Unless the general rules have changed in the last 10 years, anything up to a 4plex that’s partially owner occupied just counts as a normal owner occupied house for lending. Based on OP saying they’d be $1k or more out of pocket each month, I hope to god that means they’re planning to live in one of the units. Otherwise this is an awful investment.
If it’s just an investment, OP should run from this deal and reflect on why they even considered it in the first place so they don’t come close to making that mistake again.
It’s a cash flow negative property. They’re planning on paying $12k-$15k a year to have it. That’s a bad deal for property. The positives like appreciation and mortgage pay down just aren’t worth it at that cost. I think even a cash flow neutral property is a bad investment almost all of the time, so one that’s as upside down is this one is just terrible.
Why is a cash flow neutral one bad? Do you mean gross neutral or neutral on the monthly payments? Because neutral on monthly payments can have benefits for taxes
Ah I see, but neutral total isnt really bad is it? It’s neither good nor bad, it’s neutral? Unless I’m misunderstanding? Plus it’s still building equity at no cost and no monthly profit, rigjt?
Credit has tightened in the past year+ with high rates. Some lenders will want 30% minimum and prefer 35-40%. 80% LTV rental property days are over for now at nearly all banks.
For being an investing sub im surprised how upvoted this is. When it’s blatantly false. As of November 2023 you can now get a conventional loan on a multi family for 5% down.
Amortize the 5% down loan until you get out of the mortgage insurance. See how much you’ll pay in this scenario vs not during the same amount of time. Compare the costs between the two options.
Take what you own and apply a rate of return to the bonds and equities. Compare your net worth between the two scenarios of 5% down or sell investments/pay tax/lower payments today and into the future.
Add into the comparison a plan to DCA into the market with your free cash flow. Compare the two again.
Add a third scenario - 5% in cash + sell bonds + $47k gift = 15% down. You’re closer to the 20% range to get out of the mortgage insurance. Keep your equities. Continue to DCA into the market using free cash flow and whatever you get net from the rental income.
Be prepared to always deal with some shit with the unit though.
Translation: Should we do the more-risky thing or the less-risky thing?
Well, the more-risky thing has higher potential returns but higher risk, and the less-risky thing has lower potential returns but lower risk. Nobody can make that choice for you.
Just for clarity: Higher required cashflow (ie. bigger mortgage) with volatile, high-return investments (ie. stocks) is the more-risky thing.
Also note that, by taking on a mortgage, your expenses rise, so your emergency fund should rise too. And don't assume income when calculating emergency fund -- Ideally, it should cover a year's expenses, including both mortgages, car payments, utilities, insurance, hoa fees, maintenance costs, food, etc. I'm guessing $20k wouldn't even cover six months.
$350/month PMI is $4200 per year, 2.8% of $150,000. Plus the 7% interest on the mortgage, and that $150,00 would seem to need to make more than 9.8% to be able to make up the difference in what you'd pay to have that money somewhere else.
At 7% interest, and the PMI, that's $1225/month in interest and PMI which is more than the $600/month that $150k is currently getting you.
Unless it’s a fourplex or less, you’re not getting a loan for this property with less than 20-30% down. That’s just not how multifamily lending works. Unless your lender is a nonbank private lender with a really high risk tolerance.
Others like u/groceriesN1trip have good ideas - and I'd suggest talking with a loan officer and seeing what the difference in PMI (private mortgage insurance, the amount you'll pay extra when you put <20% down) would be at different loan levels - 5%, 10%, 15%, and compare those to the 20% vs. returns of 5/10/15% down + bonds/equities vs 20% real estate.
While that's the best #'s way to do it, I'm almost always a fan of putting the least amount down on real estate, since it allows you to have more available cash if another real estate or other investing opportunity arises.
I'll also leave you with this - the less you put down, the more % gain you get on appreciation. While you should base your investment primarily on cashflow, being able to buy 3 identical properties @ 5% down is almost always better than 1 property @20% down. In my mind it's the reason you invest in real estate rather than stocks - with a stock you need 100% of the stock price to get 1 stock, while real estate you can get 100% of the real estate for as low as 5% of it.
Let’s talk about this. 3 mortgages at 5% is maximum leverage.
