I’m ready for my 1st purchase...but it’s a sellers market

35 Replies

About me:

So if I have finally gotten to the point where I’m ready to make my first purchase. My end goal isnt to be loaded rich,but rather have some financial freedom at some point. I love my job so I will never quit. I’m handy and plan to at least the minor maintenance myself.

Financial:

I don’t own anything other than a pickup. I’m a single 25 year old guy. with around 50k total that I’ve saved over the course of 3 Years. I live in a rapidly growing area, one of the fastest growing in the nation. That means it’s a seller market for sure. People are getting well over full asking price all day long within a few days of hitting the market. Now causes some price inflation.

I’ve been wanting to buy a fourplex but the numbers don’t make sense any of them, so I’ve started looking at duplexes. I’ve landed on a Duplex I really like and it’s super clean with lots of recent repairs including new roof, new appliances, fresh paint and floor all around. It’s in a fantastic area which vacancy will be low.

Cost is 310,000; I was going to do an FHA loan with 3.5% down (10,800) which would earn me lovely pmi that would never fall off, plus a 1% loan initial fee and the Leander fee. Plus closing cost, inspection and appraisal cost. I estimate my cash total cash investment will be 18K.

The numbers I’ve crunched are as follows.

Gross operating cost per month:

Mortgage w/ pmi, insurance & taxes

$1850

Utilities

$80

Maintenance

5%

Vacancy rate

8%

Management

I’ll Self manage

Gross Income:

Rental income

$2200 worst case

$2400 best case

Total money invested:

18K

Basically I need advice from the people who have some good well rounded insight, because I can’t be sure that the people who have some stake in game(realtor and lender) are always cutting it straight, I trust them, but 3rd party insight is better. The economy here is great and growing. Everyone with money is buying marginal deals because the forecasted appreciation. Making it hard for someone like me who needs to find better than marginal deals, because I’m just getting started. My plan is to buy and hold. I can live in it for awhile and buy forecloses and do flips, after having a place to live and stop paying rent. Or I can move out in a year and do it again, or do I just keep renting and wait? Who knows when the market will drop.

Any and all advice is appreciated.

Respectfully

Hunter

It’ll likely be a sellers market for at least another couple years in most of the country.

You may not want to wait as interest rates will probably be pushing 6 percent sometime in 2019 (for non owner occupied) loans

@Hunter B. - welcome to BP and REI! You state buy and hold but is your focus on appreciation or cash flow? I haven't found (in the markets I analyze) where you can have both in small MFRs. Either you don't cash flow and hope the property appreciates (B+ areas) or you cash flow knowing the property will appreciate little to none (D- areas). What's your goal?

@Jay Helms thanks for the reply. I suppose part of the issue for me is that I don’t what is the best approach is in the situation, because I don’t know how to grade my area. Any insight where i can get info on my areas grade?

I would buy the duplex but using a conventional loan. It is too many fees and PMI with a FHA loan.

Originally posted by @Amy Beth :

I would buy the duplex but using a conventional loan. It is too many fees and PMI with a FHA loan.

 Amy I agree the fees suck but only having 50K how would I go conventional being that’s not even %20?

I think this deal sounds good if you can manage to do it without PMI. I've heard of Quicken and some small local banks being willing to do 10-15% downpayment on loans without any PMI. But you would definitely need to live in it to qualify. I know it sounds risky because you won't have much for cash reserves (assuming $31,000 downpayment and $5,000 closing costs and such) but doing it this way would be better in the long run in my opinion.

I say in this market buying the Duplex is a good first deal while the rates are low. Put down as little as possible, there are some low down payment option other than FHA but if you have to go FHA go ahead, you could refinance later (and they may even change the FHA rules about requiring MIP insurance for the life of the loan soon I here.) Put the rest of the money in reserves and continue saving for your next deal once you have some more experience or the market is favorable, but continue to look for deals because never know what may pop up.

just putting it out there, 

1. if you don't plan to occupy (although it sounds like you do) plan on 25% down for MFR.

2. Have you considered investing in a less "hot" area? 

Would you rather buy it at $310k and a 4% interest rate in a sellers market today, or wait 2 years and pay $330k at 5.5% and buy it in a buyers market then?

Whether it is a buyers or sellers market, is just one tiny piece of the equation.  

well it doesnot cash flow with #'s provided and no capex. Even with new roof etc, don't forget you are consuming; hvac systems, water heaters, flooring, roofs, cabinets, counters, appliances, etc etc. If you plan long term hold you will have to deal with all the components that make up a home, eventually. 

