Owner occupied or multi-family as a next purchase?

Question

I'm new to BP and to REI as well. Currently own 2 single family homes, both purchased owner occupied - living in one and renting out the other. These were purchased before i decided to get more serious about real estate and happened to work out so far, but I don't want to go into my next purchase as blindly.

I'm getting ready for more investments and can't decide if I should make the next one another owner occupied single family home or a multi-family home? I'm not willing to move into a duplex, etc. although I know that would be ideal! Any advice on which route I should go or pros/cons to each? Also open any advice on how much $ I should have saved for each property in case anything goes wrong; should I hold off on purchasing altogether?

Erica Moore · Answer

Account Closed great advice. thanks again for the help!

Erica Moore · Answer

Account Closed I haven't really heard much of them lately, but I'm also a little more focused on south Austin (no particular reason, that's just where I am currently).

i appreciate the insight. Completely get that it's a mostly personal decision, but it's comforting to know that one of them isn't glaringly terrible! On a semi-related note, what's your opinion on selling one of the SFR and purchasing a duplex now instead? Or should i hold on to anything i was able to snag at a decent price in Austin?

Erica Moore · Answer

Account Closed oh i won't be investing in a small mulit in Austin! It would be in one of the surrounding cities for sure. I do want to change my primary residence within the next 3-4 years to a larger, semi-permanent home. And i'd also like to start building my portfolio and expanding into small multi's.

So i guess my question really boils down to: which one do i do first? I can afford the single family much quicker, but don't want to delay growing my portfolio (granted I still would with a 3rd SFR) just to move into a larger house i don't necessarily need right now. But I also don't want to put off buying anything for too long until I can afford a duplex/triplex if i could get a 3rd property now. Unless i'm looking at this all wrong?

Account Closed · Answer

@Erica Moore if you've got a ton of equity in an SFR and your goal is to grow your rental income, selling it & using those funds for invest in something with a much higher return on that equity position would definitely be advisable. I would say it depends on how much money you have left with it.

If you can pocket 150k and make a 20% downpayment on up to 750k of property at significantly higher cap rate than that house was bringing you, I would go for it. I think most of the appreciation we're going to see this market cycle has already been had, anyways. Just make sure you 1031.

Account Closed · Answer

@Erica Moore ohhhhh! Is Centex still pretty good? I know there are some cities up north of you that were pretty attractive to me at some point a few years ago.

The "what do I do first" question is just such a personal one, ya know? I'm not sure what other life factors and preferences come into play there but here's my personal situation: I'm 29, single, without children, and work full time in my investing business. I own a home I bought during the crash that's already a bit big for me. Would eventually like a nicer one in a nice neighborhood... but where I'm at in life just doesn't command it and I'm hell bent on growing my business so every extra dollar earned is reinvested in my business, with a few set aside for my rental portfolio. I might have bought a new car last year too (whoops) but it was a big tax writeoff. I'm totally ok with the idea of not improving my standard of living substantially, now, though. 5 years down the road I might crave those upgrades more, though.

I don't think you're looking at it wrong. The investor-erica on one shoulder is probably saying "why would you upgrade your house?" Be cheap and go make more money. The lifestyle-erica might be saying "how long are you going to wait to live how you want to live?". Nobody on BP can tell you which one to pick.

Account Closed · Answer

@Erica Moore these are just two so very different options. Deciding to change your primary residence vs. your investment portfolio.

I think you just have to ask yourself whether your really want to move or not. If you're ok with your current primary residence, I would say invest. And maybe not in Austin lol, that fourplex is gonna be pricey and not a great flow-er in this market. Single and small multi both have their merits- i prefer small multi :)

Also, here's a section of a post I just made on another thread about a more detailed method of cap-ex calculation:

Truly, the best method for the over analytical, is to segregate the cost of replacement vs. remaining lifespan of each component of the property & find out how much need be budgeted yearly until replacement of that component comes due.

Ex: if you expect a furnace to last 15 years with an 1500$ replacement cost, and yours is 10 years old when you buy the property, then you should have a total of  $1500 reserved in the next 5 years. This breaks down to $300/yr, or $25/mo. After that furnaced is replaced, you should recalculate the budget. If you new furnace is also going to last 15 years with a 1500 replacement cost then you only need budget $100/yr, or $8.33/mo.  This is a FAR more accurate method of maint/capex estimation than the good ole' pro-forma 10-15% :)

Now if you buy a property that's got some older components, you should look at your short term maintenance budget vs. your long term maintenance budget. Note that once you "stabilize" a property... replace the older stuff in the first couple of years... then your average operating costs are going to go down significantly. That $25/mo furnace budget need not worry you, it's going to drop down to $8/mo after your first 5 years. And your rents will likely increase :)

Erica Moore · Answer

Thank you for the insight, @Aaron Hale. My thinking was to either do 5% down with PMI on a semi-permanent single family and rent out my 2 current properties or wait to save the money for a duplex or triplex. I've read that using a HELOC for the multi-family isn't a good play. would my only option at this point be to wait until i've saved enough?@Terrell Hill I'd like to only move one more time for the next several years (and want that to be in a single family), so owner occupancy on a mulit isn't an option :/

Aaron Hale · Answer

Hi, @Erica MooreWhat type of property you choose depends entirely on what you want to pursue. If you’re comfortable with SFRs, stick with it. If you want to begin scaling up, 2-4 unit buildings can still be leveraged with residential mortgages but lenders will require 25% Dow if you aren’t occupying one of the units. If you change your mind and do choose to move into one of the units, you can get a FHA loan for lower interest and low or no money down.

If bigger apartments is your future goal, lenders will still want to see that you have experience managing a small multi-family. It all depends on where you want to take your investment portfolio.