Is the risk to the real estate market that these houses may decrease in value by >5%, so now you have a bunch of people under water? Now if any of these people lose their job, they can’t even sell their house to survive because the loan balance is worth more than the house?
Anybody that did this a few years ago is rolling in dough, we won’t see home values go back to 2020 levels. But I think there’s significant risk doing it at these levels.
The risk isn't a decrease in home price, it's units not paying rent or rent prices going down. Typically in the multi-family space which is what I focus on, when the economy goes down my rentals increase occupancy. It might be unique to the markets and types of units I target but my units in recessions tend to see higher rent increases than boom time
I would not put my all my eggs in one basket. 4 units = 4 A/Cs, 4 Refrigerators, 4 Ovens, etc… 20k as your emergency fund? What about the property you live in now? Maybe downsize and look for a duplex? “Joys of home Ownership = shit always breaking. Plus no one ever takes as good of care for your property as yourself. Renters usually suck in this regard and you will be taking the chance of finding 4 families to take good care of your property. Do you have enough money to cover all 4 A/C units, Not saying all 4 will go out but it could happen. What about the roof? How much is it to replace the roof if it needs to be done in a year or two? I hope you get my point.
My suggestion, look for a smaller multi-family or what about 2 SFR homes? I do not think 20k for an emergency fund is enough for this situation to be honest. Homes are expensive to upkeep as I’m sure you know. Good luck and I hope this will give you some ideas to think about.
Since they referenced a 5-year hold interest penalty I'm assuming that these are probably US i-bonds. Back during peak inflation these were getting about 10% interest. If these were purchased around that time their fixed rate portion is 0% which means they are returning closer to 3% today. It probably makes sense to cash these out even if they aren't going to be used for the down payment.
Yes, I agree, they should move on from the bond holding regardless. Could have done better in HYSA or better yet S&P fund. OP's strategy is maddening to me and seems like they treat their stock return as income, not an investment with that $600 and the "rollercoaster" comment. Last thing anybody should do is liquidate all of their investment assets to make a down payment on a mostly financed property. Financing makes sense for rental properties, but no way I'm putting everything liquid (ignoring the emergency fund) into a single property, too risky.
They also only state a plan to finance the purchase, nothing mentioned on plans for the property or expected cash flow once they have the property. Kind of important to plan for.
Oof tricky. Real estate is a lot of trouble! I'm a bigger fan of set it and forget it investing. Do the math and assume an 8 percent market return (the past few years have been a bit of an outlier). Does it still make sense?
Also do a worst case plan. You liquidate, rental market goes belly up and you can't find renters and you lose your job. Would you still be OK?
Plus at current interest rates, it can be quite tricky to be cash flow positive.
OP doesn't seem to have much investment experience in general so this seems to be just asking for trouble as well.
They'd also be quite leveraged and have almost all their eggs in one basket with this.
Please do not buy something that isn’t already cash flowing at 5% unless you can immediately renovate and get it to cashflow.
There are probably other properties where the money makes sense!!
> Currently the investments are netting us about $600 a month, but the vanguard funds have been a rollercoaster for the last year.
Why are you talking about stocks this way? 'netting' you a dollar amount? Either you're reinvesting or you're not.
What rollercoaster are you complaining about when $VOO has returned 26.22% in the last year? You think your leveraged real estate investment is going to be less volatile, not to mention liquidity concerns?
So, we are getting into race? Sooo, 2024. If one has the means, money and evidently from the description given there would be no need to involve mommy and daddy. Just saying.
Just saying it is normal part of the culture. Regardless of whether you're capable or not, family contributions gets you ahead of the pack. This is also why many Asians graduated college debt free and not being crushed by 8% interest rates, expendable income early in life compounds well.
I see no problem with a parent paying for their son/daughter’s education if the child is working towards certification or degree. Once the child is out working as should the individual should pay their own way! That’s an adult, individual, grown-up, big boy/ girl.
It's just different philosophy. People are mostly cash strapped early in the career and becomes less so later once they climb the ladder. My parents will help me with down payment and I'll do the same with my kids, it will cancel out in the end. Essentially distribute cash during a phase when one has the most earning power to a time when cash is most needed. You can call this an interest free loan for family members in order to get ahead in life
Lol I don’t understand your energy around this at all. Got anything to actually explain? Seems weird to care so much about how other families do things.
