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Alban Celiku
  • New to Real Estate
  • Massachusetts
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Where to put my eggs?

Alban Celiku
  • New to Real Estate
  • Massachusetts
Posted May 26 2023, 12:53

Hello BP Community!

Knowing what you experienced investors know now, given the current housing, and economy situation, how would you attack if you were us?

My partner and I live north of Boston and we're looking to start our real estate investing portfolio with small multifamily properties within Route 128 (about 10 miles of Boston). We're both 6+ figure W2 employees, 770+ credit scores, and currently are co-living with her parents, so our expenses are very low. We are qualified for 850k at 6.10% and potentially could afford more as our DTI is strong. We are hoping to eventually replace my partner's income with cashflow and have my income continue for a while to make us more financeable. Also, I only work three days a week currently so it gives me a lot of flexibility to invest and work.

We have a few thoughts:

1) Currently, it seems like we would not gain much by house hacking; besides lowering our down payment with an FHA loan and having more capital to use. We could possible both be able to acquire two properties <500k with FHA with the caveats of being in a market further from Boston, being required to live in one of the units (unless we commit mortgage fraud- not recommended I hear), and having lower cash flow since we'd be living in one of the units instead of collecting rent. The upside could be that now we have two income properties appreciating, building equity, depreciation, "easier" to learn on, and leverage to name a few. Cons would be possibly less appreciating market, more challenging tenant class/pool, more properties for management/repairs.

2) Taking FHA out of the picture for example above, would going all in for example on a 850k property within a couple miles outside the city be a better play than going further out and acquiring two <500k properties? A few pros and cons for 850k option that we thought of: pros- higher potential for asset and rent appreciation, higher potential for tenant quality/pool, lower vacancy rates, one location for maintenance/repairs. Cons- using all of the capital, potentially biting off more than we can chew? Pros and cons of the two <500k properties are the same as above in #1.

3) It seems like utilizing all our capital at once and waiting another 12-15 months before being able to purchase again if we are solely relying on our W2s for savings would make scaling a "longer" process. But, at the same time, it isn't about the number of doors that matters necessarily; but more about value of the property(ies). You can argue that the 850k property has a "better" upside in terms of an appreciating asset and market rent, which would possibly make it a lower risk. Where the other properties further our are less expensive but also less appreciating and a different tenant class/pool.

4) With all that being said, it would seem that all in on a 850k property would be a better option financially. We could go all in, potentially cash flow year 1, let property and rents appreciate, cash-out refinance 12-15 months later, and repeat the process. Every year we'd ideally reduce the purchasing time line from 12-15 months to 8-12 months, to 3-6 months depending on their value, ROI, economy, and housing market.

We wanted to ask the vast knowledgeable community about any blind spots or pitfalls we could be falling into. Without concrete numbers and other metrics, we understand a perfect answer doesn't exist regardless. Our goal is to continue this journey for the long run and don't necessarily have to leave our W2s right away, but within the next 3-5 years would be great to have my partner out of the W2 world and ideally helping manage/run our investing portfolio. Looking forward to hearing about any oversights and other general things we didn't think about!

Thank you all!

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Melissa Hartvigsen
  • Real Estate Agent
  • Beaverton, OR
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Melissa Hartvigsen
  • Real Estate Agent
  • Beaverton, OR
Replied May 26 2023, 14:30

Hello Alban,

You live in one of the move expensive markets in the country, and that makes it harder to have any cash flow for the first several years of your investments.

1) I do not recommend this. If you get caught, mortgage fraud will mess up your future investing plans. How about looking at a multi-unit property? With up to 4 units you can get a FHA residential loan with 3.5% down payment, owner occupy and have rental income subsidize some or all of your mortgage. (Need some actual numbers to comment further). FHA maximum loan amounts in your area: $828,000 for 1 living-unit homes to $1,592,350 4-unit. 

2) Your $850K option, when you look at the monthly payments compared to the market rent in your area for this type of home is it close to breaking even? If so, this could be a great play for appreciation, just know that you will see very little cash flow. Yes, you have one property to deal with, but as you scale up, your portfolio will be in multiple locations. For ease of management and maintenance the 2-4 unit option has an advantage.

