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!
"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.
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
6y
@Henry Lazerow I've ran the numbers for 7% for CAPEX based on what I've already replaced in the house and I what I know about the other major components and I think that's relatively fair. I Do appreciate your more realistic viewpoint on the strategy though, thanks
Investor · Chicago, IL · Member since 2013 · 129 posts · 68 votes
6y
How quickly do you want to build your real estate portfolio?
If one of your goals is to acquire more rentals after moving into your new primary residence, that adds a layer to the analysis. In that case you could consider return on equity as a metric, because if you sold the house, most of that money could be put towards a new investment property.
You have 50k in equity now, and let's say for simplicity's sake your 5k reno adds 5k of value for a total of 55k. At your $207 high estimate for cashflow, your return on equity would be 207 x 12 / 55k = 4.5%.
Could you do better than that if you sold and reinvested?
Of course this would take much more time and energy than simply holding and renting your current place, so it's not just a cold financial decision.
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
6y
Thanks for commenting @Joey Nakayama. I want to build my portfolio rather quickly, or at least set myself up for the best scenario to do so. My next primary residence will be treated the same as my first. It will be an upgrade in size for us but then after a year or two, move on and use it as a rental as well. I'm not going to keep moving my family around tho so after the second, we will get situated to where we want to end up with the third. To address your points tho, I may be able to invest that 60k Equity for an investment and down payment but that leaves us with I assume just the strategy to house hack and right now, we don't want to downgrade space into a multi family if that makes sense. I know my property well obviously and what I have fixed on it as well as it being gutted and rehabbed six years ago. I believe it will be a good jumping off point for me to use as my first. Possibly use a HELOC from this current home in the future for down payments on more properties? I don't know how quickly this plan will build my portfolio so if you see any flaws, please let me know.
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
6y
@Joey Nakayama I apologize for any confusion to what you said about the 4.5% but how does that differ from the ROI I am getting when I run the numbers cause rent depending, the ROI is coming back at 30%
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
6y
The % rules arent really accurate as cap/ex is no less on a $1500 rental vs a $3500 rental. Its actually a bit lower on a $3500 rental due to better tenants who tend to take better care of things. I just use a flat few hundred a month regardless of price point and works well.
I agree look at it as what percent return am I getting on equity. If you have $55k in there can you get better cashflow with that $55k elsewhere?
HELOC are awesome. Lots of my clients use these. They may require you to be currently owner occupying it to get good terms.
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
6y
@Henry Lazerow understood on the CAPEX thoughts, it makes sense to just do a couple hundred flat rate and not base it on price of home with the %. Now with the equity in my home, I prolly could use it elsewhere for maybe a better return but then with selling, that leaves us with trying to buy a new primary residence along with getting an investment property because we wouldn't move into a multi and house hack. So my point of view is, get a bigger house for my family right now, use my house right now to break into REI since I'm familiar with the property and that may make it easier, and slowly get the loan paid down on it. I know the cashflow isn't the strongest but at least my loan will be being paid down while I get my family into a larger home. If I open up a HELOC right now, are there terms to when I have to use it or can I open it and use it need be in the future.
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
6y
You have to pull from it while still living there or its fraudulent. But you can pull cash while living there and put it in savings to keep after you move.
New to Real Estate · NC · Member since 2020 · 30 posts · 2 votes
6y
@Henry Lazerow does the pulling from a Heloc work anywhere? I have a VA loan really do not want to move but I also would like to use my savings to start buying property or use my VA to purchase a quad, triplex or duplex and repeat buying. My goal is to build enough that my daughter her husband and my grandson are in a better place for their future. They just had a house built I think 5 years ago bc she just turned 30 so I think that's right. She used her VA loan and I would love to pay of that house or even purchase it use it as a rental so they wouldn't have the payments. Call me crazy but I love my family. So I am trying to find ways to help them and do some communities for homeless veterans because I have been there too.