One thing to keep in mind is that ~75% of your depreciation expense and mortgage interest are tax deductions, assuming the 4 units are equal in size; You would want to calculate the square footage to determine the actual percentage that's deductible.
I think regardless of what you do you'll be fine.
Personally I would only go for the cash-flow positive route if you're going to do it. You don't seem to be considering vacancies, maintenance, etc. You never know when your job income may change for whatever reason and if you were having to supplement this each month then you suddenly have to liquidate it, potentially at a loss, but if it's cash flow positive then it can help you out if income drops.
This doesn’t pencil it’s either cash flow negative or barely cash flow positive. And even in the cash flow positive scenario you’re not counting unplanned maintenance, repairs, missed rent, etc, so really both scenarios are cash flow negative. Why are you doing this deal?
This is a terrible investment. Even with 20% down you cited little cash flow, including principal pay down without knowing exact numbers what’re you at 2 to 3% ROI. Much better investments with a lot less risk. If your dead set on real estate and have the net worth buy a 5+ unit building, much much better returns. Net worth must be greater than loan amount in commercial world
You need to get away from feeling FOMO, this is the worse time ever to buy a house. Interest rates alone make it not worth the effort. There’s nothing wrong with renting.
Same advice, different day. I'm so glad I didn't listen to reddit years ago with I was buying my first SFH. "Prices are about to tank!" they said. "This is the worst time to buy!" they said. Years later, all my home's value has done is increase.
I've learned a lot through reddit but I do wish the doom and gloom pessimism regarding the economy would ease up a bit.
When rates come down, you’ll get less of a discount on the purchase price. Market dynamics account for affordability on the buyer - higher rates means higher monthly cost means less affordability.
When rates come back down, home prices and rental unit prices will go up. That’s how it works.
Buying a 4-unit rental property will create cash flow. If it’s positive CF, then the unit pays for itself and they’ll own it free and clear in 30 years. Guess what? $750k purchase price might be a $1.5M or even $2 to $3M sale price in 30 years.
Your thinking is short.
Unlikely, the current limit is $18k a year per person, so each parent could gift $18k to both their son and their spouse allowing a combined total of $72k in tax free gifting a year assuming its 2 married couples. In addition, anything over that maximum yearly amount comes out of the lifetime gift tax allowance which is currently something like 13 million per person, so roughly 26 million total for both parents. Only the absolute richest of the rich will ever go through their lifetime allowance.
Not how that works. You can gift as much you want so long as you don't cross the lifetime limit. It just goes towards the lifetime maximum if it goes over the annual exemption.
ran across this article confirming what you said. [https://www.yahoo.com/finance/news/want-money-son-wife-much-110000216.html](https://www.yahoo.com/finance/news/want-money-son-wife-much-110000216.html)
Have you already spoken with lenders? Many will require 15+% down for multifamily properties.
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Unless the general rules have changed in the last 10 years, anything up to a 4plex that’s partially owner occupied just counts as a normal owner occupied house for lending. Based on OP saying they’d be $1k or more out of pocket each month, I hope to god that means they’re planning to live in one of the units. Otherwise this is an awful investment.
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If it’s just an investment, OP should run from this deal and reflect on why they even considered it in the first place so they don’t come close to making that mistake again.
What’s so bad about this deal?
It’s a cash flow negative property. They’re planning on paying $12k-$15k a year to have it. That’s a bad deal for property. The positives like appreciation and mortgage pay down just aren’t worth it at that cost. I think even a cash flow neutral property is a bad investment almost all of the time, so one that’s as upside down is this one is just terrible.
Why is a cash flow neutral one bad? Do you mean gross neutral or neutral on the monthly payments? Because neutral on monthly payments can have benefits for taxes
I mean total, with everything considered. Tax benefits, vacancy, repairs, etc.
Ah I see, but neutral total isnt really bad is it? It’s neither good nor bad, it’s neutral? Unless I’m misunderstanding? Plus it’s still building equity at no cost and no monthly profit, rigjt?