3) Will the housing prices increase more over the next 12-15 months in your market? Then it may be possible for you to use a home equity loan on your primary residence (taken out before you move on) to help you fund the next purchase. 

I think one thing you are overlooking is investing in a cheaper market. While you may forgo appreciation, the early cash flow will be higher and that may allow you to scale your portfolio faster.  I just started reading "Long-distance Real Estate Investing, How to Buy, Rehab and Manage Out-of-state Rental Properties" by David Greene. I think you should add it to your reading list. :)

Melissa

  • Real Estate Agent

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Bjorn Ahlblad
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#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
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Bjorn Ahlblad
Pro Member
#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
Replied May 26 2023, 14:42

Two rules have guided me through thick and thin: never put all your eggs in the same basket or even basket type; and 2 never place yourself in a spot where you can be forced to sell. 

Yes, buy real estate but don't forget 401k, high yield savings, index funds etc. Spread it around.

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Alban Celiku
  • New to Real Estate
  • Massachusetts
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11
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Alban Celiku
  • New to Real Estate
  • Massachusetts
Replied May 26 2023, 14:51
Quote from @Melissa Hartvigsen:

Hello Alban,

You live in one of the move expensive markets in the country, and that makes it harder to have any cash flow for the first several years of your investments.

1) I do not recommend this. If you get caught, mortgage fraud will mess up your future investing plans. How about looking at a multi-unit property? With up to 4 units you can get a FHA residential loan with 3.5% down payment, owner occupy and have rental income subsidize some or all of your mortgage. (Need some actual numbers to comment further). FHA maximum loan amounts in your area: $828,000 for 1 living-unit homes to $1,592,350 4-unit. 

2) Your $850K option, when you look at the monthly payments compared to the market rent in your area for this type of home is it close to breaking even? If so, this could be a great play for appreciation, just know that you will see very little cash flow. Yes, you have one property to deal with, but as you scale up, your portfolio will be in multiple locations. For ease of management and maintenance the 2-4 unit option has an advantage.

3) Will the housing prices increase more over the next 12-15 months in your market? Then it may be possible for you to use a home equity loan on your primary residence (taken out before you move on) to help you fund the next purchase. 

I think one thing you are overlooking is investing in a cheaper market. While you may forgo appreciation, the early cash flow will be higher and that may allow you to scale your portfolio faster.  I just started reading "Long-distance Real Estate Investing, How to Buy, Rehab and Manage Out-of-state Rental Properties" by David Greene. I think you should add it to your reading list. :)

Melissa


Thanks for responding Melissa! I was absolutely joking about committing mortgage fraud =). Sorry if it wasn't clear in #1 our opinion on FHA/house hacking. Since we are currently living rent free, house hacking doesn't seem like a big upside for us at the moment besides what I mentioned in the original post. We have also gotten similar numbers for 2-4 units that would need to meet the self sufficiency numbers.

It does seem many of the areas surrounding Boston are starting to appreciate as inventory continues to be limited and with the accessibility of Commuter Rails and the T, WFH, people are living further and further from the city. We anticipate with the biotech, hospitals, and Universities, demand to be quiet strong with an appreciating housing and rent market (if anyone knows more please comment).

In terms of out of state investing, it seems the tide has switched. My reservations are that it will be difficult to find a location that isn't already saturated. Second, the democratization of information, increased awareness, and social media, real estate investing out of state has exploded. The market that David Greene wrote about in 2019 was significantly different to what it is now nation wide. A property of 300k with a net cashflow 6k annually while it appreciates 1-2% annually can see all its cash flow wiped with a capex expense. However, if a 800k property in a market that appreciates 5% with no cash flow will produce 4x the cash flow with annual appreciation of rents and property values. Scaling doesn't necessarily mean number of doors, but net value and total ROI can be helpful.

