Need Help with my first Big Decision

12 Replies

I just graduated college and got a good job in the twin cities area. For those of you unfamiliar, that is the two biggest cities in Minnesota, Minneapolis and Saint Paul. I am renting now because I needed to find a place to move into immediately after graduating, and had no down payment.

I would like to start as soon as my lease ends. I plan to buy a duplex that I would like to live in for maybe 5 years. My girlfriend is going to grad school and we could see ourselves staying in this duplex for roughly 5 years. Correct me if I am wrong, but I am thinking that foreclosures are out of the realm of possibilities because of their timeline. I am looking to move in straight after my lease. Anyways, that is essentially the backstory now here is my biggest question.

Would I be ok to buy a duplex closer to the top end of my wanted budget (roughly $220,000) because I plan to live in there for awhile. OR is it only smart to buy a more affordable duplex that would be considered a 1-2% property. The duplex for $220,000 would have each side renting for roughly $1,000 per month before renovations while a house that I could buy for roughly $60,000 would have both sides renting for roughly $700 per month. Also, these $60,000 houses tend to require more risk of foundation issues, and would also require a more extensive renovation to increase rent.

I know this may be a long post, but I signed up for this website to get advice and information. ANY advice you may have for me would be greatly appreciated.

Bonus question ;) 

I tend to prefer side-by-side duplexes and sometimes have a hard time even looking at up/down duplexes. I just feel that if I were the one renting, I would much prefer to have side-by-side because of reasons such as hearing footsteps while living in the lower unit ect...  Am I right in having this preference? OR, if I am getting into this business, should I ignore my feelings about properties and just do what makes sense on paper?

Thanks so much, I look forward to hearing what people have to say!!!

I recommend going with the more expensive option, but get the best deal you can. For your first property at least.

It doesn't matter that much regarding side by side or top and bottom. If you are going to live there just live in the top unit if you're worried. Renters are used to this sort of thing anyway

Benjamin,

Congrats on completing college and starting your career!  

Your question is actually a very large one; just a few thoughts:

1.  While wanting to jump right in is admirable the top priority would be to make sure you are liquid.  That means having enough cash to close on the property, to effect repairs (which WILL be necessary even if the property appears in perfect condition) and to have the property vacant for a few months without throwing you into a panic (more on this below).  Once you have sufficient cash resources then you can start your search in earnest (nothing wrong with looking at properties in the meantime to get a feel for the market)

2. The top 3 criterion for investment is "location, location, and location."  In other words, find the right neighborhood first and then look for property in that neighborhood.  In St. Paul I tend to prefer Merriam Park, Mac Groveland, Union Park, the Midway west of Lexington, Summit-U south of Selby, Ramsey Hill, Crocus Hill, and Highland Park...due to the market niche that we are in...you may have other preferences for other reasons.

3. We tend to invest in properties we would be comfortable living in and in the neighborhoods we would live in (see #2 above).  We also prefer to buy tired properties that we can then rehab, but you may be in a different position.

4. Back to the panic mode noted in #1 above: I will leave an apartment empty before I rent to the wrong person...it took me a while to figure that out but now we never vary from that axiom...it is far cheaper to leave it empty then go through the pain and agony of a tenant who destroys the place or for whom rent payments are a low priority...if you are cash poor you may feel forced to rent when you may not have the right candidate...make sure you have enough cash to NOT DO THAT.

5. It might be worth finding a realtor you trust before you venture too far down this path to help you evaluate purchasing options...find one with experience in investment property...the part time realtor doing this as a hobby would be the wrong person (most likely)

6. Run your numbers so you understand good deals from bad ones.  Also, don't necessarily trust the numbers that show up on listings.  Verify them.  With a little work/research you can probably estimate how much utility bills and taxes will be per unit or per square foot on most property options.

7. Do Craigslist research on market rents for the neighborhood you are searching in.

8. Look at recent sales data to get an idea of square foot costs for similar properties.

9. Don't quit your day job...just yet.

Good luck!  I'm sure others on this website will have even better advice for your consideration.

Hi @Benjamin Andress

Welcome to BP! 

Just wanted to point out that you can buy a single family, duplex, town-home or condo up to $307,900 in the 11 county Twin Cities metro area with a $1,000 down payment. You'll need a credit score of 640+ and annual income less than $86,600 for a 1-2 person household or $99,500 for a household of 3+ people.  You can be a first time home buyer or repeat home buyer as long as you plan to live in the property as your primary residence. 

As for the duplex you mentioned; I was having a hard time following the scenario. You mentioned in the first paragraph that you would live in the duplex for about 5 years but in the next paragraph you said you'd be renting both sides. So I was a little confused as to how you plan to rent both sides of a duplex if you're plan is to live in one side for 5 years? 

My apologies ahead of time if I've misunderstood the question. 

As for personal preferences; my advice is to ignore your personal preferences. There are hundreds of thousands of people who live in apartments that don't mind having someone living above them. Unless the tenant is absolutely unbearable you'll be able to find a renter if the unit is priced right.

