Vacancy and First Property

11 Replies

I have been doing research for quite some time and I just would like some feedback from you all.

I am looking to purchase a $1.1 million apartment complex, 3 units, built in 2019, this would be my first home..ever as I am currently living with my dad. I have found this first time home buying program called NACA (which would cover closing cost, no down payment) and yes, Multifamily properties are eligible if the owner occupies one of the units. My question is for you experienced investors, Should I peruse this option? I worry about finding tenants and not being able to find any soon enough, the mortgage would be roughly $5,000 a month and im only making 42K per year ( Washington DC area) and would not be able to cover one month off vacancy.

The other option would be a single family town house for 230,000 that I would live in for a year ( first time home buying, get experience of owning a home under my belt) and then after a year, rent out that house, generate cashflow and look for another property. Im 24 years old with economics degree

christopher I would recommend not buying so much inefficient debt so young, and with your income. 

you said the loan will cover 100% of costs, so you'll have no equity. This is not ideal. 

the 1.1MM apartment is unlikely to cashflow

the 230M property that you will live in won't cash flow while you live in it. What will it rent for when you get a tenant?

I would focus more on buying profitable investment assets, it seems like you're trying to buy things you LIKE. There is a lot of value in starting this business with cheaper assets that will be more forgiving. Acquiring these large debts so early in your life can turn into more of an anchor than a wealth generator. 

Just my opinion. 

Alexander Felice I greatly appreciate the input, I would forecast the 230k property would generate 400-600 cash flow per month with a tenant. Mortgage would be around 1200 and I could charge up to $1700-1900 a month for rent.  Its in a appreciating part of Washington DC, which is going through extreme gentrification and rent in the same area go for 1900-3000. Plus the construction of the home is only 7 years old, so this inst a old style home either. 

On top of that, for this option I would NOT use the NACA program and instead finance through FHA. I am able to comfortably use $7,000 of my 401k + $5000 of savings as a down payment totaling 12k down payment.

Hello Christopher Gray, I agree with Alexander; no equity doesn't sound like a great way to start. The DC/MD area is very expensive but as you noted, rents match. Between the two I would go with a single family. However, it might be good to go with a single family where you could renovate the basement and make a small in-law suite. This would allow you to generate some income and get some landlording under your belt.

I am in a similar position and have a duplex in Baltimore under contract right now I am looking at house hacking.  You might want to consider going over towards Baltimore. The duplex I'm considering is on the outskirts and not in the high-crime area. 

Originally posted by @Christopher Gray :

Alexander Felice I greatly appreciate the input, I would forecast the 230k property would generate 400-600 cash flow per month with a tenant. Mortgage would be around 1200 and I could charge up to $1700-1900 a month for rent.  Its in a appreciating part of Washington DC, which is going through extreme gentrification and rent in the same area go for 1900-3000. Plus the construction of the home is only 7 years old, so this inst a old style home either. 

On top of that, for this option I would NOT use the NACA program and instead finance through FHA. I am able to comfortably use $7,000 of my 401k + $5000 of savings as a down payment totaling 12k down payment.

ok this comment makes me sure you're going to fast.

rent minus mortgage is NOT cash flow. This is how new people get in BIG trouble.

if you can rent this for 1900, and you assume 50% expenses (pretty much industry standard) before debt service, you're looking at -284 cash flow. At 45% expense ration you're at -47 cash flow

make sure when you're doing your anaylsis you are accounting for future vacancy and property management, maintenance, and capital expenses. with FHA 3.5% down you're going to have PMI as well which I did not account for. Not to mention you intend to cash out your 401k to do so. meaning you're going to take a penalty on an asset that makes money to put it into an asset that doesn't make money.

I'm not sure what your goal here is, but this example doesn't seem like a money maker to me. Plenty of people buy homes that aren't good rentals and the building becomes a fancy anchor, I prefer not to see this happen to you. 

Alexander Felice this is exactly what I needed to hear, I really appreciate your insight. So what should be the first thing I do? My goal is to have 3-4 rental properties in 5 years. I’m not expecting quick financial gains, I understand that it comes with time and lessons learned and luckily time is something I have a lot of and would like to capitalize on it now 

With the 401k piece, to my understanding in MD there is no penalty for withdrawing from 401k to use towards first time home buying, I am a personal banker at a national bank and help clients all the time with that all the time. Not stating this to throw around my title, I’m all for learning, I just don’t want you to think I have NO financial understanding haha. Again, your  feedback is much appreciated 
Originally posted by @Robert Bodmer :

Hello Christopher Gray, I agree with Alexander; no equity doesn't sound like a great way to start. The DC/MD area is very expensive but as you noted, rents match. Between the two I would go with a single family. However, it might be good to go with a single family where you could renovate the basement and make a small in-law suite. This would allow you to generate some income and get some landlording under your belt.

