Is Now a Bad Time to Start Out?

[Gabe Morrell]

My wife and I are certain future real estate investors (Minneapolis-St. Paul greater area) who would love to enter the market sometime within the next 1-4 years and acquire our first rental property. We both are drawn to either single family long term rentals, or STR's in the right locations.

Right now we have $20k cash available for immediate investment, with the ability to increase that to $60-70k in the next 3 years through savings and bonuses at our day jobs. We also have approx. $140 equity in our primary residence that we'd be open to getting a HELOC on (would love feedback on if people recommend this or not).

Given our limited available resources for down payment, high home prices, and higher interest rates, is now a bad time for first time investors to enter the market? Is there a chance that rates and prices decrease in the next 1-4 years as our cash reserves increase, thus creating a better scenario for us first time investors?

We would GREATLY appreciate feedback from experienced investors on how best to start out on our REI journey.

[Jacob St. Martin]

Hey Gabe, this is a great question!

$20,000 is not going to be enough to buy an investment property and have sufficient cash reserves in almost any market UNLESS you house hack or are doing a flip or BRRRR.

If you are willing to move then you can use that 20k and put the minimum amount down on a property that you can house hack. Maybe there is a finished basement or ADU that you can rent out and you get to rent out your old primary residence. If you are open you could put those up on Airbnb and you will probably get the best revenue that way.

If you need help with anything feel free to reach out to me in a private message! 

[Denis Ponder]

If you have a 1-4 year time span, just be patient. Do you know where you are looking? What kind of SFR (#BR, #BA, value add, turnkey) do you want? How much are you looking to spend/can you afford? Are you personal finances under control? Can you move from your current place and buy another primary residence? It will require less down. Are you interested in a house hack?

[Gabe Morrell]

Jacob, thanks for giving me a great straight answer to my $20k question. Seems like the sensational answer would be to direct me to a YouTube video explaining how to acquire property with “no money down.” Haven’t quite figured out how the math works yet on that strategy…

Dennis, patience is a great recommendation. Much appreciated. Personal finances are under control. Not looking to move out of current home as it fits us perfectly in our current season of life (with a 3.375% interest rate). Haven’t quite gotten to deciding how many beds/baths are desirable for future rental. A future step to consider. Likely would look in the $250-350k range.

[Yiwei Cheng]

Hi Gabe, don't underestimate what you can do with 20k!  You can invest in notes/private lending so that you can make that money work for you and continue to grow.  You can also partner with someone with money to purchase a house, manage for someone, etc.  There are many ways to get started!

No one can time the market & now is always better than later.

[Nathan Gesner]

Quote from @Gabe Morrell:

First, you need to understand what it really takes to invest wisely. Even if you find something to buy with $20,000 down, you should still have a reserve in place to protect you against unforeseen situations. For example, one bad tenant stops paying rent in January. You start the eviction and get him out by the end of February. You discover his unauthorized dog trashed the carpet in the living room, destroyed a couple doors, and the entire place needs cleaning. It takes you 30 days to turn it around and find a new renter. Three months lost rent and utilities: $5,000. Replace carpet and doors: $2,500. Cleaning: $500. That's $8,000 in losses from one tenant your first year. You need money set aside to handle these all-too-common scenarios.

Second, the market peaked and hasn't fully corrected. Sales prices are extremely high, rates are high, and rents haven't caught up. Finding a property that cash flows is rare. Finding a property that will appreciate in value is also rare because markets are more likely to go down over the next few years. We still haven't paid the piper for "free" COVID money and everything else our government has done to create this inflation.

Spend this time educating yourself, saving, getting clear on your goals, and studying the market. When it shifts, you will be educated and ready.

[Taz Zettergren]

@Gabe Morrell welcome to the forums Gabe. Where interest rates are today I wouldn't use that HELOC unless you're purchasing distressed properties and are able to pull most all your money back out of the deal after the rehab is finished. In regards to timing, definitely be patient and ensure the location is exactly where you want to be. The sooner the better in my opinion though, there are tons of investors waiting on rates to drop before they get into the marketplace so when they do that's going to bring so much demand back into the marketplace it'll cause prices to increase at a much faster pace again.

You can take advantage of the market that isn't as favorable right now and negotiate a great deal and still refinance in the next few years to help improve your position. That first step is always the toughest but like I say take your time, solidify your strategy and where you're looking to invest before jumping all the way in. 

[Jeff Schemmel]

@Gabe Morrell My post reply to you is going to read like I'm discouraging you; just know that I firmly believe investing in real estate is excellent and there are few places I'd rather put my money.  

You won't get off the ground with $20,000, and you should wait the 4 years until you have a proper amount.  $20k is the amount I'd recommend to have in just reserves for owning two properties.  It's a different situation when you're not going to occupy the property you purchase.   Owner-occupants often get lower down payment options and better rates.

