Risk of obtaining 3rd property

[Ismael Ayala Jr.]

I believe the answer to this question is probably obvious. But I would love multiple feedback, constructive criticism, and differing opinions. I'm all about having strong opinionated people and surrounding yourself with those who are smarter than yourself and who are not afraid to tell you the truth.

I would like to obtain and move into a 3rd property(townhome) in a nice neighborhood. I'm in the position to apply(depending on lender DTI requirement) for conventional financing through the builder at <6% interest rate in this current market. I own 2 homes. I live in one and rent the other for $400 cash flow.

My dilemma is this: I would ideally like to wait until I have emergency cash reserves to cover 6 months of mortgage payments for all 3 properties. Which is approximately $41,000. I have no credit debt and $12,000 of student loan debt I'm looking to pay off within the year. And approximately $130,000 of untouched equity.

I'm afraid if a recession happens, I may get stuck with 2 unemployed renters and have 2 extra mortgage payments that I can't afford. But I'm also of afraid of missing out on a good opportunity to get a townhome in a expensive popular area at the price point and interest rate I find to be favorable.

Particulars:
1) 1st SFH rental property cash flows $400 and we have a 2 year lease agreement that ends in 2025.
2) 2nd SFH I currently live in, I would rent out and probably experience a negative cash flow of --$100 cash flow for first year, break even 2nd year, and build little cash flow moving forward. But, could I minimize risk of renter defaulting on payments for the 2nd property by turning this property into a section 8 housing unit with guaranteed income from the gov't? This is DR Horton SFH, and is a newly built single story 4 bed, 2 bath that is surrounded by expensive MI homes.
3) Move into the townhome.
4) Use my $130,000 HELOC as an emergency if rent defaults do happen and save for a year until I reach my emergency fund goal of $41,000?
5) Or should I save, wait, prepare for the next opportunity when that $41,000 is saved up?

I think Dave Ramsey(who I respect but don't worship, lol) would be highly disappointed in me for even thinking about doing this, SMH.

[Joe Villeneuve]

Quote from @Ned Carey:

@Ismael Ayala Jr. 

How good a deal is the property you want to buy. If it is a lousy deal then no now is not the time to buy a 3rd property. If it is a great deal then maybe the risk is worth it. 

If you are saying the property you want to add has negative cash flow of $100. I think that is a BAD idea. (@Joe Villeneuve may want to comment here) 

Next how are you determining "Cash flow" If you are taking rent and suptracting your mortage payment (OITI) to come up with the cash flow you are already doing much worse than you think. 

Regarding the risk factor you mention, tenants not paying. If the market crashes, you HELOC can evaportate in an instant. Meaning the bank has the right to shut it don when ou might need it the most.

I don't know the right answer for you. I just want to make sure you and others reading understand the risks they are taking. 

It sounds like you're cross breeding your properties.  What I mean by that is you need to have alternate properties you own support other properties you own.  Each deal you make should always be self sustaining, that means if you only owned one of these properties, and it doesn't matter which one, it must support itself.
Negative CF means you have "other" properties supporting a property, or worse, you have your own cash supporting a property you own.  That's not smart.
As far as the potential of missing a great deal, that's short term thinking.  There's ALWAYS another deal down the road.  There's always MANY deals, just like the one you think you're missing out on, down the road.  You don't buy great properties in a great area.  You buy pieces of a market.  You buy deals.  If your focus in on that "great property", you're not an investor, you're a property collector.  If that's what you're looking for, there are cheaper ways to do it.  Just take a picture of it, save it to your screen saver on your computer, and you can enjoy the view as often as you want.