As of late I've been trying to figure the best option to get going in rental properties. What follows is a hypothetical path that I'd like input on from people smarter and more seasoned than myself.
I'm leaving a lot of details as unknown because most of my questions are vague and I'm trying to make the numbers start to work and then find a property that fits within given criteria, rather than trying to fit the criteria around a certain property.
So in the near future my wife and I are going to refinance the house we have and either 1)Move or 2)Refinance and pull out money. Most of this is based on option 1. At the absolute minimum, we'd have around 50k.
The reason for this post is we are considering buying a 4 plex (again, the idea of a 4 plex, not a specific one at this point) in which we would live in two of the units, and rent out the other two.
Our family requires 4 bedrooms at least (3 kids), and the most bathrooms possible. The 4 plex would be apartment style and build for the purpose, not a cut up house. The reason being with the apartment style (with 2 floors and 2 units on each floor - mirrored of each other) is that we could add a door or archway joining 2 units together and turning (2) 2bd 1ba into (1) 4bd 2ba. Unconventional living, but workable.
We have 2 large outside dogs. We can take the bottom 2 units and build a fenced area, can't think of any other solution to them have to be outside somewhat confined. The concern really isn't with that though, the larger concern is for the renters. Will they see the dogs and tell themselves "oh hell no"? What if a tenant's kid for whatever reason makes their way inside the fence and god forbid gets injured by one of the dogs?
As for the money end of it, let me use one that I recently saw for sale. 735k, basically what I described above. Using an FHA loan to put a minimal amount down of 3.5% (25k) the mortgage comes out to $3400 at 4%. Assuming we could get $1500 for each rented unit, that leave $400 for us to cover. That's far below the $2000/mo mortage we have now. Now I know there are a ton of other expenses, I think $1000/mo would cover those, making our share 1400(ish). After the 25k down, using the 50k we have from our house, we'd be left with 25k to be left in reserve, or into other investments. I know that's very vague but that's part of my question here, how much weight should I put into the 1 or 2% rule in the situation? How much to we spend extra because we live there? During the minimum one year we live there (FHA), probably more, our plan is to buy a small piece of land and building a garage with a 4 bedroom apartment above it and move there. Once we do this, we can return the 4 plex back to a legit 4 plex and then it's bringing in 6000 in rent per month.
I'm aware 735k is a lot of money, here are my thoughts on that. Never again (unless we live there... not going to happen again) will we be able to get so much money for so little down via a FHA loan. My wife and I both have full time jobs and combined we clear 125k (and increasing) a year. We have no car payments and very minimal debt. Because of these factors I think we can legitimately afford 600-800k. Especially considering it seems some lenders will include 75% of rent as income. With that factor included I think we could afford more, however I'm already a little gun shy about spending 600k+ in the first place. Lastly, in the puget sound area things are pretty expensive, I'd love to spend 200k and get 1000x4 for rent, but that isn't out there, at least not that I've found as of yet. I'd love to find a distressed fixable 4 plex as I can do stuff and things, but again... haven't seen it. Although truth be told I haven't looked that hard yet.
Ok, those are the thoughts I had to get out. Thanks kindly.
I have no idea about what's a good deal where you live, but I like the idea of getting a 4 plex. You could easily close the new doorway if you move out and turn it from a 3 unit back to a 4 unit. I wish I had done this instead of buying my first home.
Nearest I can figure we might have to pay retail for a good 4 plex, which as an investment, makes it less than ideal. I'm trying to decide how far we should go to make this happen, how much are we willing to pay? How do retail purchases pan out?
I will probably be in the minority here but I'm not seeing your vision. I guess I would be factoring quality of life. Are your 3 kids and 2 dogs going to be happy living in an apartment? What about a duplex? Or what about NOT moving and just investing in a MF?
Here's my justification.
Maybe it's been too long since I've lived in an apartment, but the quality of life associated with it we think is doable for a year or two.
Will we like living in an apartment? Truth be told 1 kid lives in TX most of the year but we'd still like to give him his own room. I'm not too concerned about space as joining 2 units would provide, at the very least, as much space as we have now.
Why not just invest in MF? If we don't move, we can no longer take advantage of an FHA loan, which I'd really like to do.
What about a duplex? I don't see much difference between a duplex and a 4 plex. Seems as though it would cash flow a lot less, especially after we rent out all 4 units.
In the end, it would be a temporary living situation while we decide what the next step would be, the wife isn't a huge fan of the 4 plex idea, but she sees the end game.
