Questions From New Investor Looking to Buy Fourplex to House Hack

8 Replies

I'm just starting to research REI and looking for suggestions on books or other resources I should consume. So far I've been watching https://www.biggerpockets.com/... and started reading "Long-Distance Real Estate Investing: How to Buy, Rehab, and Manage Out-of-State Rental Properties". Are there any "must-read" books people would recommend to a new prospective investor?

I'm most interested in buying a duplex or fourplex as my first property so I could house-hack. Since I'm inexperienced I'm inclined to look for a turnkey property, but maybe I should be considering rehab properties as well?

Because I work remotely, I could invest in potentially any area of the country, although I've been mostly looking at Saint Louis, MO since it's a city I was already considering moving to. I have ~140k that I could put towards down payment, closing costs, etc, and it seems like that's more than enough to get a fourplex in STL. Some recurring advice I've seen in the "Intro to REI" videos and in the forums is to be conservative when estimating expenses, and I'm finding that makes it difficult to make any property cash flow, especially if I'm living in one of the units.

For example, this fourplex: https://www.zillow.com/homedet... is only 250k (which is so much lower than most other fourplexes I've seen that it seems like there might be some additional due diligence required). But at face value, the three currently rented units produce $2095/month in net income, so it seems like the cash flow could be great, but then when I plug everything into the calculator tool on BP with 8% vacancy, 10% property management, 10% cap ex, etc, I actually end up with a negative cash flow. Granted, even if the cash flow is -$200/month, I would be living rent-free as an owner-occupant and I would be gaining equity as the mortgage was paid off, so maybe it's possible to have a good investment that doesn't cash flow? Or is that phrase an oxymoron?

Something I found odd is the calculator's projected cash flow seems to improve over time. Is that because the calculator assumes rents will increase over time?

Lastly, are there resources about FHA vs traditional mortgages in terms of expected returns? Since I'm planning to owner-occupy, I initially thought a FHA or other small down payment mortgage would generate the best returns, and after reading a few forum threads it seems like that's what people usually recommend. It makes sense, and a small down payment would leave me with plenty of cash reserves, probably even enough to be ready to put a down payment on my next property when I felt ready. But if I'm already at a negative cash flow with a traditional 20% down payment, a FHA loan with PMI and higher principle payments would make my cash flow even worse. Any thoughts on this?

Thanks to anybody who takes the time to reply! I'm hoping to learn as much as I can and it seems like this is a good community to be part of!

@Edward W. Hey Edward, welcome to BP! 

Firstly, just as a note, you may find you have more success breaking a long post like this into multiple smaller posts. You'll get more engagement and more expert engagement. Someone might know a lot about FHAs or book recommendations, but not necessarily both.

Regarding books, I always recommend this one: https://www.amazon.com/Estate-... It's more on the finance side, but I think it does a great job priming you, even if it is not immediately relevant before you have a property.

I would also echo to be conservative regarding expenses and positive cash flow. If you can make the numbers work when you account for negative outcomes, you'll feel great when it's a positive outcome.

Finally, when you're referring to an owner-occupied property having a negative cash flow, are you discounting that cash flow based on the income that is not coming in from your unit? In other words, would it be in the positive if you were paying rent yourself? If so, it is still a great buy. Having others pay your mortgage or reducing it down to a few hundred dollars is a huge win as well. Then when you move out, your income will jump (of course you'll take on a different mortgage elsewhere but that's okay!).

@Edward W.  When house hacking, calculate the numbers 2 ways, with you taking up a unit and without.  It usually wont cashflow with you taking up a unit, but it should cashflow with the whole thing rented out.

That 4-family is a good deal, and I'm going to look at it today or tomorrow.  I am guessing the other units arent as updated.  The neighborhood is also on my "up and coming" list, so it's not as shiny as some other neighborhoods yet.

As for loans, FHA and VA have extra hoops to jump through for underwriting and its a pain. The cash on cash numbers can be better, and you can save cash that way. However, the extra fees and PMI can be deterimental to cash flow. An FHA offer is weaker than a conventional or cash offer as well, so keep that in mind.