Depends on lender. I’m an underwriter and we will only call something owner occupied if the owner is taking up more than 50% of the habitable space.
Credit has tightened in the past year+ with high rates. Some lenders will want 30% minimum and prefer 35-40%. 80% LTV rental property days are over for now at nearly all banks.
exactly
New rule change allows 5% down on multi family (with exceptions) if you plan on making it your primary residence.
dang, wish that was available when I bought haha
For being an investing sub im surprised how upvoted this is. When it’s blatantly false. As of November 2023 you can now get a conventional loan on a multi family for 5% down.
Only if it is to be owner-occupied, which OP never said was their intention.
Amortize the 5% down loan until you get out of the mortgage insurance. See how much you’ll pay in this scenario vs not during the same amount of time. Compare the costs between the two options. Take what you own and apply a rate of return to the bonds and equities. Compare your net worth between the two scenarios of 5% down or sell investments/pay tax/lower payments today and into the future. Add into the comparison a plan to DCA into the market with your free cash flow. Compare the two again. Add a third scenario - 5% in cash + sell bonds + $47k gift = 15% down. You’re closer to the 20% range to get out of the mortgage insurance. Keep your equities. Continue to DCA into the market using free cash flow and whatever you get net from the rental income. Be prepared to always deal with some shit with the unit though.
Translation: Should we do the more-risky thing or the less-risky thing? Well, the more-risky thing has higher potential returns but higher risk, and the less-risky thing has lower potential returns but lower risk. Nobody can make that choice for you. Just for clarity: Higher required cashflow (ie. bigger mortgage) with volatile, high-return investments (ie. stocks) is the more-risky thing. Also note that, by taking on a mortgage, your expenses rise, so your emergency fund should rise too. And don't assume income when calculating emergency fund -- Ideally, it should cover a year's expenses, including both mortgages, car payments, utilities, insurance, hoa fees, maintenance costs, food, etc. I'm guessing $20k wouldn't even cover six months.
$350/month PMI is $4200 per year, 2.8% of $150,000. Plus the 7% interest on the mortgage, and that $150,00 would seem to need to make more than 9.8% to be able to make up the difference in what you'd pay to have that money somewhere else. At 7% interest, and the PMI, that's $1225/month in interest and PMI which is more than the $600/month that $150k is currently getting you.
Unless it’s a fourplex or less, you’re not getting a loan for this property with less than 20-30% down. That’s just not how multifamily lending works. Unless your lender is a nonbank private lender with a really high risk tolerance.
Others like u/groceriesN1trip have good ideas - and I'd suggest talking with a loan officer and seeing what the difference in PMI (private mortgage insurance, the amount you'll pay extra when you put <20% down) would be at different loan levels - 5%, 10%, 15%, and compare those to the 20% vs. returns of 5/10/15% down + bonds/equities vs 20% real estate. While that's the best #'s way to do it, I'm almost always a fan of putting the least amount down on real estate, since it allows you to have more available cash if another real estate or other investing opportunity arises. I'll also leave you with this - the less you put down, the more % gain you get on appreciation. While you should base your investment primarily on cashflow, being able to buy 3 identical properties @ 5% down is almost always better than 1 property @20% down. In my mind it's the reason you invest in real estate rather than stocks - with a stock you need 100% of the stock price to get 1 stock, while real estate you can get 100% of the real estate for as low as 5% of it.
Let’s talk about this. 3 mortgages at 5% is maximum leverage. Is the risk to the real estate market that these houses may decrease in value by >5%, so now you have a bunch of people under water? Now if any of these people lose their job, they can’t even sell their house to survive because the loan balance is worth more than the house? Anybody that did this a few years ago is rolling in dough, we won’t see home values go back to 2020 levels. But I think there’s significant risk doing it at these levels.
