House hack scenario. Thoughts?

[Soni]

Ok MMM hive mind, I need some help thinking something through. I’m 42, single, and started my mustashian path fairly late. I now find myself in a spot where I’ve got some FU money put away and am starting on investing in real estate in a small way. I own a home in Michigan and recently took a good paying job in OR and currently paying rent here while collecting rent for my place in Michigan. I want to buy here because I hate paying someone else’s mortgage.  I’m looking for a multifamily a large 3-4br with a 1br unit. I’d live in the one bedroom and rent out the larger part to cover most of the mortgage. A place like this runs $600,000-$700,000 here. If I get an FHA loan I can do 3.5% down. I can afford the down payment, and with renting the larger unit I can afford the monthly. However, my Michigan house is currently on and FHA and you can’t have two at the same time. I would have to refinance the Michigan house to a conventional investment property loan. With closing costs, and some equity contribution to get the refi to 75% loan to value I would be out of pocket about $11,000. Down payment and closing costs on a place here would then be around $30,000. So, in about three months my liquid reserves drop to about $20,000 (I save around $2,500/mo).

A note on life goals. I plan to work out here for a another few years because the pay is way better, but ultimately resettle back in Michigan.

So, with limited reserves does buying an asset that mostly pays for itself, in a decent mmarket make sense. What am I missing? I welcome all thoughts on this because I’m cautious when I get excited about something and need people to shoot holes in it.


My current situation
Income
Job: $81k annual. After taxes $55k/$4,571mo
Michigan rental Income: $1,175
Personal note payments: $1,136

Expenses:
Personal living expenses: $2,000/mo
Michigan rental expenses: $1,050/mo

Assets:
Cash(bank): $24,000
Michigan house: $140,000
Index fund balance: $37,000
Personal note: $35,000

Liabilities:
Michigan house mortgage balance: $116,000

[secondcor521]

There are several risks you face.  I'd make sure you are aware of them:

1.  The renters you have in Michigan move out and you have to cover the Michigan mortgage without the corresponding rental income.

2.  The renters you have in Oregon move out and you have to cover the Oregon mortgage without the corresponding rental income.

3.  #1 and #2 happen at the same time.

4.  When you go to sell the Oregon property, if real estate values drop by, say 10% and you have to bring a check to closing for $50,000 to move *or* let the bank foreclose on you or do a short sale, that would probably be an issue for you.

5.  This is not an exhaustive list.  There are other risks you face.  The above are just the first few that came to mind and strike me as the biggest ones.

The fact that you would have limited reserves after buying an Oregon place would make these risks more difficult to handle if you went down that path and they occur.

I'd consider selling the Michigan house now and buy another house in Michigan when you ultimately move back.  That is a less risky and less profitable way to do things.  Since you don't sound like you have the capacity to take these risks, it's what I would consider in your situation.

[secondcor521]

6.  The house in Michigan needs expensive repairs (roof leak, HVAC replacement, etc.).

7.  The house in Oregon needs expensive repairs (roof leak, HVAC replacement, etc.).

8.  You lose your job.

9.  The payment on your personal note asset is not made.

10.  Any combination of 1, 2, 4, 6, 7, 8 and 9 happen.

The more I look at your situation I'd probably consider both selling the house in Michigan and not buying but just renting in Oregon.  Save any extra income for a big down payment when you move back to Michigan.

[sammybiker]

@Soni No way would I be buying in OR even with the househack. Way too thin.  Instead, I would focus on living in someone else's househack, reduce your personal expenses as much as possible while trying to boost your income.

Single income of $81k in a HCOL West coast area w/a non-cash flowing rental back home while looking at $700k units is not good.

WHAT I WOULD DO

1)  Get your single fam in Michigan cashflowing, if you can

2) Michigan is one of the best cashflow states - continue living like a college kid in OR making better income while buying cashflow real estate in a state/city that you know well, have established relationships and want to eventually return to

[SndcxxJ]

I fully agree with Sammybiker.  Keep buying in Michigan.  Owning a place for a few years may not work out for you in Oregon, especially with such a small down payment.  Who is managing the Michigan rental?  If that has been working well for you so far, keep that up.  Your down payment will go further, cash flow might be better, management is in place, it sounds like a longer term hold... These are some of the fundamentals that make for successful real estate investing.
Whereas, small down payment and shorter term hold makes your margin of success much thinner, and the chance of failing larger.  Don't forget, when you sell you need the property value to have grown by +/-8-10% just to cover costs.  If you are needing that to happen in the next couple to few years it might not.

I invest where I live (HCOL area), not because it is the best market but because it is where I am located.  If I had roots in a better market I'm sure that would be my focus.

[Soni]

@secondcor521, @sammybiker, @SndcxxJ

Thank you all for the feedback. I truly appreciate the time you put into reading my scenario and offering thoughtful advice.

I have a high-risk tolerance AND a tendency to come up with ideas that would be successful by only a narrow margin. I too easily focus on the upsides, I miss calculate the risks. Hence why I asked for help.

I’ve really only been in a position for investment options recently and enjoy exploring strategies while I find the right path. Thanks again for your thoughts.

[cosine88]

My takeaway from this is just to not use FHA if at all possible.

By contrast, if you go 5-10% down payment with conventional, you do still pay PMI, but then you don't have to fully refinance to get out of it, you can just pay some off and get an appraisal and "show" that you have 20% and get rid of PMI. Is that true? Then if you've already moved out you don't have to go through a refi with the investment loan rates.

Also, at least rates are so low right now that even investment loans aren't bad at all, I've seen 3.375% on an investment.

Why not go conventional but low-down on the Oregon one?