Hah, bravo, if I told my wife this is what I wanted to do she would have me in a padded room! Keep your house, refi cash out and buy a second property verses uprooting your family. While this seems a good idea you will pay for that many times over with grief and stress from your family. Good luck whatever you do.
I second Kyle. Figure out what you can buy for the $50K and invest that into a property. I'm not a fan of displacing your whole family for investing purposes. The dogs won't be good either, your tenants will not be happy.
I left a little info out I suppose, and that is even if we refi to get some cash, we're still going to want to move in the near future after. My commute to work is 80mi/day, wife's is 50mi/day. We're both just kind of sick of the driving, mileage on cars, traffic... Etc. We want to move closer.
The problem with our house now is that we have almost outgrown it. Plus it's on a busy street which isn't ideal for our kids. Therefore, the ideal scenario is moving and how to improve our quality of life long term.
I actually know a family that did just this except they built theirs. They opened a doorway between two units for their family and rented out the other two that were separated by a small courtyard. It turned out well for them. If your wife is on board it makes it a lot easier. If you don't do this, how long is it going to take you to acquire the 25% down on an equivalent property. Heck if one kid is gone all the time I wouldn't even combine two units, I'd just make them share a room. If you really don't like living there, I don't think anyone from the the mortgage company is going to stop by and see if you are still there 7 months after closing.
Billy, I would love to hear more about your friend. This is the first example I've heard of some actually doing it.
@Loren Thomas It may be helpful to search here for others' ideas on "what they would do with 50K" Some of the options they suggest would likely be much more tempting, provided they allow you to stay in your current home.
One such thread that references these other threads:
I should also mention that I prefer a much more "managed risk approach" and would rather not have 700K of debt wrapped in a single building. Your strategy may differ.
Thanks for your reply Robert. I agree with too much wrapped into one investment, I'm still torn on it, consolidation is nice. Too many eggs in one basket isn't.
This really isn't about to move or not to move, we're moving either very soon, or within 6mo of refi. So it's just a matter of where to move.
I've had a couple more thoughts after the help you guys provided.
I'm not concerned about living in a 4 plex affecting our quality of life. Am I missing something? Just doesn't seem like a big deal to us. Maybe we're simpletons.
The dogs. This is where I'm most torn. I'm trying to convince myself that the units wouldn't be vacant, just may demand a little less rent. Is this sound logic? They aren't loud or bark. I've pictured a large covered and fenced dog run that only our unit would have access to. I'd probably not even use chain-link and go for the "out of sight, out of mind" sort.
I think I've been convinced that 700k+ might be too much to spend on this venture. What would you guys say is more acceptable figure? There's been some listings for around 500k, but I haven't seen any acceptable properties for less. It's just too damn expensive around here. Again I'm justifying the large purchase price because of the low down payment an FHA loan allows.
If we do this, I think we'd try to live in just one unit and rent out the other 3, to maximize potential. Using this method it appears to be possible to have a cash flowing property while living in there. This would allow us use our earned income toward more properties, or more realistically, build a house ready for us when we move out of the 4 plex and then buy more properties.
My friends that did this did it back in the 70's. It was in a really nice neighborhood in Fort Worth and they raised their kids there. The guy actually still lives in it to this day and one of his daughters lives across the courtyard and an old friend rents out the other unit. He made really nice area on one side for cooking out. It's not your typical 4plex. The guy was a builder so he built it himself.
I'm not a fan of 2-4 unit housing, and even less of a fan of the idea of living there myself, esp. w/ a family.
@Loren Thomas This is a really creative idea, and it seems to solve multiple existing challenges (space, commute, pets, etc.) while also providing an entrance into REI. So I absolutely love the idea in principle.
But I am not excited at all about the numbers. You are taking on a huge amount of risk based on the numbers you provided. I don't mind a bit of business risk, but only after my family's situation is stable and protected.
You sound not only creative but also determined, so I think you will be able to find a deal that substantially reduces your risk while providing the benefits you seek. Be patient but diligent.
I like the idea. It is something my wife and I have considered. I don't know much about your market, but here in Los Angeles, we've almost given up on the idea to do it because prices are just too crazy right now. I might revisit the idea in the future, but for now we are looking to invest outside of LA, unless we can miraculously find a great deal here. If the numbers can work, it might be a great opportunity to own a cash-flowing property after you leave it. I think that is what you also need to analyze. What are you going to get in rent after you leave? This is my problem with buying in the overheated market in Los Angeles at the moment...my mortgage will be cut in half by other tenants, but will I cash flow when I leave?
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