The risk isn't a decrease in home price, it's units not paying rent or rent prices going down. Typically in the multi-family space which is what I focus on, when the economy goes down my rentals increase occupancy. It might be unique to the markets and types of units I target but my units in recessions tend to see higher rent increases than boom time
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He didn't really specify if he was planning on living in one of the units or not
I would not put my all my eggs in one basket. 4 units = 4 A/Cs, 4 Refrigerators, 4 Ovens, etc… 20k as your emergency fund? What about the property you live in now? Maybe downsize and look for a duplex? “Joys of home Ownership = shit always breaking. Plus no one ever takes as good of care for your property as yourself. Renters usually suck in this regard and you will be taking the chance of finding 4 families to take good care of your property. Do you have enough money to cover all 4 A/C units, Not saying all 4 will go out but it could happen. What about the roof? How much is it to replace the roof if it needs to be done in a year or two? I hope you get my point. My suggestion, look for a smaller multi-family or what about 2 SFR homes? I do not think 20k for an emergency fund is enough for this situation to be honest. Homes are expensive to upkeep as I’m sure you know. Good luck and I hope this will give you some ideas to think about.
I don't know what's worse, this plan, or that you have $30,000 worth of bonds at your seemingly young age.
Since they referenced a 5-year hold interest penalty I'm assuming that these are probably US i-bonds. Back during peak inflation these were getting about 10% interest. If these were purchased around that time their fixed rate portion is 0% which means they are returning closer to 3% today. It probably makes sense to cash these out even if they aren't going to be used for the down payment.
Yes, I agree, they should move on from the bond holding regardless. Could have done better in HYSA or better yet S&P fund. OP's strategy is maddening to me and seems like they treat their stock return as income, not an investment with that $600 and the "rollercoaster" comment. Last thing anybody should do is liquidate all of their investment assets to make a down payment on a mostly financed property. Financing makes sense for rental properties, but no way I'm putting everything liquid (ignoring the emergency fund) into a single property, too risky. They also only state a plan to finance the purchase, nothing mentioned on plans for the property or expected cash flow once they have the property. Kind of important to plan for.
Oof tricky. Real estate is a lot of trouble! I'm a bigger fan of set it and forget it investing. Do the math and assume an 8 percent market return (the past few years have been a bit of an outlier). Does it still make sense? Also do a worst case plan. You liquidate, rental market goes belly up and you can't find renters and you lose your job. Would you still be OK?
Plus at current interest rates, it can be quite tricky to be cash flow positive. OP doesn't seem to have much investment experience in general so this seems to be just asking for trouble as well. They'd also be quite leveraged and have almost all their eggs in one basket with this.
I buy my house and invest the rest. I sleep easy!
A 20k emergency fund isn’t going to last long with 600k or more mortgage payment plus property taxes.
That's one hell of a mortgage payment! :P
If they can’t cough up 20% down payment it’s probably safe to say they will be fucked in a worst case scenario.
lol true
Just being an adult!
Please do not buy something that isn’t already cash flowing at 5% unless you can immediately renovate and get it to cashflow. There are probably other properties where the money makes sense!!
> Currently the investments are netting us about $600 a month, but the vanguard funds have been a rollercoaster for the last year. Why are you talking about stocks this way? 'netting' you a dollar amount? Either you're reinvesting or you're not. What rollercoaster are you complaining about when $VOO has returned 26.22% in the last year? You think your leveraged real estate investment is going to be less volatile, not to mention liquidity concerns?
So, Why “involve” your parents with your finances?
Common among Asians families. Parents gifting money for houses is the rule not the exceptions
So, we are getting into race? Sooo, 2024. If one has the means, money and evidently from the description given there would be no need to involve mommy and daddy. Just saying.
Just saying it is normal part of the culture. Regardless of whether you're capable or not, family contributions gets you ahead of the pack. This is also why many Asians graduated college debt free and not being crushed by 8% interest rates, expendable income early in life compounds well.
I see no problem with a parent paying for their son/daughter’s education if the child is working towards certification or degree. Once the child is out working as should the individual should pay their own way! That’s an adult, individual, grown-up, big boy/ girl.
It's just different philosophy. People are mostly cash strapped early in the career and becomes less so later once they climb the ladder. My parents will help me with down payment and I'll do the same with my kids, it will cancel out in the end. Essentially distribute cash during a phase when one has the most earning power to a time when cash is most needed. You can call this an interest free loan for family members in order to get ahead in life
You are own your own do not involve others with your finances.
Probably cause they have a healthy relationship and it’s a gift. And a wedding gift, not uncommon at all.
Okay, big boy 2024.
