Brainstorming Next Move After House Hack

I bought a duplex in McKinley Park in Chicago 6 months ago. It was a gut rehab I found off the market and bought at $270K (5% down conventional). Put in ~$10k. It's a SFR converted to a duplex, so the bottom is a 2B/1B and the top is a giant 1B/1B. Bottom rents for $1,500. Top will probably get $1,700 when we leave. No serious problems with the tenant or house so far. I was thrilled with it at first and just pretty happy currently. Buying, owning, and managing the property has taught me a lot and I'm about ready to move on to the next one.

About us: I’m 24. My wife is 22. I’m a non-CPA accountant and my wife’s a special ed teacher. We make $85K W-2 income together and I just started a business that’s making ~$2K/month so far. That’s still just an experiment. We have ~$20K saved up and growing.

Goals: I want to quit my job and focus on real estate, businesses, etc. Anything where I can run things myself. That’s where I thrive. My wife has another year on her teaching contract and wants to work in nonprofits or education admin after. We want to have a kid in the next ~3 years and I plan on staying home with the kids while doing entrepreneurial stuff while my wife does her career stuff. We want to move to the NW suburbs of Chicago or potentially Colorado. Longer-term, we want to be financially independent and have “passive” income to travel and pursue interests. I’ll probably always have a couple irons in the fire though.

I’m primarily interested in 2-4 unit buy and holds or BRRRs and eventually apartment buildings and commercial. I do like the Chicago market a lot and I think that the weather and our misunderstood crime stats keep a lot of people away, which is good. It’s also pretty safe from natural disaster and water/heat issues. Tenant laws aren’t the best, but I’ve been lucky, so I might change my mind one day. I am very open to investing out of state though in the typical “turnkey states”. I especially like Texas and I especially dislike Florida. Just because it’s a gross swamp and half of it is going to drown. I like property management but will self-manage as long as it keeps making sense.

The options I’m considering:

1) Start looking for another cash flowing 2-4plex to buy with 3-5% down and move into in 6 months. Rent out our current duplex completely. Now I have another house hack and an investment duplex. Pros: Lower cash down, lower rate, I’m mildly experienced here. Cons: Wife is not thrilled about having neighbors. How quickly she forgets how we were sharing a twin bed, sleeping head to foot to fit, less than a year ago. Also not adding any value, which is where the quicker money gets made.

2) Buy a multi-unit HUD home while living in my current duplex. I'd look at SFRs too since that'd be a less steep learning curve on the rehab. Hire a GC, do a rehab, rent it out, stabilize, refinance what I can out, hold it and move on to the next one. I'm leaning toward this option, but it also scares me a bit as I have zero rehab experience. I'm reading a book on flipping currently and will read a few more to become more familiar with the territory. I'm only interested in holding or 1031-ing though.

This is the option that offers the highest potential returns on paper, but also has a lot more moving parts. I feel there’s less certainty with holding than if I were trying to do a flip though because time heals all wounds. It’s not like the contractor I hire will make the house worse. Worst case is I overpay for the house and I overpay to fix it. Fine, that’s a lower return in exchange for some lessons.

Risk aside, my other concern is that I run out of money. I'd need 20% down to buy an investment property, from what I understand. The HUD homes I'm looking at are $30-$100K. So that's ~$10-$20K down. So then I need to save cash for a while longer to pay the contractors. But if they go over budget, which they probably will from what I hear, I'll need to take a loan or keep the rehab going on my credit cards. Lot more risk and uncertainty. I'm emotionally very comfortable with taking risk. I just want to be sure it's a smart risk first and I know all the probable ways things can go wrong.

3) Buy a turnkey in a market I like. I’m considering this as a sort of “buy some time” move that beats cash sitting in my bank account making 0.9%. I’m leaning toward this option over the continuing to house hack option. We wouldn’t have to move and I can get into a turnkey in a good market for ~$20K (20% on ~$100K). A house hack in Chicago in a market I like would cost ~$300K, so the cash down wouldn’t be too different. Rate would be a bit higher with the turnkey. Cons is that the return is capped since you aren’t adding any value. But it’s still real estate and I’d be able to leverage my cash 5X and reap all the other benefits of owning real estate. If I do this, I’d be studying rehabs more while we save cash for the next one.

