Go commercial vs stay residential for 1st 10 properties

Rental Property Investor · Jewett City, CT · Member since 2020 · 2 posts · 2 votes

Got questions man where the helpers @

Just closed on my first Multi-Fam, it’s a 2 (3b/1) with basement and garages in East Hartford Ct area trying to grow my portfolio, what is the best way to go about it ? Take some years off to save 25% + closing cost to eventually close on a 5-20 family which would be the commercial route, but would take quite some time.

Or keep on buying 2-4 family property using fha or conventional loans and use them as owner occupied for 1 year then turn them into investment properties

But with this strategy I run the risk of falling into debt to income ratio or at least i think,

Those are the two strategies looming over my head if you guys have any insight, tips, articles don’t hesitate thanks in Advance

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Joshua JanusBusiness Member

Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes

I would house hack every few years or however often that you can meet the equity requirements and refi. As you accumulate more properties you can use the rental income from the previous properties to help you qualify for the next. Just make sure they are cash flow positive! Also, I would find investors near you and pull money together to buy a 5-20 unit and scale faster.

[email protected]614-502-5316 Podcast Guest on Show From DoorDasher to $1.5 MILLION in Real Estate (All at 22 Years Old!)

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Ryan AllisonPro Member
Investor · Connecticut / Massachusetts · Member since 2019 · 65 posts · 38 votes
4y
Is your first deal a house hack? Seems like a good start if it is. If you can keep doing that, I would highly recommend it. House hack residential properties to start....
If you find a commercial deal you like down the line, can always do a 1031 exchange and sell the residential properties that you have acquired. Seems like the rite of passage for a lot of people.
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Joshua JanusBusiness Member
Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
4y
I would house hack every few years or however often that you can meet the equity requirements and refi. As you accumulate more properties you can use the rental income from the previous properties to help you qualify for the next. Just make sure they are cash flow positive! Also, I would find investors near you and pull money together to buy a 5-20 unit and scale faster.
[email protected]614-502-5316 Podcast Guest on Show From DoorDasher to $1.5 MILLION in Real Estate (All at 22 Years Old!)
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Chris John
Member since 2020 · 671 posts · 937 votes
4y
@Samuel Dumond
Congrats on the purchase! That's exciting. Also, I love the question. I wish I'd asked the same thing when I was getting started because I think things would've grown a lot more quickly for me.
If I had it to do all over again, I'd use your suggestion of buying 2-4 MF and using fha or conventional loans. Ultimately, as prices increased and debt retired, I'd 1031 them into bigger properties or do cash out refis on them to buy more 2-4 MF until you get to 10.
It's not hard to imagine a scenario where you fairly quickly get to 10- MF units and then can 1031 those into 10+ apartments. Anyway, that's the route I wish I'd pursued and the strategy I will be sharing with my own children as I believe in sustainable growth.
I will say that you're correct about the dti ratio though. I'd work closely with a trusted lender and an accountant and let them know your strategy so they can talk you through it over the years. I know I've frustrated my accountant on more than one occasion by showing more income than he wanted me to, but I had to keep my lender happy too. I felt it was cheaper to pay a little more in taxes, but to keep my dti solid enough to get the next loan. Of course, part of this strategy would also center around keeping the spread between rents and mortgage payments at an acceptable level, so you may have difficulty participating in too many low down payment fha loans depending on your actual salary. I'm a teacher, so I definitely needed to put 20-25% down to keep that spread large enough to qualify for the next loan.
In the end, the world loves a man with a plan, so you're gonna be great with whatever route you choose. Please don't hesitate to reach out if there's anything you think I can help you with. Best wishes!
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Samuel Dumond
OP
Rental Property Investor · Jewett City, CT · Member since 2020 · 2 posts · 2 votes
4y
@Ryan Allison thanks for getting back to me Ryan and yes it’s a house hack, thanks for the advice
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Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
4y
@Samuel Dumond keep buying 2-4 family homes and having your tenants pay down your debt. Take good care of the properties and make sure you keep up on maintenance and CapEx.
7 years from now refinance them all, take the funds you pulled out and buy a 5-20 unit commercial property.
Have your cake and eat it too.
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Jacob H.
Rental Property Investor · Orlando, FL · Member since 2018 · 64 posts · 54 votes
4y
If you're trying to use your own money and not syndicating into a large multi-family commercial then as others suggested, the best route is likely to purchase small multi-family properties for now, grow using that strategy, and then use those properties to purchase the larger commercial property. Naturally, the 1-4 units will have less of a down payment, especially if you're using FHA. As you accumulate appreciation, equity, and cash flow from these small multi-family properties, at a certain point you'll be able to refinance, sell (1031, ideally), and/or put the cash flow towards a commercial sized property.
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