Have you had success with out of state investing? I have a few friends that have gone over the boarded in NH and CT but not the traditional out of state in the sense of going to Indiana or Ohio or somewhere in the Midwest where traditional investors go to find higher cash flowing properties. Interestingly enough, if you have followed David Greene, his opinion and strategy has shifted from his/Brandon's initial opinion of cash flow vs appreciation (not speculation). I'm on episode 630-ish and David's tune has changed throughout the years with the shift in market/economical trends.

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Alban Celiku
  • New to Real Estate
  • Massachusetts
5
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11
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Alban Celiku
  • New to Real Estate
  • Massachusetts
Replied May 26 2023, 14:59
Quote from @Bjorn Ahlblad:

Two rules have guided me through thick and thin: never put all your eggs in the same basket or even basket type; and 2 never place yourself in a spot where you can be forced to sell. 

Yes, buy real estate but don't forget 401k, high yield savings, index funds etc. Spread it around.


 Thanks for the reply! I agree, diversification is crucial, that is why I will continue with my current W2 income and 12% 403(b) contributions that are 4% matched by employer that increase annually.

What are your thoughts on the old mantra of BP talking about going a "mile deep but an inch wide?" It seems like being a "generalist at all, master of none" is difficult in investing, especially real estate investing. Most of the success has come from those focusing on a specific niche in the market or what the market gives them i.e. Brandon and mobile home parks, Andrew Cushman and commercial MF, Rob and STR, and the numerous guests with MTR, condo conversions, rent by room, land, building, etc etc.

I feel like being in one area and getting to know the market, the players, the resources, the trends, etc will help in knowing when a good opportunity presents itself. Warren Buffet is also well known for saying "put your eggs all in one basket and watch that basket very careful" Granted, none of us are the Oracle of Omaha or anywhere close to his knowledge.

Could you expand a little more on what would a position to sell be? Would it be a shift in market trends, housing costs, loss of job, lack of capital, etc? If everything in my personal life stays the same (of course no one can predict a Black Swan event) in terms of W2 and if we hold for a while, are there any outside factors that could be that severe that we'd be forced to sell?

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Melissa Hartvigsen
  • Real Estate Agent
  • Beaverton, OR
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Melissa Hartvigsen
  • Real Estate Agent
  • Beaverton, OR
Replied May 26 2023, 15:16

You are welcome!

Thanks for clarifying the joke! Sometimes it is hard to pick up on jokes just reading a post. :)

2 units do not have the self-sufficiency requirement that exists on 3-4 units. (In my market finding a 3-4 unit that meets self-sufficiency requirements is like finding a unicorns).

Personally, I haven't taken the leap to invest out of state yet. I am considering it after I referred a client to a broker in Peoria Illinois (the largest local employer there is Catepillar, and there are several hospitals/medical centers). Their cap rate is about 8% which is better than the 4.5% cap rate in Portland Oregon where I am from. Properties in Peoria don't appreciate greatly in value, but the cash flow is pretty good there. My portfolio is entirely local and built by house hacking. It is all about appreciation in Portland as cash flow takes many years for new investors here.

It depends on where you are looking for the out of state investment.  I know that David's strategy has shifted, most people had to. The pandemic did a number on markets all over the country, and any good investor will continue to educate themselves and shift with the market.

Bigger Pockets has a lot of wonderful calculators, but one thing I have found they are lacking is a long-term hold calculator that highlights property appreciation, rent appreciation, and cash flow. I use this one:
https://www.calculator.net/rental-property-calculator.html

I hope you find the calculator helpful in your future deal analysis.  

Melissa


  • Real Estate Agent

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Bjorn Ahlblad
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#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
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Bjorn Ahlblad
Pro Member
#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
Replied May 26 2023, 17:14

There are a number of factors that could force you to sell. 2006 when the floor fell out and banks stopped lending everybody tried to sell, the dot com bubble in San Francisco and Silicon Valley. If high earners lose their jobs they might have to sell (almost happened to me). War, natural disaster-volcano, tsunami, earthquake, flood, water supply runs dry and a few more, some covered by insurance but most not. All the best!