I'll PM you to follow up with more recommendations for STL.

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For the BP sheet, you can click on Advanced and set your annual increase amounts for rents & value.

Down payment will depend on:

1) What reserves you feel comfortable with

2) How aggressive you plan to be on your next purchase.

Originally posted by @Dave Spooner :

@Edward W. Hey Edward, welcome to BP! 

I would also echo to be conservative regarding expenses and positive cash flow. If you can make the numbers work when you account for negative outcomes, you'll feel great when it's a positive outcome.

Finally, when you're referring to an owner-occupied property having a negative cash flow, are you discounting that cash flow based on the income that is not coming in from your unit? In other words, would it be in the positive if you were paying rent yourself? If so, it is still a great buy. Having others pay your mortgage or reducing it down to a few hundred dollars is a huge win as well. Then when you move out, your income will jump (of course you'll take on a different mortgage elsewhere but that's okay!).

Hi Dave, thanks for the suggestions -- I'll add that book to my reading list. I agree being conservative is prudent; an example I read on the forums here which really drove that point home for me was if you can't cash flow while budgeting for a property manager then every time you buy a new property it's like you're buying a new job as well. Even though I want to start off by self-managing my future property if possible, so I can gain experience and some extra income, the dream is to one day have enough properties that I would want to outsource the property management aspect.

I was discounting the cash flow based on income not coming from my unit, yes. All of the properties I looked at would cash flow positively if I were paying rent myself, so it's good to know I won't have to stumble upon the deal of a lifetime to find a good investment!

Originally posted by @Kyle Eckert :

@Edward W.  When house hacking, calculate the numbers 2 ways, with you taking up a unit and without.  It usually wont cashflow with you taking up a unit, but it should cashflow with the whole thing rented out.

That 4-family is a good deal, and I'm going to look at it today or tomorrow.  I am guessing the other units arent as updated.  The neighborhood is also on my "up and coming" list, so it's not as shiny as some other neighborhoods yet.

As for loans, FHA and VA have extra hoops to jump through for underwriting and its a pain. The cash on cash numbers can be better, and you can save cash that way. However, the extra fees and PMI can be deterimental to cash flow. An FHA offer is weaker than a conventional or cash offer as well, so keep that in mind.

I'll PM you to follow up with more recommendations for STL.

Thanks Kyle, and I responded to your PM, looking forward to chatting! I was calculating both ways but wasn't sure which one to give more weight to. Good to know it's common to see a negative cash flow if I'm occupying one of the units. I agree that the other units probably aren't updated, it seemed like the range of rents was pretty wide too.

Those are basically my first impressions about FHA vs conventional loans as well. I don't love the idea of paying PMI or extra fees, and the first lender I've gotten pre-approved with doesn't even do FHA loans, although I would probably shop around before committing to a mortgage anyways. But I guess paying PMI could be worth it if I was investing the other cash somehow (a second property or maybe stocks?) with good enough returns... curious if any diehard FHA loan supporters have thoughts?

Originally posted by @Drew Sygit :

For the BP sheet, you can click on Advanced and set your annual increase amounts for rents & value.

Down payment will depend on:

1) What reserves you feel comfortable with

2) How aggressive you plan to be on your next purchase.

 Thanks Drew, will have to play around with the calculator some more after I upgrade to Pro!

HI @Nikolas W.  if you have not, great books to read are:

• Rich Dad, Poor Dad

• The Millionaire Next Door

• Cash Flow Quadrant

• Tax Free Wealth

• Set For Life

• Rental Property Investing

• The Millionaire Real Estate Investor

• The REAL Book of Real Estate

• So Good They Can’t Ignore You

You are more than welcome to reach out if you have any questions.

Good Luck and go make it happen!

@Nikolas W.

I purchased a house hack fourplex in March 2020 (Portland, Or). Pm me and I will answer any questions you have based on my experience.