What would you do if you were starting out?

Question

I need help deciding on something I have $50,000 and was wanting to use it for a rental property but I live on 5 acres with a mobile home and there is a builder I could use on a $114,000 stick built home and get the equity that 11 years of living here has gotten, what would u do?

James C. · Answer

Janel,

I'd be looking for a 2 to 4 (or more) unit to house hack, and rent the trailer.

Logic: You apparently want to be out of the trailer into a stick built home. Having room mates in a SFR doesn't sound like what you want. Spending your 50K on a personal residence leaves you in a difficult financial position for investing.

Roughly speaking, at 3.5% down for FHA, you get a 1.4M building. 5% = 1MM, 10% = 500K and 25% = 200K. Make sure you keep enough cash for reserves. The bank will probably make you do that anyway.

So, my suggestion would be to find a 4 unit property. You could look at it two ways: the first, and best, is that the building cash flows properly with 3 of the 4 units occupied. The second is that the building cash flows properly with all 4 units rented. If it doesn't cash flow property with all 4 units rented, don't buy it, or buy it at a level where it does cash flow properly (on 3 or 4 units).

If you buy it cash flowing properly on 3, you live for "free". If 4, then you have to pay your share, until you find the next property and move out. At that point, then the building is putting money in your pocket.

Personally, I would find a 4 unit where I could live for "free" and purchase it with an FHA 3.5% down. 12 to 18 months later, I would refinance to recover my down payment (BRRRR strategy), take that and roll it into the next "live for free" building.

This might require that you do a bit of work on the building, or it's not in your favorite location (read safe, nice but not the "it" place) or raise rents, or any other strategy to get it working better. You might have to wait 2 years instead of 1... but that is the approximate path I would be pursuing.

What I wouldn't do is try to use the trailer rent to offset the 4 units expenses. Keep the trailer rented (profitably) and treat both buildings separately. Ideally, the trailer should rent for 1.35x it's mortgage costs (PITI). The reasoning for this is that you will get about 75% of the gross rental receipts as a credit back. If you rent for 1.35x, then on paper for the banks underwriting, they see that as a "break even". It helps if you have a year (or longer) lease. If MTM, then they want some sort of track record, which you don't have. If you own it free and clear, then it's a moot point.

Hope that helps.

Good Luck!

Jim