4) Buy a personal residence SFR in the suburbs of Chicago or in Colorado. This is one we'd prefer personally, but I'm struggling to find a way to make it a good move financially. The only reason we'd want to stay around Chicago is to get help with future children, but that's a pretty good reason. So we'd but a SFR, rent out the duplex completely, and continue saving money and investing in real estate. This would be a big quality of life improvement and I would like to set up a more permanent home base and raise some chickens. But I'm afraid I'm being hasty here and will look back on that move as a setback.

5) Hybrid between my #2 and #4 strategies: Buy a SFR HUD home with a 203(k) loan, live in the duplex while the rehab happens, then move into the SFR, rent out the duplex, and plan the next move from our SFR home base with my chicken coop and no neighbors. A lot of these HUD homes are eligible for bids for nonprofits and owner-occupants only and most of them are SFRs. This might get me the beginner rehab experience I want while setting up a SFR home base. I'd need to do a lot more research about 203(k)s but please let me know if this sounds viable.

Are there any strategies that work with my goals I haven’t considered? What do you guys think? What would you do?

 
Best Response

Love your Colorado goal, I live in NM.

Colorado RE has gotten increasingly more expensive over the past few years though, especially with investors looking to AirBnb props and use them as secondary vacay homes as opposed to long term occupied rentals. There's some gorgeous areas along the San Juan that aren't as astronomical as Breck, Aspen, Telluride, Crested butte, etc. Durango has the occasional good deal as does Pagosa Springs. One thing to point out with Rocky Mountain living that most don't consider enough: digging your house out of snow very frequently in the winter and having a contingency plan when you're snowed in. Also check for structural issues when buying an older prop as snow weight wears on roofs and decks much quicker.

Clearing snow and being snowed in seems like a tolerable chore, but the novelty of a winter wonderland wears off after your first season of snowbound cabin fever. It's not as bad if you're in a city like Denver, but why move to CO to live in a cookie cutter city like Denver when there's a plethora of gorgeous mountain towns around where deer hang out in your front yard? Most people move to CO to get in touch with nature, not urban living. If Denver is your plan though, disregard my input.

 

I want to live in CO, not invest there. I'm going to continue investing in Chicago and good cashflow markets. I enjoyed Denver. I want to be as much in the wilderness as possible while my wife likes cities. We figures outside of a city in CO is a good compromise.

heister: Look at all these wannabe richies hating on an expensive salad. https://arthuxtable.com/
 

I'm bidding on a HUD duplex for 110k purchase where the value after finished rehab work would be 230-250k. It's not in a bad condition but with two kitchens needing replacement, flooring and carpet, drywall placement, splitting utilities, plumbing, siding work, and some other misc. stuff, I'm coming up to $60k-80k in work. I still don't understand how you put in 10k to get a property which was gutted to the studs to a liveable condition. But more power to you.

 

Would the banks keep letting you get the 5% conventional loans? I could see them getting concerned with both your Income to debt and your properties DCR and cutting you off. I know of a few people whom had tried this and after about 3-5 houses started seeing trouble. I think the bank started to worry that if a couple of the properties went vacant at the same time, the owner wouldn't have enough monthly income to pay the loan.

 

I am a bit confused, are you saying you get $1500 for a 2b/1ba and another $1700 for 1b/1b? I am from Chicago and do a lot of real estate investments...McKinley park those numbers are impossible. Total $3200/m in rent?

Not questioning your methods but you will hit a ceiling on conventional loans. Typical underwriting requires 2 years of rental income before it can start counting towards your income if I'm not mistaken through conventional.

 

I've got some friends in the underwriting department at a big bank and this seems right at least for a WF, BofA or Chase type bank. I haven't gone into too much depth with them because frankly underwriting single family homes isn't all that interesting to me but I have heard that they look for two years. When buying my place, on my own personal calculations, I under wrote in how much I would make off roommates and they wouldn't let me include that on my form due to it not being 2+ years.

EDIT: No point in not trying though. If I had the ability to do this I would be.

 

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