via private message. Will try that.

Thanks in advance.

@Kreighton Reed... are you seeing 1% down owner occupant loans for first time home buyers? And, are you seeing 5% down for subsequent owner occupant purchases?

Thanks!

I love this model Ashley. We call people that buy a home as an owner occupant, live there for a year then convert it to rental and repeat the process Nomads. Do you have an idea of purchase price and rent you can get for it once you convert it to a rental? Curious what the numbers look like there compared to here.

@Solomon Oh... I'm curious what the price of an entry level SFH is and what the rent you could get on it would be.

In our market there are folks buying homes as an owner occupant, living there for a year, then converting them to rentals and repeating the process to acquire properties that way.

I'm wondering what the numbers might look like for you there doing that.

Thanks!

Thanks @Chris Mason!

> Underwriting will flag that. How can someone move into the unit I'm living in, before I'm even scheduled to close escrow on my new place and move out? It needs to make sense.

Yes... we're suggesting they find a tenant (with the lease subject to them being able to find a replacement home).

> Re: Qualifying the property and calculating rental income.

> Fannie Mae actually has multiple ways to calculate rental income. To keep things simple, qualify the old property thusly:

> If [ rent * 75% - PITIA ] yields a positive number, owning the departing residence will not impact DTIin a negative way. If it does, get tight with the lender.

Perfect. That's what we do, but when we model it we know the price of the home they'll be buying, so we can give an income number too.

Thank you!

James

Welcome Trevor!

> I grew up in Fort Collins and am looking to start building rental portfolio or finding some flips but it's hard with the market as it is now.

I'm in Fort Collins as well. While it is possible to find some opportunities to buy, fix up and resell in our local market. There are fewer of them then we've seen historically. Here's a chart showing the number of buy, fix up and resell transactions that happened in various Northern Colorado cities with at least a $30K spread in our local MLS (not profit, just difference between buy price and sold price).

We did a series of classes on these opportunities earlier this year in our Fort Collins investor club as well.

Some of the strategies that are working here are buying and then offer lease options and the Nomad model.

> I am by no means an expert but have been working in real estate with my dad for years. Biggerpockets seems to have a great group of members willing to help so wanted to join and keep learning.

Yes... there is a ton of great info available here. Hope to see you around Northern Colorado and on BP.

Thanks Chris.

First, thank you for the excellent reply.

> I call them nomads too. :)

Awesome!

> It'll be worth your time to have them working with a minimal overlays lender that can count departing residence rental income regardless of equity position or prior landlord experience.

Yes... I have actually modeled *part* of this. I did not take into account prior landlord experience and we don't count the equity they have.

What I do though is figure out how much income would be required with the following assumptions:

• We use 75% of gross rent from each property
• We subtract the full mortgage principle and interest payment for each property
• We subtract the full monthly HOA for each property
• We subtract the monthly utilities they are paying on each rental property (often this is zero since tenant pays in most cases)
• We subtract monthly property taxes for each property
• We subtract monthly insurance for each property

Then, we divide by .45 for debt to income to find out how much income they'd either need to offset and "carry" this negative cash flowing rental or how much income this property contributes and therefore how much less income they need to earn.

Does that seem right to you?

Here is a chart showing the minimum income required assuming the borrower has no other debt with them buying a new house each year for ten years. They live in the house for the first year then convert it to a rental.

In the model above, the property value is going up 3%per year so you're buying properties that cost 3% more each year. Rent is also going up 3% per year. You're putting 5% down on each property (remember this is as an owner occupant).

> You as the expert in marketing real estate can be a huge help: you will want a lease signed and security deposit made in time for underwriter review, prior to releasing financing contingency because hypothetical tenants and hypothetical rental income will not cut it.

Yes, I totally agree. We recommend our Nomads start marketing to find their tenant at least 60 days prior to a lease ending or prior to them moving out and converting their primary residence to a rental.

> Specified move-in date on the lease to be a few weeks after the scheduled close of escrow.

We'd even recommend sooner if possible.

> Getting that in time for underwriter review prior to financing contingency removal is huge -- you don't want to put a $30k EMD on the line over chasing $75 extra per month in rent.

Yes. In our market we rarely see $30K earnest money, but why risk even $3K earnest money.

> If you pair those two things together (minimal overlays lender local to you + you getting that tenant/deposit quickly) you could very well have a niche value add area that not a lot of other agents know how to serve, in your area, much less how to serve them well.

Yes, that's what we're finding.

> If working with James Orr and his go-to lender means I can buy a $450k home, whereas everyone else I'm talking to caps me at $150k (due to hitting my DTI with full PITI of both homes), obviously I'm going to be working with James, right?

I would hope that's not the only reason, but yes.

> Trivia: there's a deal in escrow right now where the wife lost her job three days after going under contract. Dead deal, right? Nope. Departing residence rental income, and an agent busting his butt to market the rental unit and find a tenant quick-like-and-in-a-hurry, saved the deal.

That's super interesting. Had not thought about that as a way to possibly save the deal.

> It helps that I always work for minimal overlays firms (specifically for this type of deal-saving added flexibility) and I identified the solution, but the agent got to be the hero in the eyes of the homebuyers too, for marketing the property, finding that tenant, and getting that security deposit so quickly.

Yes. I would agree with that as well.

Thanks again for the reply. I do appreciate it.