Hello from Minneapolis,

We are in very similar situations. I graduated a little while back (May 2014) and have been at a good Minneapolis firm since then. I purchased a duplex that I am occupying. I plan on being here for a while too as I start fixing it up (no major repairs). Buying a duplex is a great choice but will be more expensive than you think. If youre doing FHA financing, I'd budget to pay out cash $2200/month in cash for Mortgage, PMI/escrow, and maintenance (dont forget about deferred maintenance, the roof/siding doesnt last forever). If you get a fairly priced duplex (2BR 1BA/2BR 1BA), you can expect to make ~$1300 for a 2BR you are not occupying depending on the location. Are you comfortable paying $900/month + utilities? It all starts to add up. This was a long response, but you were the one with the long post.

Matt

Updated over 1 year ago

Good luck with your decision!

Ben,

First off welcome to BP! The one differentiation that I would like to point out is not to confuse investing with your personal residence. House hacking is still a personal decision and a property that is 1% or 2% properties especially in the under $250,000 price point are most likely properties in transitional neighborhoods i.e. not the best locations. Granted FHA is a great way to go for a first purchase but you still want to be mindful that a house hack is not a pure investment and if you evaluate just by the numbers you may not want to live where the numbers will take you.

For your first purchase especially one you plan to live in for 5 years; I would scrap the investing lens and just evaluate in terms of what you want in an ideal living  situation. On your next purchase once you have some Land lording experience then get into numbers and returns.  

I've been doing a LOT of digging for 2-4 unit buildings in Saint paul and you CAN find ready to live in duplexes for $200 in decent neighborhoods.  The fancy parts of St. Paul are out of this scenario, but midway and frogtown are both examples of neighborhoods in which your money goes a lot further.  They are both going to continue to be strong growth areas because of the lightrail, new commercial development, etc.  They both have some sketchier pockets, but also have some really nice pockets.

I'd stay away from those cheap units in bad areas. They seem like the cash flow should be great, but the maintenance and tenants are WAY more work than you'd imagine. It will suck your checking account and your desire to keep investing in real estate.

Targeting $150-220 should put you in a good range to find something.

Hopefully this is helpful.

David

@Benjamin Andress , @Ryan Schroeder , @Conor Hesch

Ryan has some great advice for you and it's pretty much what I would tell you as well.   I helped about a dozen people in the past year house hack a duplex with 3 couples within the past 3 months and I've referred several of them to Conor Hesch (you can connect with him on bigger pockets) at US Bank for a very cool 3% down loan they have that doesn't mandate mortgage insurance.  One of the couples also got around $7,000 in grants tied into the loan from the city.

I met up with @Bruce Runn and he's an awesome guy. I'd listen closely to what he shares with you. I also worked with Conor and he's great as well.

Hello @Benjamin Andress did you know there is currently A LOT of free down payment grants in Minneapolis and St Paul ?   The money is first come first serve and will dry up eventually.  This is what I did for myself and what I do for other like the couple @Bruce Runn mentioned!

Use the loan that I used; 3% Down Payment and NO Mortgage Insurance (yes this loan really exists). This will make your monthly payment way lower than an FHA Loan. The only loan other than this that I know of that would allow less down-payment would be a Veteran Loan (Vets only). Once you add on all the available down payment assistance your actual cash out of pocket is WAY less than 3% down. 

2. Don't start with an FHA Loan, instead use it for your 2nd Duplex...because the 3% down loan that I used requires that you do not own any other homes at time of closing. So start with that one, then move to a 3.5% down FHA. Once you have an FHA loan you are not allowed to have another FHA loan unless relocating a great distance for work. FHA does not mind if you already have another home as long as it is not already FHA…make sense? That is why you start with the loan I used then move to FHA next. So if you follow that order you can maximize your options with the least amount of cash invested.  

3. Now that you have exhausted your Low Down Payment Options (the one I used and FHA) you will need to use a Standard Conventional Loan and put 20% down to get your 3rd Duplex. 

4. The sky is the limit...you could continue to buy properties and build an empire or just stop there and enjoy more free time...I have friend who quit his job and just manages his properties now since he has 2,400 from each duplex in gross monthly rent. 

Be alert, if you time it right you might be able to get down payment assistance/grants there is over 10,000 in Minneapolis and St Paul right now (I got $5,000 from a local program and used it to buy my interest rate down to 3.125% which is way below typical market rates for a Duplex). There are also many down payment grants for first time home buyers in various cities around the US. My 250k Duplex total payment = 1,480 and the lower level pays me 1,200 while I live upstairs.

Keep in mind that this 4 step process I outlined takes time (anywhere from 1 to 10yrs depending on the person) so keep the big picture in mind but don't let it stress you out too much. Send me a message if you have any more questions or need specifics and keep us posted on your success! GOOD LUCK !

 

@Conor Hesch, What type of loan is this? And where would I apply? I have never heard of it before.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here