What is the best option?

Question

Hi.  I am new to investing and looking for where to start.  I have read "Rental Property Investing" and am debating my first step.  I am currently renting and have about 50,000 for down payments, closing costs and rehab.

1. Buy a single family in a desirable area with an FHA loan and live in it for a year while rehabbing it.  Then, rent it out.

2. Buy a multifamily in a less desirable area ( expensive in my area) and live in one unit and rent the other unit.

3. Buy an investment property with 20 % down and rent it right away.  Not necessarily in my area.

They seem to all have their pros and cons.  I am leaning toward number 1, but want to know if there is a clear upside or downside to these choices that I am not seeing.  I know each choice would have to come with property analysis, just looking for guidance. Thanks!

Brad Jacobson · Answer

Depends on your motivation!

Highest profit, lowest living standard: small multifamily house hack

Middle profit, middle living standard: single family with FHA loan

Low profit, highest living standard: investment property with 20%

Personally, I've found a nice niche in-between options 1 and 2 where I like to live in a nice single family residence (with a 3-5% down FHA or conventional) but that includes a mother-in-law apartment that I can rent out but live with a nicer standard of living.

You can also do these options over and over with the "nomad" strategy where you live in each for a year, turn it into a rental, and repeat with another new purchase the next year.

Good luck!

Nathan A. · Answer

To me, the best option is one that isn’t cash-flow negative to your financial situation the first few years as you get started. If you do #1, I'm willing to bet your expenses on the property your first year are higher than your rent now. You get in the game of property ownership at the expense of being house poorer, which would cut down your savings rate from where it is now. If you do #1 make sure you can actually save at a good enough rate to actually move somewhere else in the future and as @Nathan Grabau said make sure it doesn't analyze as cash-flow negative as a rental once you move out. Depending on the property, #2 has the potential to net out a little better for your personal financial situation relative to your rent now.

Also, live-in rehabs aren't super fun (speaking as someone who's been through one) and that really hurts your chances of getting roommates / using a SFH as a house-hack during the rehab.

Nathan Grabau · Answer

If I were in your shoes I would do number 1, assuming you can get it to cashflow when you move out. In most situation you can only have 1 FHA loan, so if you can get to 5% down, you can save your FHA loan for future use, or you just need to be aware that you will need to put 5% down on your next primary. I would also try to find a house you could have a set or two of roommates in to offset your expenses.

If you are looking for a market where you can cashflow with 50k down, I am invested in the Ames, Iowa area. I bought a 6plex for 275k, triplex for 190k, and a duplex for 150k. All three of them cash flow even after property management. I am happy to get you in touch with the Realtor and property manager I used, who is also an investor if you are interested in that market.

You could also combine 1 and 3, putting 15k down on a 400k ish FHA property, and then 35k down on a cash flowing mf property out of state.

Nicholas L. · Answer

@Noelle Stecher

house hack if you can.

i'd recommend not doing anything exotic, or even using hard money, on your first deal.

Leo R. · Answer

@Noelle Stecher to me, Option #1 is the way to go--especially for a beginner.

Here are the reasons:

First, location and grade of neighborhood are critical (in more ways than one). Personally, I always go with A and B properties in A and B areas (even though it means getting less cashflow, and/or not getting as nice of a property). I follow the most fundamental three rules of REI: location, location, location.

A property in an A or B area will usually be much easier to find tenants for, the tenants will often be more qualified, and the management of the property will be MUCH easier (which will make it more likely a PM will be able to manage the place, if you decide to hand it off to a PM). Plus, you will have much lower vacancy, much more protection against market downturns, and often better appreciation in market upturns (all of this often ends up overshadowing the lower cashflow of A and B neighborhoods). Also, you mentioned multifam in a less desirable area--not only would the lower grade area inhibit appreciation, but it being a multifam would also likely slow appreciation (single fam properties tend to appreciate better) Moreover, properties in C and D areas are notorious headaches, and are very difficult to manage (even for experienced pros)--since you're starting out, it's probably a good idea to start with the easier of the strategies (which is a property in an A or B area).I am a huge proponent of house hacks (whether you do a live-in rehab or not). A HH has some significant advantages over other strategies. For instance, it can quickly and simultaneously lower your expenses while increasing your income (the fundamental recipe for building wealth), you get the better terms of an owner-occupant mortgage, it can provide multiple exit strategies (rehab, sell, move out in a year or two and rent it, just keep living in it, etc.), and--importantly--it will teach you many of the most important skills that are needed for continued success in REI (e.g.; property analysis & due diligence skills, tenant screening skills, property management skills, etc., etc.). Also, it's a much easier learning curve to manage a property you live in or near, than to try to manage a property in another area/state (which makes management exponentially trickier).

...because of all these advantages, I'd suggest going for a property you know you'd be comfortable house hacking (even if you decide not to HH, it's a very nice safety net to have the option!)

In summary, I'd say start off with the strategy that is simplest, easiest, has the most upside, the least exposure to downside, and therefore the highest chance of success--which, to me, is probably option #1 (especially if you combine it with a house hack, or at least have the option to house hack it).

Good luck out there!

Ashley Noethe · Answer

For maximum cash flow, I'd go multifamily. We started with a 5-plex as our first investment property and from a cash flow standpoint it remains our best property. We initially used property management and now are just self-managing since we live close by and it hasn't been too challenging. As mentioned above, you can also use FHA financing for up to 4 units.

Drew Sygit · Answer

@Noelle Stecher you need units to have any sort of cashflow, so go #2!

Basit Siddiqi · Answer

There are benefits to Multi-Family Investing(faster scaling opportunities) but I encourage new investors to start off with a SFH. Where you can learn the ropes.Do well and then scale to multifamily. You can apply what you learned in the SFH to the MFH.With $50,000. You can purchase a SFH in a lower cost market in a decent neighborhood for about $150,000 to $200,000.20% of which is equal to $30,000 to $40,000.The remaining difference leaves you with enough for the closing costs + small rehab budget.Best of luck.

Ben M. · Answer

Hi Noelle, I like options 1 and 2 but if you’re not familiar with brrrr it might be worth looking into as another option.  Using the brrrr process you can minimize your out of pocket cost and not use up all of your 50k, possibly even get 2 properties depending on the deal

What is the best option?

Most Popular Reply