Options for purchasing
I'm currently applying for pre-approval to purchase my first ever property. Since I'm 24, and don't have much behind me I'm planning on using an FHA loan and taking on the PMI expense. I have a good credit history and I make solid income.
My original plan was to house hack a duplex in the area (Kansas or Missouri), but the real estate agent I'm working with informed me that I'd have a better cashflow and appreciation chance if I purchase a single family unit. The reason why is that in this area there is a lot of competition among the multifamily properties, thus, not making them cashflow efficient. However, he also stated that the multifamily unit is a better option if I'm thinking on a long term hold (which I am) and it will have two units rather than one when I move out to the next property.
Any advise on things I may be missing in my though process? Should I consider a single family home and eat the cost of owning it for a year while I fix it cosmetically and then rent it out when I move out?
I would run the numbers comparing the two, they will give you a clearer picture. This is possible though as the competition for small multi-family is pretty intense in some areas.
House hacking by the room is worth considering as well. Then when you move out you only have your room to rent. This will increase your work but will substantially increase your cashflow.
@Misael Herrera Granados- use a conventional loan versus the FHA because 1) conv loan allows 3% down if first time buyer 2) no upfront mtg ins fee of 1.75% that FHA has 3) monthly mortgage insurance is lower than FHA mtg ins and can be eliminated in the future ( whereas FHA mtg ins is permament ).....you can use the FHA loan for your 2nd property
Thank you both! @Dave Skow and @Nathan Grabau. I actually did not think of house hacking by the room. This is something I'll have to run the numbers on. And so far, it doesn't look like the multi family properties will be providing any cashflow.
1) have you identified a property/subdivision yet? I say this because you could factor appreciation in your equation as I’m sure both of those markets have strong pockets of growth.
2) as a first time home owner and investor, you may want to consider TCO (total cost of ownership). You eluded to it in your last sentence. Consider this, maintenance repair or capex expenses, into evaluating your exit strategies.
3) property condition and new inventory are also things you may want to consider. You mentioned you have stable income. One thing I’ve done is made my first home purchased a new construction in a low inventory market in SC. Since the neighborhood is roughly 50% developed, there’s strong initial appreciation and desirability, while not being concerned about condition. As rents rise you may get marginal cash flow, but over 5 years I predict a great mix of cash flow and appreciation (as @DavidGreene reminds us).
hope this helps, and remember to run your own market data analysis and property analysis, utilizes showings, property visits, and convos with your local team to validate your assumptions.
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Quote from @Misael Herrera Granados:
Thank you both! @Dave Skow and @Nathan Grabau. I actually did not think of house hacking by the room. This is something I'll have to run the numbers on. And so far, it doesn't look like the multi family properties will be providing any cashflow.
Keep in mind that if you rent out rooms in your home it will not be considered rental income when you qualify for the next one. So you will need to qualify for both full mortgage payments. It is called border income and only a couple scenarios work when trying to use the income.
What state are you buying in? Depending on what type of job you have there may be some extra benefits when you purchase your first home.
@Misael Herrera Granados I commend you for starting at a young age. Be careful of generalizing. Appreciation and cash flow will be dependent on asset class and neighborhood. I agree that in general, appreciation will be better with a SFR all other things being equal. I don't agree that the cash flow is better with SFR however. A MF in a solid area will generally outperform a SF on a cash flow basis. I'm not real clear on what his point is about a long term hold however. Unless you're flipping for short term equity, you should always be thinking in terms of a long term hold. Real wealth in real estate comes over time through cash flow, appreciation, mortgage paydown and depreciation tax benefit.
