Primary residence as a rental

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Primary residence as a rental

Tim Sipowicz
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

I've been told twice now that using my primary residence as my first rental property would be a good move. I've thought about it and I'm starting to agree, I would just like some feedback on the approach I want to take. We were initially looking to sell our home and use the profits from the sale as a down payment on our next house. But now instead, hold onto the property as rental, buy a new primary residence with an FHA loan and get a little more sq footage for our growing family. My question is though, is it a backwards move to open a new mortgage that's just going to increase our monthly expenses with a higher payment? Also, how do I approach this situation correctly to keep building and acquiring properties after we get settled into our new home. If I need to clear anything up, please let me know because this may be a winded post. Thanks in advance!

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John Clark
Member since 2018 · 1k+ posts · 1k+ votes
6y
"the home should cash flow $200-300 dollars. "
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From the numbers you gave, that house does not cash flow. Cash flow is much more than rent minus (mortgage plus insurance plus property taxes all wrapped into one payment). You will have capital expenses, you will have maintenance, a vacancy, management fees -- you name it. You may get lucky and not have capital repairs for a long time, but you need to reserve for them.

So your old house won't cash flow, which means you have to see if any appreciation  will make it worth your while.

Sell, move, and buy a two or three flat in your new town that you can live in and rent other units at the same time.
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  • Paul Shannon
    Rental Property Investor · Fishers, IN · Member since 2016 · 335 posts · 470 votes
    6y

    Tim, I had the same dilemma when my wife an I had a condo in Boston we needed to sell 2012 to move to Columbus, OH.  We decided to sell to get the equity out and give us a cash cushion and downpayment for our new house in Columbus.  We bought for $400K in 2008, sold for $413K in 2012 and the condo just sold for $795K in 2019.  Whoops!  It would have rented for somewhere between $2750-3200 during those 7 years to boot.  

    Now this is a different time in the market cycle, so those gains are unlikely.  However, if you are in a desirable neighborhood in Chicago and can break even or better, I would consider holding.  Illinois is a little backwards fiscally and budget wise, and the taxes are brutal, but demand is there and that city rocks.  I actually lived in Lincoln Park for 10 months and think if Chicago was in a warm climate, it would be the best city in the country.  

    Anyways, I digress....speculation isn't helpful.  But if you can swing it, and the numbers support the property as a rental, and it doesn't disallow you from buying your next house, you should consider.   The opportunity cost is other investments, so consider that. 

    2Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    Using your primary residence as an investment can be a great idea but the numbers have to make sense. The numbers often work with multi units but if it's a single family it may not cashflow as a rental (depends case by case). Lots of people buy 2-4 units low down payment owner occupant loan then live in it for a year and after a year use it solely as an investment while they repeat for the next house hack. 

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  • Dan NelsonBusiness Member
    Real Estate Broker · Chicago and Kansas City · Member since 2016 · 87 posts · 67 votes
    6y

    I agree with @Henry Lazerow, it has to cash flow.  But if you can make it work, I cannot recommend it highly enough.  Then in your new house after you get equity, refi out and buy a 3rd.  Then Refi out of that and buy a 4th.  And on. And on...

    [email protected]773-295-1751Podcast Guest on Show 2 “Slam Dunk” Small Multifamily Deals in 2023 (and Where to Find Them)
    Dan Loves Houses4.971 Reviews
    WebsiteView Page
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  • Joe Aamidor
    Rental Property Investor · Bay Area, CA · Member since 2018 · 29 posts · 15 votes
    6y

    We did just this (and it's managed by FGR) - cashflow was just ok but we've seen some rental appreciation, a lot of property appreciation and are ~9 years away from paying it off (15 year mortgage). Got a bit lucky on timing, but it's just a nice no-trouble passive investment that gives us optionality for the future!

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  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Paul Shannon thanks for the insight and the real life scenarios you went through, very helpful! So a little background on my property, I owe 140k and it's worth roughly 190k with a mortgage of $1230. I should be able to rent it for 1500-1600, I'll obviously get a more solid reference point in the near future but talking to my agent, that's what we believe. There will be roughly 5k in renovations to get it fully tenant ready but after doing so, the repairs in the future and CAPEX will be relatively low but I'll of course still save and put aside for those costs. I just want to approach my next property correctly because we do need an upgrade sq footage wise for our growing family, but I also want to keep growing my portfolio so I don't know if getting into a more expensive mortgage payment, will be taking a backwards step.

