Good Risk vs Stupid Risk: Buying Advice for Multifamily HouseHack

25 Replies

My goal is to buy a multifamily as a house hack by spring 2019, so I have been diving into Bigger Pockets and other resources to educate myself on cash flow analysis.

Lately, I've been working on clarifying my ideal metrics for buying the multifamily. For example, one of my metrics is that I want my payment/house hack rent to be 30% (or less) of my take home income. 

I've always used the 30% rule of thumb when renting an apartment, so it seems to make sense to also do it for owning a home. 

And that's where my question comes in. When are thinking about buying a multifamily, how do you set up this equation? Is it:

A) Mortgage+expenses /income = 30%

OR 

B) MY portion of the rent /income = 30%

I like Option A because it makes me feel safe: If for some reason I am unable to find tenants, I will be able to cover the full mortgage and expenses on my own. 

Using Option B opens up opportunities for me to buy larger/nicer multifamiles. But I'm worried that it could cause me to buy too much property and overextend myself. 

Does that make sense?

Perhaps another way of asking this is: How do I decide how much property to buy? Where's the line between good risk and stupid risk?

at this stage you should be working with your trusted mortgage lender.. they will set up your DTI's and ratios that you will need to qualify.. what we want has no bearing on what the underwriters or lenders will qualify you for.

@Jay Hinrichs I see what you’re saying but I don’t love the idea of having another person tell me what my risk should be. Isn’t that how we got into 2008-08? Bankers told buyers they could handle more loans than they actually could? I don’t want to put myself in that situation. I want to create my own definition of risk comfort level. 

Obviously, a lender will stop me if I pass their ceiling but they could also mislead me about what that ceiling should be. 

As I’m researching this, I’m thinking my question might be tied to the debt to income ratio...?

they will give you max you can do  then its up to you how much debt you want to take on.

but your on the right track prior to 08 if someone was approved for a 500k house they bought a 500k house  not a 475 not a 450k right to the max.. so just get your max ability then back into what your comfortable with.. this is great thinking on your part..  however If you think you may not rent the other units then be cautious what you buy.. know that you can rent it if you lower price a tad and are still alright..   good luck.. !!!!  and good conservative thinking

It is always a good idea to make sure you can cover the whole mortgage on your own. I had a tenant in my house hack accidentally flood the property and it took 5 months to get it livable again.

@Rachel Brewster ; how is the multifamily hunt going in Minneapolis? I’ve been seriously hunting in the metro for a house hack while my wife goes to the U but so far the market is out of control.

What I don’t understand is: these people buying duplexes in Minneapolis, are they running numbers on this or just wildly throwing money after money? My numbers don’t work for any of the multifamily properties in the areas I want.

Hi @Lee Fahy ! It’s nice to meet someone who is looking for the same thing I am. 

There was a 3.1 duplex in St Louis Park earlier this month that was priced accurately. It was clearly a motivated seller and it was off the market in 5 days. I’ll be curious to see what the buyer ended up paying for it (I’m going to look up the Hennepin County property info once it’s posted...because I’m a creeper like that). 

I agree with you, the numbers are insane. It’s definitely a sellers market. For us, I think that means:

1) We can snatch up good deals when people realize they can’t keep up with their mortgage payments 

And/or

2) We have to look for off market deals, a strategy I’m beginning to explore. 

Do you have particular areas/neighborhoods that you want or are you just evaluating at everything that pops up? 

@Rachel Brewster ; Ha! I’m that creeper as well. I keep a list so I can go back in a month or so to see how much was paid.

I’m looking by Nokomis, south of Harriet, St Louis Park, Roseville and the NE. Every time I work in the downtown area I take a walk before I start. I have a grid in the north east (north and east of Betty Dangers) and I take notes on all duplexes that need work.

I then do some creepin and see who owns them, last sold, taxes up to date? Etc.

