Am I ready to purchase my second property?

Question

Is it too soon or a bad idea to buy my second property right now?

Last June I bought a duplex using a VA loan with no money down and boy has this been a hell hole.  Problems and problems, but once It's complete It will be bringing in some decent monthly income.   My family and I have been house hacking it and slowly renovating our unit and will do the same to the other side.

I would like to out offers on another duplex/triplex starting this month, and use a FHA loan, and will move into the property in June, to fulfill both the VA loan/FHA loan 1 year requirement.   I want to get a place that is more turn key than this last one, and my question is if i'm being too ambitious or if this could work out well.

Thank you, let me know if you need any more info guys.

Mike Roy · Answer

@Shane Welch Definitely okay if you know what you're doing.  Sounds like you do!

Shane Welch · Answer

@Mike Roy I think I got a good deal only because of the huge headache it was, horrible tenants that have been there 5 years with no ups in rent, and extremely outdated.  But the military base location was keeping it rented for still a 800 price tag, I could push 1,000 when I finish all my renovations.

I have been doing all the rehab myself so its kept cost down, but i still suspect i will be putting in 12-15k total to bring it to where i want it.  Im in one side, and the last headache tenant just left, so not its just us for a couple of months (im covering the whole cost myself, its not a huge issue).

From what im taking in from your advice, as long as I use caution, quadruple check numbers/ cash flow.  It wouldn't be a terrible idea to use a FHA loan for my second property?   After this I will start saving to do BRRRR.

Mike Roy · Answer

@Shane Welch - That sounds like great cash flow, atypical of a duplex with that kind of leverage unless you bought a screaming deal.

Since you just bought your first multi last June, I'm not sure if you've experienced much vacancy yet or the associated turnover cost.  Losing 30 days of income, and spending $2,500 to turn a unit, will usually devastate cash flow on a duplex.  Realistically, it might take 10 years of ownership to average out the bumps before you can accurately assess average monthly cash flows.   Any rental property can look phenomenal in a one-year window, so the perspective that time allows is important.

Again, I would just stress test your deals.  What's the worst that could happen that would still allow you to break even?  If you can withstand a whole lot of bad and not lose money, you probably have a good deal on your hands.

Shane Welch · Answer

@Mike Roy

Unless I am mistaking what you mean, the cash flow has been pretty decent.  $1600 income on a $1150 monthly payment, after taxes/expenses/cap ex, im looking at $200 a month, however after the rehab, comparable put me at $2000 monthly income, which is $600 net.

I still plan on House Hacking the next deal as well, so that will also help cut some of my risk.  I defiantly understand not wanting to be over leveraged, and as my second property with would also be my last ability to get low down payment financing.

Should I just suck it up and stay in this place for a couple more years till i can save up for a traditional finance? or sell it?  Im also wanting to move into a bigger place now that my family is about to add another.

Should I wait?  Or will it be fine as long as I make sure my cashflow is past a certain % of the mortgage?

Mike Roy · Answer

@Shane Welch - I'd be cautious about trying to build a durable portfolio on extreme leverage, especially given the maturity of this market cycle.  I would also spend time reflecting on the mistakes of the first property and consider whether extreme leverage, and correspondingly thin cash flows, was one of those mistakes.

Always buy for cash flow and stress-test your deals - even on a duplex.  Consider what would happen if your vacancy rate doubles, or rents decline by $100.  However unlikely, what would that do to your personal finances if it did?

There is no such thing as being too ambitious, but you want to employ responsible risk analysis along the way.