I am in a similar position and have a duplex in Baltimore under contract right now I am looking at house hacking.  You might want to consider going over towards Baltimore. The duplex I'm considering is on the outskirts and not in the high-crime area. 

Hey Robert i appreciate your input, that is definitely an option next on my list: Rent out the basement of single family home. Ironic that the house My dad and I live in, we are renting out the basement next month to a tenant to generate some extra income he can put towards the mortgage (Currently underwater, got f*cked by housing bubble, literally purchased house 2 years before crash) so this will indirectly give me some land lording under my belt.

I did find a spot in Frederick MD that had the basement already renovated to appeal to a In-suite rental ( separate entrance and full bathroom) i could probably install a small stove and add a full refrigerator to a property like that.

Looks like a single family home will definitely be my first buy

Originally posted by @Robert Bodmer :

@Christopher Gray

Frederick is a great area that is developing fast. I grew up around there! Prices are appreciating and there's good, stable income for tenants. Out of curiosity, what neighborhood is it in?

103 Linden Ave, Frederick, MD 21703 its minutes from Downtown/Baker Park

I don't know if BP will let me post outside links here, If you go on zillow and search for houses in Frederick it should be in the top result. 337k |4bd | 2ba

@Christopher Gray - I'm not sure if you'll qualify for the loan but if you can, try to buy a 5/3 or 6/3 house (note they may be listed as 4 bedrooms in mls or on Zillow) and rent out the 3-5 extra bedrooms to working professionals you interview and like. Honestly they're so busy or video gaming you'll think you live alone. I bought a 6/3 in NOVA DC suburbs (250k during foreclosure crisis, worth about 400k now) and it generates roughly $4000/mo of rent on a 1650 mortgage. So you can get paid to live in your own house while it goes up in value... A lot of MD and VA don't have good multifamily options so you have to qualify for the loan solely on your income (or maybe your dad can help co-sign.) You have to be open to living with other people (but you can get rid of anyone you don't get along with). It's a win for them because it's like 30-50% cheaper than a 1 Bedroom apartment.

Originally posted by @Natalie Schanne :

@Christopher Gray - I'm not sure if you'll qualify for the loan but if you can, try to buy a 5/3 or 6/3 house (note they may be listed as 4 bedrooms in mls or on Zillow) and rent out the 3-5 extra bedrooms to working professionals you interview and like. Honestly they're so busy or video gaming you'll think you live alone. I bought a 6/3 in NOVA DC suburbs (250k during foreclosure crisis, worth about 400k now) and it generates roughly $4000/mo of rent on a 1650 mortgage. So you can get paid to live in your own house while it goes up in value... A lot of MD and VA don't have good multifamily options so you have to qualify for the loan solely on your income (or maybe your dad can help co-sign.) You have to be open to living with other people (but you can get rid of anyone you don't get along with). It's a win for them because it's like 30-50% cheaper than a 1 Bedroom apartment.

My credit is pretty good however I think my DTI would not work out in my favor for the 1.1 million dollar property. I'm going to start with single family homes and then work my way up to larger properties.

Thanks for you input! 

Originally posted by @Christopher Gray :

Alexander Felice this is exactly what I needed to hear, I really appreciate your insight. So what should be the first thing I do? My goal is to have 3-4 rental properties in 5 years. I’m not expecting quick financial gains, I understand that it comes with time and lessons learned and luckily time is something I have a lot of and would like to capitalize on it now 

With the 401k piece, to my understanding in MD there is no penalty for withdrawing from 401k to use towards first time home buying, I am a personal banker at a national bank and help clients all the time with that all the time. Not stating this to throw around my title, I’m all for learning, I just don’t want you to think I have NO financial understanding haha. Again, your  feedback is much appreciated 

You're probably right abotu the 401k thing if you deal with it. I certainly reserve the right to be wrong about stuff  ;) 

I only converse the way I do to be a permanent devils advocate. I just try to poke holes in peoples' plans so they can see all the ways things might not work out. it's not to be negative, just trying to temper over confidence 

you're doing the right thing and on track, keep learning and don't be impatient. real estate is very forgiving so a few lousy deals won't leave you in ruin but they can make you broke and miserable LOL