I own a duplex in St Cloud that I’ve rehabbed.

https://www.biggerpockets.com/forums/522/topics/464525-investa-brothel-the-odyssey

@Rachel Brewster I would go with option B. I’ve lived in my Northeast duplex for over a year and never had to pay the mortgage out of my pocket. You’ll have to get preapproved of course and I would start to talk to a lender now to get on course for that.

You’ll have no problem finding tenants in Minneapolis if you buy a place in a decent area and make it nice. Duplexes in the right neighborhoods are going for $200-300k so you’ll want to make sure you can get approved for that, although the rents can help push your approval higher in most cases.

I had a guy buy a duplex with 3 bedrooms in each unit for $230k. We closed yesterday and he’s putting about $30k into it which is all part of his financing. Those units will rent for around $1500 a piece and he’ll do well.

@Lee Fahy you either have to find something to add value to or find a seller that’s motivated and is willing to come down on the price.

How have you been searching?

@Rachel Brewster yes it was a client of mine and we found it on the mls.

It was originally listed for $260, dropped to $249,900 and we got him down to $230 with the seller paying 3% closing costs if I’m remembering it correctly. The buyer only ended up bringing $3k to closing and has a rehab loan.

Originally posted by @Rachel Brewster :

My goal is to buy a multifamily as a house hack by spring 2019, so I have been diving into Bigger Pockets and other resources to educate myself on cash flow analysis.

Lately, I've been working on clarifying my ideal metrics for buying the multifamily. For example, one of my metrics is that I want my payment/house hack rent to be 30% (or less) of my take home income. 

I've always used the 30% rule of thumb when renting an apartment, so it seems to make sense to also do it for owning a home. 

And that's where my question comes in. When are thinking about buying a multifamily, how do you set up this equation? Is it:

A) Mortgage+expenses /income = 30%

OR 

B) MY portion of the rent /income = 30%

I like Option A because it makes me feel safe: If for some reason I am unable to find tenants, I will be able to cover the full mortgage and expenses on my own. 

Using Option B opens up opportunities for me to buy larger/nicer multifamiles. But I'm worried that it could cause me to buy too much property and overextend myself. 

Does that make sense?

Perhaps another way of asking this is: How do I decide how much property to buy? Where's the line between good risk and stupid risk?

 I would do neither. When you are looking to buy a duplex, you should be sure that it cash flow's well if you move out. If you are not able to make at least $300/month with you not living in the place, then I would avoid it. I think that too many people just buy a duplex thinking it's great that the other unit pays for part of your mortgage, but you want to be able to move out of the place and still be making money

@Todd Dexheimer In both scenarios, the property produces positive cash flow, so I’m not worried about that, just the risk attached to it. 

I would go with option B.  Why, because the better property you buy the easier to rent.  It is all about cash flow and I want to maximize it but the further I can get from renting to the desperate the better.  If you can settle on a property that rents for $1000 to $1200 a month should allow you to find decent tenants.  

Your back up is your side of the duplex.  Since you are able to afford more property with option B if you get financially stressed you have the option of renting out a room if absolutely necessary.

@Lee Fahy

@Rachel Brewster

I've met with a lot of newer investors and have helped quite a few get a better understanding of how to go about buying a property.  The biggest issue I've seen is when people use a generic formula based on a book or podcast since those formulas have to cover a very conservative approach.  They often load every contingency known to man into their formulas so they'd never be able to come out with a positive cash flow and thus never be able to buy a property. 

You may wonder how some people are able to buy when you can't figure out how they did it? Your approach shouldn't assume they are just throwing money at something but rather what did they see or do that I didn't? I'm guessing they might know the current rent was too low and can they raise it so they make more money, maybe they can add a bedroom in each unit, or maybe they are going to house hack and can just pay more than you having figured something out that wasn't obvious. There's a big difference in profitability in putting 25% down and 3.5% for a FHA. Are you going to self manage or build in a 10% management fee? What vacancy rate are you putting in? Prime areas can carry a low vacancy estimate while rough areas have a much higher vacancy rate-Minneapolis has the lowest vacancy rate in the nation at 2.1%. What do you put in for repair/capex? How old is the property you are looking at and what is the age of the heating system/roof/water heater?