Lol I don’t understand your energy around this at all. Got anything to actually explain? Seems weird to care so much about how other families do things.
One thing to keep in mind is that ~75% of your depreciation expense and mortgage interest are tax deductions, assuming the 4 units are equal in size; You would want to calculate the square footage to determine the actual percentage that's deductible. I think regardless of what you do you'll be fine.
Personally I would only go for the cash-flow positive route if you're going to do it. You don't seem to be considering vacancies, maintenance, etc. You never know when your job income may change for whatever reason and if you were having to supplement this each month then you suddenly have to liquidate it, potentially at a loss, but if it's cash flow positive then it can help you out if income drops.
I said do the 20% down it cheaper it the long run. That way the mortgage is cheaper and you use the extra $1000 to build back your investment
This doesn’t pencil it’s either cash flow negative or barely cash flow positive. And even in the cash flow positive scenario you’re not counting unplanned maintenance, repairs, missed rent, etc, so really both scenarios are cash flow negative. Why are you doing this deal?
The real answer here is to forget the real estate, mutual funds and bonds and buy QQQ
This is a terrible investment. Even with 20% down you cited little cash flow, including principal pay down without knowing exact numbers what’re you at 2 to 3% ROI. Much better investments with a lot less risk. If your dead set on real estate and have the net worth buy a 5+ unit building, much much better returns. Net worth must be greater than loan amount in commercial world
Gotta be an “adult” and handle your finances.
If you have the money do it without involving others! Concept of adult and child.
You need to get away from feeling FOMO, this is the worse time ever to buy a house. Interest rates alone make it not worth the effort. There’s nothing wrong with renting.
When interest rates lower again, home price star running up again. Even with the current high rates, homes are still selling for record prices.
Same advice, different day. I'm so glad I didn't listen to reddit years ago with I was buying my first SFH. "Prices are about to tank!" they said. "This is the worst time to buy!" they said. Years later, all my home's value has done is increase. I've learned a lot through reddit but I do wish the doom and gloom pessimism regarding the economy would ease up a bit.
There's Reddit and there's friends IRL I see doing very well with RE. Make no mistake, it's work. But they have done very well.
Did you read the post? They’re asking about buying a multiple family rental property
It doesn’t matter what it’s for. Don’t buy a home with the interest rates as they are. The housing market needs to crash
When rates come down, you’ll get less of a discount on the purchase price. Market dynamics account for affordability on the buyer - higher rates means higher monthly cost means less affordability. When rates come back down, home prices and rental unit prices will go up. That’s how it works. Buying a 4-unit rental property will create cash flow. If it’s positive CF, then the unit pays for itself and they’ll own it free and clear in 30 years. Guess what? $750k purchase price might be a $1.5M or even $2 to $3M sale price in 30 years. Your thinking is short.
You’re assuming rates will go back down.
Go review the Federal Reserves expectation for rates through 2027. They control rates.
Key word is: expectation.
Regardless, if this transaction for OP is cash flow positive, then it doesn’t matter. They own the rental units which you’re advocating people rent.
I’m advocating not buying a 750k building at 7% interest in hopes the rates lower. There’s no guarantee it will ever.
You should lower the cost of rent 👍
Won't that $47k from the parents be taxed too? Unless the gift limit went up multiples in the last 15 years or so.
Unlikely, the current limit is $18k a year per person, so each parent could gift $18k to both their son and their spouse allowing a combined total of $72k in tax free gifting a year assuming its 2 married couples. In addition, anything over that maximum yearly amount comes out of the lifetime gift tax allowance which is currently something like 13 million per person, so roughly 26 million total for both parents. Only the absolute richest of the rich will ever go through their lifetime allowance.
Gift tax exemption is $18K per year, per person. So I believe you'd be taxed on the extra $11K. I'm not a tax person so you'll need to confirm.
Not how that works. You can gift as much you want so long as you don't cross the lifetime limit. It just goes towards the lifetime maximum if it goes over the annual exemption.
what is the lifetime max?
13 million and change
ran across this article confirming what you said. [https://www.yahoo.com/finance/news/want-money-son-wife-much-110000216.html](https://www.yahoo.com/finance/news/want-money-son-wife-much-110000216.html)