Investor · Chicago, IL · Member since 2013 · 129 posts · 68 votes
6y
@Tim Sipowicz I wasn't suggesting you house hack a multi. Unless I misunderstood your first post, it sounds like you're in a position to buy a larger SFH as your primary residence AND keep your current home as a rental. As long as that's the case, the question is after you move, do you rent the current home or sell it to buy an investment property with better returns?
Return on equity (ROE) is not ROI. If you're considering selling one rental to buy another, it doesn't really matter how much you initially invested in the first one. All that matters is what you're making now versus what you could make if you sold and reinvested. To make 30% on 55k you'd need $1375 cashflow per month.
P.S. If you run across a deal like that, please let me know...
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
6y
@Joey Nakayama I understand what you're saying now, my mistake. I was just referring to what the ROI is when I run the numbers but that has nothing to do with what you're speaking about. You're saying the rate of return may be greater using the 55k of equity somewhere else. I guess I've been so stuck with the idea of either selling this property for a down payment on a new primary, or now renting it out, and those being my only two options. But maybe I can still buy a new primary residence and use the 55-60k on a new investment property. Covering the down payment and any Reno costs. Please correct me if I'm wrong in what you're saying and I appreciate your feedback
Investor · Chicago, IL · Member since 2013 · 129 posts · 68 votes
6y
@Tim Sipowicz that's exactly right. You'd want to factor in the taxes and fees associated with selling one property and buying another (some of that 55-60k would get eaten there), but your returns could be substantially higher than what you're projecting for your house as a rental.
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
6y
@Joey Nakayama wow, thanks. Another great option, just want to make the right one in order to get me on the right track towards future investments. Some of those funds will definitely be eaten up like you said, this decision on what to do just got a little more complicated haha. I appreciate your feedback on this post, thanks again
Brookfield, WI · Member since 2016 · 191 posts · 108 votes
6y
I had to do this with my last house. We are still renting it out at a slight monthly loss due to timing of some less favorable mortgages on it. However, the key here, it was never bought as an investment, so the numbers suck. Bases on your numbers, I don't see how you think it can cash flow. You really need to put aside 8% for vacancy, 10% for PM (even if you manage it yourself, you might want/need to make a change), and at least 5% for capex (I still use 10% until I hit a certain "fund" threshold per property) and maintenance (again, even if the "plan" is to do it yourself). based on that:
pm: 160 /mo. vacancy: $125
capex 80/mo maintenance? lawn/snow service, weed prevention, clogged toilets? let' say $25 a month(really low)
160+80+125+25=390
1600-390= $1210 and those are really best case numbers, fudging numbers to make it work is a bad idea.
Now, it might still be worth it if there is an appreciation play. OR, to rent for a few years and self manage to "pay" to learn (I learned a LOT by holding my money sink). However, I think the $40k in equity on the new house could be more useful to leverage on a new investment property 6-12 months down the road., personally.
Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
6y
@Joseph Walsh thanks for commenting. I think I've gone the other direction on renting my house. I wasn't quite fudging the numbers just to make it work, I was actually upping the percentages just to cover more than I thought but still, the numbers are still a little to tight. When you say use the 40k to leverage out of the new house in the future, are you saying maybe cash out refinance or use a HELOC if there's any equity gain?
@Joseph Walsh thanks for commenting. I think I've gone the other direction on renting my house. I wasn't quite fudging the numbers just to make it work, I was actually upping the percentages just to cover more than I thought but still, the numbers are still a little to tight. When you say use the 40k to leverage out of the new house in the future, are you saying maybe cash out refinance or use a HELOC if there's any equity gain?
Or some combination. Maybe you can get a low down payment on your next house(fha, va, seller financed), and just bank the remaining cash to roll into an investment property, or like you said, do some sweat equity to up the value even more, and then cash out-refi, HELOC, etc. If I could of sold my old house at a profit(or even not a loss), I would of done that instead of renting it out, since it wasn't bought as an investment. Good luck.
Murrieta, CA · Member since 2017 · 19 posts · 10 votes
5y
@Tim Sipowicz Hi Tim, if you do refinance, just remember that you will not be able to buy another owner occupied primary for 6 months and if you do buy before 6 months than the loan will need to be for an investment property, with higher interest rates and 20% down payment.