As a first investment, should I look to flip or house hack?

Question

I’m from San Diego and went to school in LA. I’ll be moving to Pittsburgh late summer to start work in commercial real estate (lending). I joined BP to learn the residential side and I hope to dabble in private real estate investment as I progress through my life. One note: my job has me in Pittsburgh for 18-24 months - there’s a possibility it might be up to 36 months.

As a California kid all my life, moving to the North East is a huge move for me (what's winter? Never heard of it). I did a summer in NYC for an internship and have been to Pittsburgh for the interviews for this job, but It’ll be a complete change.

Here are two options I’ve thought of:

1) Owner occupy a 2-4 unit.

There are a few neighborhoods that I’ve been recommend to check out to live in from friends (Shadyside, Southside, Lawerenceville). It looks like these have the highest demand, thus the acquisition prices are higher and competition among other investors is fierce.

Adv: Can take advantage of strong rental rates, start building an income-based portfolio, and take advantage of PA lending programs that can lend up to $6,000 repaid at 0% interest over 10 years that goes towards closing costs. Can take advantage of putting down between $5-15k.

Disadv: My lack of knowledge about the neighborhoods without living there makes it extremely challenging to connect with RE professionals, view potential opportunities, and keeping a close eye on trends. I’m concerned I’m going to have to find a place month to month to lease for a few months until I acquire something. LL’ing with a full-time job might be tough? (Can be mitigated by prop. mgmt).

2) Flip

I’ve been reading that Pittsburgh is also one of the hottest flip markets in the country as well. I’m seeing people sell property for prices like $40k-150k. In SD, your D class dumpy house wouldn’t sell less than $200k. So the barrier to entry is much lower for someone without a ton of cash like me.

Adv: Low barrier to entry and seems like a compelling market to flip. Ability to connect with investors to fund rehabs (both in the Burgh and from back home?). Have the ability to settle down, find a place to rent, learn the neighborhoods, and then take 4-6 months to do a flip once all that is taken care of. I have the power not to get stuck with RE out of state in case the time comes to move back to the west coast.

Disadv: Little knowledge and experience about rehabs (well anything really) and the types of homes common in the North East. May be difficult to work a full time job and do flips. Is it possible I take on more risk at losing my capital?

Bonus 3) Channel my inner Donald Trump and do both at the same time

I think this came out longer than I anticipated, but hopefully someone can help me out!

Link to that PA program: http://www.phfa.org/consumers/homebuyers/advantage.aspx

Austin Mudd · Answer

@John Powell what sort of hoops do I have to jump through if I'm acquiring a building that needs rehab. I'd need to obtain a 203(k) correct? What kind of red tape is there with that, and what does the timeline look like @Austin Yuma's maybe you have some insight too?

Ed Emmons When i was in the burgh for interviews we actually went out in Southside and I definitely got that impression, but it looks like a fun place. I'll look toward Mt. Washington too, how's the commute downtown (where I'll be working?)

Terrence Redmond II · Answer

Check out some of the local REI groups when you arrive. There are a few out there. Pittsburgh Real Estate Investors is a great one to check out. It's headed up by a guy named Jerry Kisasonak. Request to join the Facebook group, alot of great people to connect to that know Pittsburgh and the ins and outs of investing in the local market. All my blessings to your journey here in Pittsburgh.

Michael Noto · Answer

@Austin Mudd why not do both? Your first 6 months there find a place to house hack or owner occupy and then your last 1-2 years there do a couple flips.

Austin Mudd · Answer

@John Powell that's a great way of getting around the FHA route. @John Upperman that seems to be a great plan by being able to take advantage of cash flow and then cash out your equity. I'll keep that in mind.

@Austin Yuma's that's informative, appreciate it. Sounds like a lot of stuff. @gino

@Gino Passant are you talking about connecting with a property management firm to handle my MFH or a management firm to handle something else?

Steve Bracero · Answer

Hi @Austin Mudd

Personally, I am looking to house hack and build equity. I am able to move out after one year and cash flow with the property.

With what you are putting down, run the numbers and check your numbers to see if the percentages work for you,

If you don't know the neighborhoods, check listing daily for trulia, trulia, and MLS. THis will show you the prices in your markets. Also Craigslist can show you your market prices for rent, as well as padhopper.

Focus on Flip or Buy and Hold, just focus on one to fully understand it.

John Upperman · Answer

@Austin Mudd

I would look at a house hack as a long term flip. Find an MFH that needs a little work and has some upside potential. You move in, make the improvements, possibly increase rents and the overall value of the property. Then when you're ready to move in in 2-3 years you can either hang on to it as a longer term buy and hold or sell it at a profit.

In this scenario you get the best of both worlds by having someone fund your personal mortgage and profiting from the improvements you make.

John Powell · Answer

On my first rehab deal in 2013 I had maybe 30K to my name, a decent job 60k year and good credit. I looked into a 203K loan to do a rehab but found that in my case it was easier to buy the house with a construction loan then take it out with a traditional mortgage after renovations were complete. The red tape involved with a 203K was extensive and I would have been dealing with and individual in a cubical somewhere who would be managing the bureaucracy. The construction loan was from a local bank and was very simple. They did an appraisal that was contingent on planned improvements to the property then they lent me up to 75% of that ARV. I took the first draw to buy the house then any time I need money I just called the bank and they would cut a check in the amount that I needed up to the remaining available credit. In my cases there were no questions asked as to what the money was being used to pay for and no one ever questioned my choice on contractor or scope of work. Once all work was completed I got a traditional mortgage to pay off the construction loan.

Eric Kang · Answer

I would advice from staying away from a flip unless you have the experience/knowledge. You will end up spending a lot more money and time if you are figuring out as you go. I suggest finding a local mentor via BP or meetups and learn about rehabbing first (costs, timeline, what to look for, what to avoid, etc.)

Austin Youmans · Answer

Yes, you would need a 203k Loan.

Talk to a local real estate agent and find one that has done 203k loans in the past as they do have their own set of rules and hoops to jump through.

The time line really depend. I ran into some mold issues and an appraiser that wouldn't do his job so mine took longer but I am told that most can close in 60 days.

Hoops:

1) you have to hire a general contractor to do anything under the loan. (Get a contractor that will work with you so you can piece out some other work.) ( I did cosmetic repairs myself and did not include it in the loan because any work done under the loan can not be done by you)

2) min rehab budget of $5,000 and max of $35,000 for a streamline 203k which is what I did. (not sure how it is different from a full 203k.) (the max amount also need to include a 15% emergency fund)

3) contractors need to bid the project by line item and given to the lender.

I am sure there are other things but that is what I can think of at the moment.

So definitely find a lender and a agent that has done these before so they can help you through the process.

Gino Passante · Answer

@Austin Mudd Your drive is commendable, but be realistic about your time. Flipping can be a full time job, even if you're not doing the work yourself because you'll still want to maintain a strong on-site presence. Since you're in PA to do a job, you'd be better off making a good connection with a reputable management firm and letting them do most of the legwork. You won't lose money on buying and selling fees and you'll enjoy the extra income. You seem very informed, so you shouldn't have trouble identifying a company with your best interests in mind. Good luck!

As a first investment, should I look to flip or house hack?

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