I wish you the best in your search and always advise people to get into a lot of properties to understand condition/rent/opportunity since you can't really run numbers off the MLS without getting inside places. As an FYI, I bought 7 properties in South Minneapolis in 2017 so there are still deals out there.

If you want to get together for coffee, connect with me and we can chat.

@Rachel Brewster

How about set your goal to buy for April of 2018 instead of 2019 so you don’t waste another year thinking about this nonsense and just do it.

Originally posted by @Rachel Brewster :

@Todd Dexheimer In both scenarios, the property produces positive cash flow, so I’m not worried about that, just the risk attached to it. 

What is the risk you speak of?

Tenants not paying?  Water heater breaking?  It’s all part of the game.  If you find a property that you believe will cash flow hop on it.  Or send it to me and I will

Originally posted by @Rachel Brewster :

@Todd Dexheimer In both scenarios, the property produces positive cash flow, so I’m not worried about that, just the risk attached to it. 

 If the property truly produces positive cash flow then what is your risk and can you handle that? If you have a 6 month+ payment reserve and are putting away the extra necessary reserve needed, then you risk is minimal. You eventually need to get out of your own way and take action.

@Lee Fahy / @Rachel Brewster

You are correct, most of Minneapolis itself is currently overpriced for the rent amounts to properly work. The NE area (e.g. Sociable Cider Werks) still has occasional 2-4plex deals that has decent financials, but otherwise start looking in more of the 1st tier suburbs (richfield, golden valley,...) 

@Todd Dexheimer I appreciate the tough love, but it’s not just the money, it’s the education. While it’s unwise to be over educated and never take action, it’s also unwise to be under educated and take action....and I’m definitely the latter! 

I found started looking into real estate and found Bigger Pockets just a few months ago. I need to get a plan and system in place before I buy. In Brandon’s first book, he sugggests taking a year to grow your money and your knowledge so that’s what I plan to do. But if I feel comfortable taking action before that, I definitely will. 

@Rachel Brewster Good luck on making progress, I hope you find a property that will work for you.  Just my two cents but I'd encourage taking this point of view - you're never going to be perfectly educated, no matter how much you read or try to prepare, there's bound to be a curveball or something else unexpected real estate will throw at you.  When I began my approach just factored in some unknown-what-ifs.  If you can carry the property on your own paycheck, and you have 6mos-1yr of access to cash then go for it.  It may not be financially the best deal in the world, but  you'll learn more from doing it.  

Originally posted by @Rachel Brewster :

@Todd Dexheimer I appreciate the tough love, but it’s not just the money, it’s the education. While it’s unwise to be over educated and never take action, it’s also unwise to be under educated and take action....and I’m definitely the latter! 

I found started looking into real estate and found Bigger Pockets just a few months ago. I need to get a plan and system in place before I buy. In Brandon’s first book, he sugggests taking a year to grow your money and your knowledge so that’s what I plan to do. But if I feel comfortable taking action before that, I definitely will. 

Every second you procrastinate, you give up your greatest asset:  time.

@Rachel Brewster I think it's awesome that you are content amalgamating, learning as much as you can (this is extremely crucial to the process)

To get closer to your 30% rule, I'd suggest you look at 3 or 4 unit-buildings just because you are more likely to contribute less to the mortgage if you have 2 or more tenants. Generally, as consume more content about real estate, the answer becomes clearer to you (I empathise that it currently doesn't appear that way). 

Check out a good book on MF:  Investing in Duplexes, Triplexes, and Quads: The Fastest and Safest Way to Real Estate Wealth.  

Hope this helps. Goodluck. Thanks! - Ola 

@Rachel Brewster I would second the thoughts of @Bruce Runn @Todd Dexheimer and @Jordan Moorhead .  In general, it's too easy to set parameters that either prohibit or stunt your investing growth.  If you find good deals that cash flow they will still have some risk.  That risk can be mitigated with cash reserves, but I would caution you against setting up too many arbitrary roadblocks to executing a profitable investment purchase.

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