Rental Property Investor · Tacoma, WA · Member since 2021 · 12 posts · 7 votes
I'm looking to start my investment journey by purchasing a duplex, living in one side and renting out the other. I only have enough for an FHA loan which requires a 3.5% down payment. I'm having a hard time finding places that will provide a positive cash flow. Does anyone have any advice or experience with this?
Here are some numbers to let you know what I’m working with:
Mortgage - $3,400 per month
Rent - $1,800 per unit
This leaves about a $200 revenue but does not take into consideration all of the expenses etc.
Clearly, this is a bad deal as it would create a negative cash flow. But I was wondering if we should continue to pursue the 3.5% down option and bite the bullet for a few years until we can refinance the loan or if we should start to save enough for a conventional loan (20% down). And advice helps, thanks!
Rental Property Investor · Pittsburgh, PA · Member since 2019 · 530 posts · 511 votes
5y
@Cameron Sume
@Jason Hartmann always preaches that real estate is a multidimensional universe. Cash flow is one metric. You get depreciation which lowers your tax burden. You get appreciation which lets you pull out more money in the future. Finally you get equity which allows you leverage.
If this is your primary residence you also get to live for about half the going rate per your numbers.
You may want to factor in some of these other areas before making a decision.
Rental Property Investor · Pittsburgh, PA · Member since 2019 · 530 posts · 511 votes
5y
@Cameron Sume
@Jason Hartmann always preaches that real estate is a multidimensional universe. Cash flow is one metric. You get depreciation which lowers your tax burden. You get appreciation which lets you pull out more money in the future. Finally you get equity which allows you leverage.
If this is your primary residence you also get to live for about half the going rate per your numbers.
You may want to factor in some of these other areas before making a decision.
Rental Property Investor · Tacoma, WA · Member since 2021 · 12 posts · 7 votes
5y
Wow, I really appreciate your response. I think I just got to so focused on not getting rich right away that I forgot about all of the other benefits of real estate.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
5y
@Cameron Sume you've got a good response already above but just to reinforce this message it is extremely unlikely to ever cash flow on a duplex where you are occupying 1/2 of the income for the property. Likewise, because you are borrowing over 96.5% of the property value, that means your loan balance is higher than most other scenarios as well. For someone not occupying the property is it common to need 25% down...which means their loan amount is lower, which means their mortgage payment is lower (in theory). That is a factor, but not as large as you occupying the property.
So if you can offset SOME of your expenses to a property, that is the main benefit. That's the immediate benefit. The long term benefit is that you now have a 2 unit rental property of which you came out of pocket a very small amount (comparatively). So keep searching and look at this from those types of viewpoints and you'll find a great property that will make a great start to your real estate investment career.
Rental Property Investor · Tacoma, WA · Member since 2021 · 12 posts · 7 votes
5y
Thank you for the info, Andrew! When you say “offset some of your expenses to a property”, what do you mean exactly? Do you mean by having tenants in the other unit to pay a portion of the mortgage? Thanks again!
Wow, I really appreciate your response. I think I just got to so focused on not getting rich right away that I forgot about all of the other benefits of real estate.
Real Estate is get rich slow. 😀
Do one deal that makes sense, rinse and repeat for 20 years, retire. Now imagine is you started by house hacking in college, you could be retired and sitting on 7-8 figures wealth by 40.
Couple of thoughts; First, always keep in mind that rents minus PITI doesn't not equal revenue. You need to factor in expenses. Vacancy, Maintenance and CapEx. Second, an FHA loan isn't really 3.5% down when you look at total cost. With FHA you have to pay 1.75% of the loan amount upfront in MIP (FHA version of Mortgage Insurance) plus closing cost. Closing and MIP are typically rolled into the loan but just be aware that your actual cost is much higher then 3.5% down. Third, if your in a competitive market an FHA offer is the least likely to be accepted. Especially if the sellers are getting cash offers or strong conventional offers (I.e. over list offer, little to no contingencies and 20% down).
Not saying it can’t be done just keep all of this in mind as you look for properties. Speak with a mortgage broker about your options. Also there are special loan programs available for certain people, Native American? First Responder? Both have special loan programs available plus many others, these are just two examples.
Rental Property Investor · Tacoma, WA · Member since 2021 · 12 posts · 7 votes
5y
@Ryan Avila would my lender be able to give an example of how much I’d have to actually put down on a property? I’m sure it will all depend on the rates and taxes of the area, right?
Rental Property Investor · Tacoma, WA · Member since 2021 · 12 posts · 7 votes
5y
@Ryan Avila ok perfect, thanks for the info. Your comment asking cash offers and strong conventional make sense because a lot of places we’ve looked at so far only accept those two. Washington is a hot market right now.