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  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Joe Aamidor I agree! I already know the property well obviously and feel it’ll be a good learning experience to start my RE journey!

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  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Dan Nelson thanks for reaching out! I have roughly 50k in equity and my mortgage payment right now is $1230. Rents should bring in 1500-1600 and with about 5k in renovations, my repairs and CAPEX should be roughly low because improvements in a lot of facets, will already be done. I like the idea of doing this process for the next couple homes, but also would like to settle into our forever home eventually so what's the best approach to do that? Maybe that's a little to hard to foresee.

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  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Henry Lazerow the home should cashflow $200-300 dollars. I haven’t ran the numbers completely yet but knowing that the area rents for and what I owe, I have a strong idea. Obviously I’ll get a definite on the numbers but this being the first day I’ve thought about this process, I just wanted to reach out. Isn’t this a somewhat form of house hacking?? Also, I appreciate your feedback

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  • Dan NelsonBusiness Member
    Real Estate Broker · Chicago and Kansas City · Member since 2016 · 87 posts · 67 votes
    6y

    It is really up to you and what you want to do. I have a forever home and always borrow against it to buy other homes.  From your numbers this would be a no brainer for me.  It sounds like you made really savvy decisions and you are now in a position to benefit from it.  Most people don't. They just upgrade and never gain wealth.  This is how it starts. Good luck whatever you choose to do.

    [email protected]773-295-1751Podcast Guest on Show 2 “Slam Dunk” Small Multifamily Deals in 2023 (and Where to Find Them)
    Dan Loves Houses4.971 Reviews
    WebsiteView Page
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  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    Thank you so much @Dan Nelson! 

    1Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    If rents are only $200-300 over mortgage that might not make sense. You are going to have vacancy, turnover costs (painting, etc.). It might be better just sell it and put that money towards an investment property. 

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  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    House hacking is where you live in one of the units. For example you buy a 3 flat and live in one unit. Since you want more space this might not be the best route for you. I would look into selling for a profit and then re-invest it in something with excellent cash flow numbers. You could also do a rehab and eventually BRRR it into more deals if you find something at a good price that needs updates. This is what I did with a 4 unit.

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  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Henry Lazerow I'm going to look into possibly refinancing into a new 30 year fixed loan and maybe get the rate lowered and in turn hopefully help with the cash flow. I understand what you're saying but if I do about 5k in renovations right now, It'll be fully ready to go, with a lot of the major CAPEX components taken care of. I will definitely still put money aside for vacancy and repairs but I should be ahead of the game when it comes to repairs when moving out. Obviously have to prepare for the unknowns of the tenant tho

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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    6y

    @Tim Sipowicz make sure you are underwriting the taxes for future increases. A lot of buyers in the Chicago area pay zero attention to their assessed value at purchase. They wrongly assume that taxes increase in some simple and understandable way. They then are shocked when they buy a property for double the assessed value and... taxes double. 

    With a single family home, you have a lot of options other than house hacking. Read here on BP about the live in flip model. You buy a property that is a decent deal like an estate sale, foreclosure or proverbial "little old lady" house. After you do some modest cosmetic improvements, you can sell to realize your appreciation, or you can pull cash out through a HELOC or cash out refinance down the road and use this money to buy investment properties.

    I just missed out on being able to house hack because I had kids already, so I was unintentionally forced into this strategy. I have done it twice now, and the two primary residences have helped me buy 58 apartments!

    1Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    6y
    Originally posted by @Tim Sipowicz:

    I've been told twice now that using my primary residence as my first rental property would be a good move. I've thought about it and I'm starting to agree, I would just like some feedback on the approach I want to take. We were initially looking to sell our home and use the profits from the sale as a down payment on our next house. But now instead, hold onto the property as rental, buy a new primary residence with an FHA loan and get a little more sq footage for our growing family. My question is though, is it a backwards move to open a new mortgage that's just going to increase our monthly expenses with a higher payment? Also, how do I approach this situation correctly to keep building and acquiring properties after we get settled into our new home. If I need to clear anything up, please let me know because this may be a winded post. Thanks in advance!