As far as whether to take or utilize a HELOC for the acquisition my advice is a firm NO. HELOCS can be leveraged in consideration of a short-term project, but in my opinion you want to avoid leveraging one property to buy and hold another for several reasons. Consider utilizing a HELOC for a flip/brrr where you are extremely confident you can turn it around in 6-9 months (max), so you don't hold that 2nd property leveraging the first for longer than necessary; especially with single-family rentals. I wouldn't even consider this scenario if you have no business managing a flip, and you have never done renovation projects, as that is an arena where you need to have built experience and connections to just be OK.

Let's consider that you decide to save just enough ($75k) and grab a $300k single-family rental with 20% cash down (plus closing costs) and you just rent it out (not owner-occupied) and you have limited reserves. It's crucial that you properly screen the tenants and you don't skip any part of the necessary due diligence with that. If that tenant decides not to pay, the whole asset is jeopardized because you don't have enough reserves, AND there's no part of your mortgage or utilities covered when a tenant isn't paying rent. If you've used a HELOC to purchase this property, you have both the HELOC (high-interest payment) AND this 2nd mortgage which aren't being covered. If you can't pay that HELOC, that's bad news for your primary as well. Now, consider that same scenario in a duplex investment, where one tenant is still paying and even if you have issues with the 2nd tenant you may have a chance to weather that storm. There is more to that argument, but this is something you really need to prepare for and consider well in advance of your decision to invest. In the MSP single-family rental market you'll want to have a solid $90-100k before you consider throwing it at a single-family rental you don't live in. That is no exaggeration. Here's some rough math:

purchase price: $300,000 (well below median, and forced to certain geographic areas)
down payment: $60,000 (minimum 20% for NOO SFH)
Closing & out of pocket $11,500
Rehab & reserves: $20,000

I want to congratulate you a bit for having built some really solid equity in your primary; consider yourself very lucky and take good care of that asset.  This corner of the single-family market at or below $350,000 is currently hyper-competitive.  It's the first rung on the homeownership ladder, and folks who could previously afford $400k in a 4% interest rate environment, are now having to fight over a basic bungalow.  I strongly encourage you to consider a variety of asset types while you build up the capital to enter non-owner-occupant investing.  The fall/market market tends to favor investors a bit more, as the common homeowner isn't selling during that time unless they have to.  Less choices in the fall/winter, but then again, we're not worried about where to put the tv, or what color the carpet is :) 

[Wale Lawal]

@Gabe Morrell

New real estate investors face tough times with high house prices and loan rates. But, there's room for smart moves. To do well, learn about real estate, make a strong plan, meet local investors, check the market, look into loan choices, start small then grow, stay ready for changes, and get advice from pros.

Learn about market trends, loan options, and ways like renting out for long or short terms. Meet local investors, go to workshops, and join groups for tips. Look into loans like FHA, traditional loans, HELOCs, portfolio loans, and teaming up. Start small and grow slowly, using equity or HELOC wisely. Be ready to change with the market and ask for help from real estate agents, money advisors, tax experts, and seasoned investors.

Good luck!

[Gabe Morrell]

Quote from @Jeff Schemmel:

@Gabe Morrell My post reply to you is going to read like I'm discouraging you; just know that I firmly believe investing in real estate is excellent and there are few places I'd rather put my money.  

You won't get off the ground with $20,000, and you should wait the 4 years until you have a proper amount.  $20k is the amount I'd recommend to have in just reserves for owning two properties.  It's a different situation when you're not going to occupy the property you purchase.   Owner-occupants often get lower down payment options and better rates.

As far as whether to take or utilize a HELOC for the acquisition my advice is a firm NO. HELOCS can be leveraged in consideration of a short-term project, but in my opinion you want to avoid leveraging one property to buy and hold another for several reasons. Consider utilizing a HELOC for a flip/brrr where you are extremely confident you can turn it around in 6-9 months (max), so you don't hold that 2nd property leveraging the first for longer than necessary; especially with single-family rentals. I wouldn't even consider this scenario if you have no business managing a flip, and you have never done renovation projects, as that is an arena where you need to have built experience and connections to just be OK.

