I'd like some advice on what avenue to take for my first investment property.
I bought a home last year with great equity and cash flow potential, but it's my current residence and I'm subject to live in it for another 3 months due to owner occupancy requirements.
However, I don't want to wait so I've been in the market for another property. Preferably a SFH or Duplex as an investment property.
My two options are:
1. Wait 3 months, move out into another property and rent out my current residence. This allows me to save money. A lower down payment moving into another owner occupant (3.5-10%). Save up a little more over those 3 months and fix up my current property in preparation to rent it out. (I've already renovated the kitchen).
2. Buy an investment property now. This would require a larger down payment, 20-25%. However, if I can find a great deal with tenants in place it would immediately create a return and I could house hack my current residence by getting a roommate. I'm focusing more on small multi-family like a duplex. Based on the market it seems they create better cash flow for me. Much better than my current residence could.
Now at first it doesn't seem like option 2 is a very good idea, its a larger initial investment, but the returns are greater as well. More risk more reward. Option 1 is more conservative which seems to fit my personality a little more. However there is no telling how long it will take to find another residence. I want to pull the trigger and get invested now.
From what I understand, here are your 2 options :
Option 1 ) Buy a second owner-occupant home with 3.5% down and move there. Here, I will suppose you did the same with the home you currently live in. Therefore, option 1 calculation will be based off as if you rent out your current home which you put 3.5% down and now live in another home.
Option 2 ) You stay in your current home and buy another property with 20% down since you cannot take advantage of the 3.5% down then you rent it out too.
Actually, option 2 isn't a greater return. Here's why.
Let's suppose you bought a 100K house, got a tenant in with a rent at 1100$/month. Expenses are arbitrarily 50% of rent. Your NOI is 550$/month.
Debt service is as follow :
Option 1 ) 3.5% down - Mortgage = 456$/month (25 years, 3% interest)
Option 2) 20% down - Mortgage = 379$/month (25 years, 3% interest)
Your Cashflow is :
Option 1 ) 550 - 456 = 94$/month
Option 2 ) 550 - 379 = 171$/month
Your ROI is :
Option 1 ) (94 x 12)/3500 = 32.23%
Option 2 ) (171 x 12)/20 000 = 10.26%.
Best of luck!
Thanks for the reply. It's a little more complicated than that and I should have probably put #'s in my original post.
My current home would cash flow about $225 with an ROI of 27%.
This duplex deal I'm currently working on has the potential to cash flow about $387 with an ROI of 14%.
So you're right, the ROI isn't as good because of the large downpayment required. However, it's still good and I can't really compare it to my home. It's unlikely I'll find another deal like my home as it's not representative of the market.
I guess I should be comparing option #2 to the home I'd be moving into or my current home.
1) I can wait 3 months to move and then possibly not find a deal right away, all the time getting no return on my money and edging closer to higher rates.
2) Or I can spend a lot of my money now, start receiving a good return, lock in a great rate, and start saving that cash flow to reinvest in a new deal later.
Then in that case, if it was me, I'd go with option #2 as long as I find a deal within my criterias. I prefer having my money working day and night instead of doing nothing. Of course, it doesn't mean to go and buy anything regardless of the property and its return. This wouldn't make sense. If you stay smart and you find something great soon enough, then why not?
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