    It's only a backward move if your monthly cash flow from renting out your primary residence will be less after you rent out the property.  Get an analysis of what you can get for rent along with how long it would take to rent out the property.  The analysis of the potential Days on Market should be integrated into your cash flow analysis. 

    312-681-7487
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  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Warren i always appreciate your insight on my post, thanks. So me also having kids and a growing family, I'm missing out on the house hacking as well but I feel this approach will still let me get some partial benefits from the strategy. My next primary residence I purchase, I plan to do so with an FHA loan to keep majority of my reserves for renovations, light like you said, or possibly refinance the house I own right now if the numbers still make sense and use that towards renovations of the new property. I'll live in the next house for a year or two, doing the same with holding it as a rental, and hopefully purchase a home in an area where we want to raise or family. I may be overlooking something but I feel like this will help me grow my portfolio with then having two rental properties, and then using the equity in either of them to purchase more, even though people say it's harder to pull equity out of an investment property. That's my plan at least, please let me know if you see any cracks in it. To address your tax point, are you speaking about my future property or the one I am currently living in? I reside in the south suburbs right now and don't see any great spikes in taxes, please correct me if you're talking about my next property. Since our son is young, we have a couple of years to move around before settling down into a great school district and planting roots. I'm hoping this bubble will help us grow our portfolio and set us up with momentum to continue to do so.

    0Reply
  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    Hi @Crystal Smith, thanks for commenting. I was thinking it would be a backwards move to go out and upgrade our home, in terms of sq footage but still buying a home that needs updating to increase our equity, and having a more expensive mortgage then we currently have. Running the numbers, we should be able to cashflow $200-$300. This is only my second day of bouncing around this idea so the next couple days will be getting more concrete numbers but agent and feel strongly that it will positively cashflow. The house was fully renovated when I moved in 6 years ago, it needs minor repairs that I plan to take care of so CAPEX and maintenance should remain low, but of course I'll still put away for the unexpected

    0Reply
  • Michael Belmore
    Rental Property Investor · MA · Member since 2020 · 98 posts · 77 votes
    6y

    @Tim Sipowicz

    As a general rule of thumb while house hacking using FHA they want you to either decrease your family size of stay the same. So if you are looking to increase your units, I would recommend starting with a 4 family and staying the same or head down from there.

    Good luck 

    - Mike 

    0Reply
  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    Thanks @Michael Belmore I’ll be sure to speak to my lender about that 

    1Reply
  • Michael Belmore
    Rental Property Investor · MA · Member since 2020 · 98 posts · 77 votes
    6y

    @Tim Sipowicz

    Great good luck, if you did end up starting with a single family/duplex there are exceptions to the rule. 

    1Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    6y
    "the home should cash flow $200-300 dollars. "
    ---------------------------------------
    From the numbers you gave, that house does not cash flow. Cash flow is much more than rent minus (mortgage plus insurance plus property taxes all wrapped into one payment). You will have capital expenses, you will have maintenance, a vacancy, management fees -- you name it. You may get lucky and not have capital repairs for a long time, but you need to reserve for them.

    So your old house won't cash flow, which means you have to see if any appreciation  will make it worth your while.

    Sell, move, and buy a two or three flat in your new town that you can live in and rent other units at the same time.
    2Reply
  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Michael Belmore thanks!

    1Reply
  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Clark thanks for commenting. Running the numbers with the lower end of that rent would be at $1500, the house would cashflow $120 with an ROI of 29%. My agent and I believe will be able to get $1600 a month for rent bringing the cash flow up to $207 with an ROI of 49%. That is including still putting money away for repairs, CAPEX, and vacancy. I definitely understand your point about still putting money away and I tend to do so.

    0Reply
  • Tim Sipowicz
    OP
    Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Clark also I will be self managing the property so there will be no added expense there

    0Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    You need to average a few hundred a month for cap/ex. Stuff will break eventually and a few hundred averages out the cost of roof, basement leaks, etc. I think your property will negative cashflow at those numbers and that the cash (equity) can be better used elsewhere. If this is in one of the suburbs you need to factor 5 or 6% for vacancy so your arent forced to accept first tenant to apply. If its in a hot area can drop this to 3-4%. Also as John stated factor in tax increases. I always run analysis at 110% current taxes being IL. 

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