First Rental Property - Where to Buy?

Question

So I am looking for my first rental property in Philadelphia. I currently live in NJ but my girlfriend lives in philly and I've moved back and forth from the city for a few times now. I'm finally ready to buy and get into real estate. So I'm looking to use the FHA house-hack strategy where I live in a unit and rent the other(s) out, livd in it for a year and rent it out completely.

If you were in this situation where would you look to buy? And where would you look to buy regardless if it was not going to be a house-hack scenario?

Sarah Gabriel · Answer

My first question would be what kind of budget you're working with, and then how realistic the location would be to whatever you need to do in your daily life (like get to work). I have heard a lot of people finding good opportunities near the universities (like Temple) to do something like this since there are always going to be renters looking in those areas. We have not lived in any of our rentals but own a few multifamily units in the city. We have had luck in the West Oak Lane area in terms of finding decent properties as well as decent renters. Good luck :)

Brett Stander · Answer

Jason,

As  new Investor myself, I'll give you some thoughts, given that I seem to be in the same position.

Personally, the house hack idea, while beneficial, can be difficult. Property values in any sort of nicer area (think fairmount, university city, fishtown, rittenhouse, etc) can be rather expensive. Even with an FHA203k loan @3.5% down, it can be difficult to find something that cash flows well as an investment opportunity.

Also, trying to fix up a property with this type of loan can be difficult and a huge headache. All the reading I have done talks about the difficulties of this strategy. One that seems particular difficult is that, when using an FHA loan, the HUD has to approve the bank to send money for rehab (it is not all sent at once). So, your contractor will have to be happy waiting weeks (or maybe months) to get paid as they are at the mercy of the government, which, to my best knowledge, is not known for their speed.

Personally, the best option I came to for myself (and maybe for you) would be a BRRRR strategy somewhere in a lower income neighborhood (think Mantua/west philly). Because we do not have to comply with the 1031 guidelines regarding finding a new home (45 days to find, 6 months to close) we do have one advantage over other BRRRR investors who may be more integrated already: Timing. Instead, I am looking for a property that has 2-3 bedrooms that I can increase to 3-4, as well as something with heavy rehab potential. This way, even a hard money loan won't be problematic, as I can cash out on the ReFi for more money than I put in, even with a conservative LTV of 75/25.

Of course, these are just my thoughts, and a property where the owner is trying to sell fast may make any one of these strategies work; it all depends on if you can find the right deal.

Let me know if you want to talk more!

Jason Wade · Answer

@Brett Stander & @Jimmy O'Connor, yeah I've been looking and looking and honestly the expensive prices dont scare me too much as long as cashflow is positive. I've looked at some other neighborhoods like west philly and some north but most of them seem...rough. I'm trying not to stay in NJ, I'd rather invest in Philadelphia. Thanks for your input guys!

Jimmy O'Connor · Answer

@Brett Stander took the words right out my mouth. The idea of house hacking to get into REI is awesome but the issue is in execution. If you are serious about getting into REI, you will be on the sidelines for a while looking for an opportunity in a place that you would actually want to live in at a price point that you will actually cashflow in.

Brett Stander · Answer

@Steve Babiak - good point, and you're right. Just thought I would mention it because it is something I have looked into using to keep gains and decrease taxes. But of course, 1031 does not need to be involved at all if you are only looking to buy one property or house hack, good point.

Steve Babiak · Answer

@Brett Stander - there is no reason that a 1031 exchange has to become involved. You can literally keep accumulating properties just by purchasing them. A 1031 exchange would only enter the picture if you have some reason to sell but you wish to remain invested in real estate with the proceeds from the sale.

First Rental Property - Where to Buy?

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