First real estate property, good deal with no cash flow?

Question

My starting the process of my buying my very first real estate investment, I’ve decided to go with multi-family, I plan to buy and hold, I plan on buying a duplex or triplex, I plan to live in one unit and rent the other one(s), I live in a town where there are many old properties such as Victorians, a-lot of the time witch I prefer because I plan to update it with time such as carpet, appliances, counters etc. I plan on getting an FHA loan. My questions would be should I be worried if a buy a house that’s 80+ years old? I current live in a 4-plex  that is 100+ years old that was once one big house. Old houses very common in my town (Eureka CA). I also plan on using a line of credit for my down payment since I don’t have very much money but great credit, I’m 23 years old. Does it make sense to buy a duplex and the other unit only covers 50-60% of the mortgage? I would also be adding a monthly expense of 300-500$ for using my line of credit, Any advice would be greatly appreciated!

Tj Hines · Answer

@JC Espinoza

My questions would be should I be worried if a buy a house that's 80+ years old? (Anytime you're buying an older asset be sure to have a thorough inspection done, so there aren't any surprises after you close on the asset. Typically older assets may need more maintenance than a newer asset. If you take care of all the repairs before hand and not just throw lipstick on a pig, then you will have a viable asset that's trustworthy, to where you don't have to worry about maintenance issues)

Does it make sense to buy a duplex and the other unit only covers 50-60% of the mortgage? (At least in this case you do have someone else who will be contributing to the mortgage payment besides yourself, which definitely take a load off. 50-60% of the mortgage is better than you having to cover the entire 100%)

Greg Dickerson · Answer

The age is not a concern it’s the condition of the structure and systems. If they are in good shape and up to date your ok. If not you need to know the costs to correct all defects.
You need to run the numbers to determine if it makes sense to occupy half the property as apposed to renting or owning elsewhere. I would not use a credit line if the interest is too high.You could look for owner finance deals if your cash is limited. Some owners will finance 100% if they are motivated enough.

Carson T. · Answer

I bought and rehabbed a house in Ferndale three years ago near Eureka that was built in 1889. The old houses around here have great bones being mostly built with old growth redwood. Anything that has made it through 80 years of earthquakes is probably built pretty solid. Its the guts you have to be concerned about. The wiring, plumbing, and insulation are the things you are hoping someone in the not too distant past has already redone. If it still has knob and tube wiring in the attic you are in for a major expense rewiring an entire house. I'd recommend staying away from houses with fireplaces or at least plan for a new source of heat. Old windows and roofs can also get you when you least expect it.

There are several multi-families for sale in Crescent City just north of you which is a market I understand much better than Eureka but you probably need to live somewhere closer to your work. If you are young and unmarried I'd say take big risks while you don't have a lot to lose. You have plenty of time to recover if it goes bad.

Chris Grenzig · Answer

@JC Espinoza hey man house hacking is a great way to get started and also get your hands dirty. I'm like you, living in an expensive area (NYC/Long Island) and unfortunately cash flowing house hacks aren't practical. So the way I look at it is, if you are paying $1500-3000 for housing or whatever it is, and by doing a house hack and being conservative, you can reduce that cost and build up equity in the home, it could make sense.

I think too many people get hung up on house hacking and needing cash flow when its just probably not gonna happen in these areas, but if you reduce a major expense in rent/housing, then thats a net positive to your personal bottom line, and you still get a property under your belt, build up credit by paying loan on time, start your track record, and build up equity through amortization overtime.

It all depends what is right for you, but if you DO care about your properties having positive cash flow as well, then this is not a strategy for you and I would look out of state.

Greg Dickerson · Answer

All of the above. The key is consistency.

JC Espinoza · Answer

@Travis Gibson thanks for the reply! How do you feel about the other unit I rent out covers 75% of the total monthly expenses such as insurance, taxes etc? I’m only left to pay the other 25%, let’s say the the 25% I’m left to cover the rest of the expenses is half of what I’m currently paying for rent. So I would be cutting half of my current rent in witch I can put aside to reinvest, save for those big expenses that would eventually come up, or put into rehabbing. Can you call this a good deal, or something I should stay away from and find a property that at least breaks even or little cash flow? Any advice is greatly appreciated!

JC Espinoza · Answer

@Greg Dickerson great advice appreciate it! Would a good way to try and find owner finance deal would be ‘driving for dollars’ sending out post cards etc. things like that? What’s the most effective method you find to be effective?

Travis Gibson · Answer

@JC Espinoza sounds like you and planning on “house hacking” you 1st deal is a great idea and a great way to BRRR(Buy, Rehab, Rent, Refinance) the property.

However when you say “no cash flow” that is a bit of a concern. Anytime I buy any Real Estate(especially MF) I always make sure it adheres to the 3 Immutable Laws of Real Estate from Joe Fairless:

#1 - Buy for Cashflow

#2 - Secure Long Term, Low leveraged debt

#3 - Maintain adequate cash reserves

What happens when you do not have cash flow is you have to maintain your operating capital fund out of your own pocket. So say you need a new roof and the cost totally depletes your operating fund. Without cash flow at this point any additional operational issue with the property comes out your pocket(which I can tell you firsthand really sucks.)

First real estate property, good deal with no cash flow?

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