Multi-Family Benefits in current market?

Question

I'm going to buy a multi-family property in around 6 months as my first investment and house hack it. I'm using the VA home loan so 0% down and no PMI which helps. I talked to my real estate agent and he told me in the current market it's mathematically impossible to cash flow even when I move out and rent all the units (Duplex or Triplex) he told me I will still be losing some money on the property. Can someone explain to me the benefits of still getting in the market even if the other units don't cashflow or even break even? I understand going from $1700 in rent currently to house hacking and maybe paying like $1200 while living in one unit will save me money but how could I grow like this? Also, I'm trying to get into a B-class area not trying to buy a fixer-upper in a shady part of town, and I have a wife and kid so having a roommate in the unit I will stay in is out of the question. Would love to hear what you guys think about the current market, and why it's still a good idea to jump in.

Jonathan Taylor Smith · Answer

@Devin Voelker - Cash-flow is not the only way you make money owning rental real estate... There are 4 others, including appreciation, mortgage paydown, tax benefits, and inflation profiting. And if rates go down again in the future, you can always refinance at that time to lower your payment. But you'll be increasing rents each year. So, second year and beyond cash-flow will almost certainly be better than first year. Do you think rents and prices will be higher or lower in five years - and then five years after that? In 2018 I thought prices were too high. How can you know if in 2030 we're not all wishing things were as "cheap" as they are now in 2023?

Justin Moy · Answer

There are a few things to consider.

If you're buying in a class B area and purchasing a nice property and using 0% down, it will be hard to cash flow.

I'd consider buying something under market because it needs work (but can still pass VA inspection) and putting some sweat equity into it to push your rents up.

If you put 0% down you'll have a 100% loan, which will push your payment high. Personally, I think you need to rethink your cash flow expectations with that strategy. People are looking for and excited about ~5% cash on cash in a big growing market by putting 25%+ down. It would be tough to find the same with 0% down.

If you want more cash flow you can put some cash down, drop your neighborhood expectations, buy an undervalued property and put in the cosmetic work to push up rents, or find a home run deal that will require tons of patience and work on the acquisitions side

Randall Alan · Answer

@Devin Voelker

What the challenge is at the moment is that interest rates are sucking up your  profit into the loan expenses .  That’s the short and sweet answer.  The other challenge is that real estate costs are out of balance with rental costs. Also, by putting zero down you are making your payment higher than a typical investor would see… so that also plays against your cash flow as well.

You have to factor all these things into your buying considerations.  Truthfully, it isn’t the best time to be buying a leveraged (financed) property.  All the best principals you read about on Bigger Pockets work in a low interest rate environment - which we have had for years and years leading up to 2022.  Higher rates effectively push pause on many concepts like the 1% rule… and 7+ percent rates with high prices removes the majority of profit / cash flow from most deals right now.

I continue to apply the same principles though… you run your numbers and only buy if the deal makes sense.  While you can refi to a lower rate later on, the costs associated with that are a couple of years worth of loan pay down…  so you take a big step backwards to do that. For now I will wait for rates to drop and home prices to settle.

All the best!

Randy

Casey CJ Noble · Answer

Hi Devin!  While current market conditions do not make it easy to achieve what you're looking for, it's really not impossible...however does take some serious work to make it happen finding and closing the right deal.  In a B neighborhood, cash flowing turn key house hacking opportunities are rare (although do exist on occasion), but I do see better opportunities with properties that need some work.  I commonly work with investors in this scenario.  There are also renovation VA loan products out there which can allow you to close on a property in need of repair and even capitalize those repair costs into the loan.

Looking long-term, if you can land a property that turns some cash flow now, there will only be upside from there as rents increase, refi opportunities if rates decrease, and your net worth increases through appreciation (at which point you could consider pulling out some equity to put in another deal!).

Hope this helps!  Feel free to reach out it you'd like to connect sometime here in Jax.

Evan Polaski · Answer

@Devin Voelker, as others noted, you are in an in demand market where values have risen faster than rents.  Appreciation is typically the real money maker in real estate.

And regardless, with 0% down, your opportunity cost is nonexistent (unless this is a one and done offer from the VA).  So, even if the only really option is saving money each month, that is still a step in the right direction.

Is now a good time to jump in: maybe.  No one has a crystal ball.  When getting started, I tend to say, get in, as long as your career is moving in a good direction and you can recover if things don't go great.

Bjorn Ahlblad · Answer

Today's interest rates only look high compared to the nutty 3% rate we had a year ago. Compared to historic interest rates 7% is pretty normal. Combined with current property prices it is hard to make a buck with LTR in many parts of the country. Make sure of your underwriting skills before you take the plunge.

Multi-Family Benefits in current market?

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