Grad student turned REI seeking advice on first property

[Sheldon Vic]

Hello all,

Currently living in Hawaii finishing up my last year of grad school (I have a little less than 1 year left). Have a family of 4 and currently renting. My wife works full-time, while I have part-time work (not significant income; primarily financial aid), we will have no debt aside from student debt. My grandparents property just sold, which I will be splitting half of the proceeds between a relative and myself. 

I am working with a local REI/Realtor on finding our first property here. My goal for this is to eliminate rent, while preserving capital for our next property. I was looking into utilizing an FHA (down payment would be something feasible for a property <$400k-->refinance to utilize as cashflowing rental), USDA (no down payment, high mortgage-->refinance to utilize as cashflowing rental), or HELOC (interest only payment, then seek to refinance and utilize property as cashflowing rental) to acquire this property.

Once I graduate, our family plans on moving to Oregon, which we would seek to find our next property (live and flip). I am also interested to invest out-of-state with any extra equity.

Ideally I would like to keep the Hawaii property for appreciation with potential cashflow (worst case im temporarily breaking even on the property, but having mortgage paid down and gaining appreciation).

Does this sound like something that could work? Thanks again BP community! 

[Sheldon Vic]

Originally posted by @Isi Nau:

Hey @Sheldon Vic

Congrats on grad school!  No easy task with a young family.

Three things to consider; how long will you be in Hawaii, will you rent the property or sell it when you leave, will the refinance be a cash out refi?

1. How long will you be in Hawaii

I totally understand wanting to avoid rent.  You'll want to run the numbers in a buy vs rent scenario.  Often times the magic number seems to be 2.5-3+ years.  This is the point in which buying makes sense financially .  If you're only going to be here for a year or two, I would recommend continuing to rent.

This is assuming you sell the home when you leave Hawaii.  Local economists and experts are expecting little to no appreciation in the next few years.  Any significant appreciation will come from forced appreciation.  So if you sell when you leave, natural appreciation will likely not be sufficient to offset the closing costs, meaning you may end up losing money on the deal.

Above, you had mentioned worse case scenario being you break even.  I think worse case scenario is you lose money.  We are at a treacherous time in the market.  The market is fickle right now.  Neighborhood to neighborhood, property type to property type are all varying.  Some are up, some are down.  This is when people lose their shirt on short term holds.  You can still make money, but you or your team have to know what they are doing and be disciplined.  Anyone could make money the past eight years.  Now we'll start to see the market teaching some really tough lessons.

2. Will you rent or sell the property when you leave

Selling when you leave was addressed above, and will depend largely on how long you'll be in Hawaii.

If you are going to rent the home, you'll need to go into it (during the house hunting process) running those numbers.  One challenge will be finding a home you want to live in that will also make a good rental when you leave.  The majority of the time (in Hawaii) it's difficult to find a home that fits both bills.  Rentals that make financial sense often do not have the features an owner occupied home would have.  Similarly, homes attractive to owner occupants often do not make financial sense as a rental.  Live where you like, invest where you'll make money.

This is another reason why I might recommend not buying now.  Save the money and buy a rental in Oregon.

3. Will the refinance be a cash out refi

If you're here for a year, there won't be much equity to pull out.  Even after a few years, I wouldn't anticipate much equity.  At least not enough to offset the cost of a refi.  Not with where the market is going.  Also, if it's going to be a cash out refi, the numbers might not work from a cash flow stand point.  If you pull out the max amount, your higher mortgage payment will likely push you into negative cash flow.

If you are set on buying a property in Hawaii (which is a good idea if you think you might come back) then I would buy something strictly as an investment, and have your family keep renting until you leave.

Your realtor has their work cut out for them in running these scenarios and analyzing potential properties that fit your short and long term needs. If you end up buying a rental, do not buy a single family home! Realtors love having their clients invest in SFH. Not sure why, except a higher purchase price means a higher commission. SFH in Hawaii are a tough product for long term rentals.

Thanks @Isi Nau for the feedback. What you said completely makes sense from both an investment and return standpoint.

So I was running through various scenarios in my head and how they could play out, but I would always try to make sure that there is some form of 1. forced appreciation (whether it be from minor rehab work i.e.: kitchen and bathroom remodel, flooring, paint]), and 2. the purchase price was not at the upper end of our qualifying threshold. 

In this scenario, our PMI would be less than what we currently pay in rent, we would be building some (not much) equity in the property; and should we sell, the property would have built in forced appreciation (even if the market dips, our budget/offers should account for this). The location we seek to invest in seems to have a positive economic outlook within the nexts 3-5-10 years as well.

I would consider a cash out refi only if the numbers made sense (1. funding is enough to pay off current mortgage and provide some profit to reinvest, 2. if the property serves as a rental AT WORST its a temporary break even). 

Assuming everything plays out as above, we expect to have some residual capital for our move. In this case, irregardless with or without a cash out refi (along with my wife and I having established W2's), we would have good momentum to find our next house hack where we do move. 

Hoping this seems like a logical plan where we covered all angles.

And yeah if all else fails, we continue to rent then move on.