If that is $2400 TOTAL rent there is no way I would buy that for $310,000. Much less in Idaho (no offense). I would be looking in another market.

@Hunter B. If you’ve got 50k that’ll buy you two or three properties in other markets. You can always go that route to

@Hunter B. you outline what I hear every home buyer say when they fall in love with a property that's selling at market price. If it's clean and has a bunch of updates I don't want anything to do with it.

I want the piece of garbage that smells like cigarettes and is infested with rats. The duplex I bought in Minneapolis to househack smelled like cigarettes, had no working appliances and had lots of mice. I got a deal on it because the owner was making it hard to buy and it needed work. Now it's worth a lot more and it cashflowed from day 1.

Go find a **** hole my friend and make it not.

Originally posted by @Hunter B. :

@Jay Helms thanks for the reply. I suppose part of the issue for me is that I don’t what is the best approach is in the situation, because I don’t know how to grade my area. Any insight where i can get info on my areas grade?

The more you analyze dealS the more you'll gain that knowledge but one of the best ways is to talk to Local realtors and your local REIA group.

Originally posted by @Jordan Moorhead :

@Hunter B. you outline what I hear every home buyer say when they fall in love with a property that's selling at market price. If it's clean and has a bunch of updates I don't want anything to do with it.

I want the piece of garbage that smells like cigarettes and is infested with rats. The duplex I bought in Minneapolis to househack smelled like cigarettes, had no working appliances and had lots of mice. I got a deal on it because the owner was making it hard to buy and it needed work. Now it's worth a lot more and it cashflowed from day 1.

Go find a **** hole my friend and make it not.

 So I totally agree with you and that’s my preference, but my predicament Is that I’m currently renting and putting the money nowhere. My plan was to buy this duplex with total cash invested of 17K  and at least be putting my money in equity rather than paying rent. 

Then with the remaining money I have, do exactly what you say on the side with another home. Is this not what you think I’d the right play? What would you do differently? 

Thanks for the insight!

Nevermind I was going to, but there is no contact info. I have some properties that I have gotten into for much less by house hacking. I would love to share this with you and give you my insight. Message me. I may also have a property for you to look at.

If you’re in it for the long haul it doesn’t matter if it’s a buyer’s or sellers market.

@Hunter B. Remember, the market is cyclical in nature, so think of Real Estate Investing as a long-term play. 

If the $2200 is with your rent + the tenants' rent, it isn't a fantastic deal; however, maybe you could try a triplex instead but fully deploying your 50k using FHA. This might be another approach that could work.

Hope this helps. Goodluck. Thanks! - Ola 

@Hunter B. ,

I was in your same situation 2.5 years ago. I both wanted to REI and live in a fantastic neighborhood (South Minneapolis, MN) but everything was also overpriced. Nothing made cashflow-sense, at least in the A neighborhoods.

So we gladly paid too much for a duplex. We gambled with the hope of profiting from Appreciation. We counted the other unit's rent as contribution towards PITI (also did FHA 5% down)

Today, we are selling after 20% Appreciation. Rents have also gone up, but the buyer is gladly paying too much as well.

When looking to buy in nice (A-class) areas, you often have to pick your profit-preference; Cashflow or Appreciation.

We can give you advice all day long, but ultimately you're the one who has to live with the decision.

Looking forward to hearing what you decide!

@Hunter B. just be patient and find something that needs a little work and actually cashflows. You're almost never going to find something that makes sense and is turnkey. Even if you do you miss out on the value add component.

I don't believe that you can count on appreciation unless it's forced so I wouldn't buy and cross my fingers that the rents  and value of the home went up.

No better time than the present. Your in a great situation with little debt and a down payment. Just get preapproved for loan and GET AN INSPECTION
Good luck

It may seem counterintuitive, but it may be better financially for you to rent your residence there.

This house, being fairly newly updated, might be a good place to start your investing career.  It is a buy and hold play, so the interest rate matters.  You're young and holding, so if the market fluctuates, you hold steady and keep paying down the mortgage, while living cheaper than you would with a single family home.  All repairs spent on the home are tax deductible if you account for them properly.  You can learn the game a little bit here and in a few years with experience you may better understand where you want to go.  

I'd do it if I was you. Do the FHA loan and save your limited cash resources. Keep living frugally as possible and saving and investing (401k/Roth/etc) to diversify your portfolio.

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