Let's consider that you decide to save just enough ($75k) and grab a $300k single-family rental with 20% cash down (plus closing costs) and you just rent it out (not owner-occupied) and you have limited reserves. It's crucial that you properly screen the tenants and you don't skip any part of the necessary due diligence with that. If that tenant decides not to pay, the whole asset is jeopardized because you don't have enough reserves, AND there's no part of your mortgage or utilities covered when a tenant isn't paying rent. If you've used a HELOC to purchase this property, you have both the HELOC (high-interest payment) AND this 2nd mortgage which aren't being covered. If you can't pay that HELOC, that's bad news for your primary as well. Now, consider that same scenario in a duplex investment, where one tenant is still paying and even if you have issues with the 2nd tenant you may have a chance to weather that storm. There is more to that argument, but this is something you really need to prepare for and consider well in advance of your decision to invest. In the MSP single-family rental market you'll want to have a solid $90-100k before you consider throwing it at a single-family rental you don't live in. That is no exaggeration. Here's some rough math:

purchase price: $300,000 (well below median, and forced to certain geographic areas)
down payment: $60,000 (minimum 20% for NOO SFH)
Closing & out of pocket $11,500
Rehab & reserves: $20,000

I want to congratulate you a bit for having built some really solid equity in your primary; consider yourself very lucky and take good care of that asset.  This corner of the single-family market at or below $350,000 is currently hyper-competitive.  It's the first rung on the homeownership ladder, and folks who could previously afford $400k in a 4% interest rate environment, are now having to fight over a basic bungalow.  I strongly encourage you to consider a variety of asset types while you build up the capital to enter non-owner-occupant investing.  The fall/market market tends to favor investors a bit more, as the common homeowner isn't selling during that time unless they have to.  Less choices in the fall/winter, but then again, we're not worried about where to put the tv, or what color the carpet is :) 

Hi Jeff,

Thank you VERY much for the straight forward honest answer. I don't take your advice as discouragement, but more as a realistic picture of the risks of entering the REI game that most won't tell you.
$20k has felt light to me as well, and I love the idea of having an emergency fund for each property I own. Seems like the wise move for those unforeseen circumstances that can happen.

Love the firm NO on the HELOC option as well. I've heard several people recommending the HELOC option as a "quick way to get in" and it just hasn't sat well with me for the exact reasons you outlined. Thanks for the confirmation!

I think I've gotten myself slightly confused by all of the people out there advertising the "get into REI quick with little or no money down" sales pitches. I still haven't gotten a clear picture from any of those people on how that's exactly done. Just seems like sensational Youtube video titles that generate clicks and views. The $90-100k number you quoted has been the continual number my wife and I come back to every time I run the numbers. Glad to have someone else in the MSP market who shares that same perspective.

Yes, the equity in our house is GREAT. Bought right before Covid with low(er) prices and low interest rates. Been happy with that decision in hindsight. Another option we've toyed with is saving to buy our next primary residence in a few years and converting our current home into the long term rental. Given the mortgage payment, it could likely generate a solid $800-1k in cash flow after expenses per month.

I appreciate your insight, Jeff. Since you're in the MSP area, I may shoot you a message to continue gleaning from you if you're open to that. Thanks!

[Jeff Schemmel]

@Gabe Morrell you're welcome.  

I have some additional thoughts on the return on equity.  I believe there are some gains to be had there by expanding your perspective on holding that primary or entertaining some other options.  Happy to chat on that.  reach out anytime.

[Katy Norman]

I agree with what Jeff says. It's always good to have reserves and the problems that can arise can be quite costly, so it's important to have an emergency fund, but part of what you'll want to think about is your risk tolerance and back up plans. Everyone is different in the level of risk they are willing to take and the life stage you're in can certainly contribute to that. 

Here are a few things I like to think about when making a decision like this:

1. What's the best and worst case scenario with this investment? 

2. What's my exit strategy? Is there another option that works well if exiting is not a good idea at the time?

3. What are my fears? Then answer those questions. 

There are strategies to buy properties with less money down for sure, like private money, seller financing, contract for deeds, etc, but figuring out what's most important to you and the why behind what you're doing should help guide you both in you journey! 

I know this isn't a straight forward answer, but hope it helps give you some things to think about. 

[Gabe Morrell]

Quote from @Katy Norman:

I agree with what Jeff says. It's always good to have reserves and the problems that can arise can be quite costly, so it's important to have an emergency fund, but part of what you'll want to think about is your risk tolerance and back up plans. Everyone is different in the level of risk they are willing to take and the life stage you're in can certainly contribute to that. 

Here are a few things I like to think about when making a decision like this:

1. What's the best and worst case scenario with this investment? 

2. What's my exit strategy? Is there another option that works well if exiting is not a good idea at the time?

3. What are my fears? Then answer those questions. 

There are strategies to buy properties with less money down for sure, like private money, seller financing, contract for deeds, etc, but figuring out what's most important to you and the why behind what you're doing should help guide you both in you journey! 

I know this isn't a straight forward answer, but hope it helps give you some things to think about. 

 Hi Katy,

This is great advice. Thanks for the tips!

[Jake Andronico]

@Gabe Morrell

Congrats! Sounds like you're in a great spot. 

What will most likely cash flow better than anything you purchase soon (because of prices and rates) is your personal residence (assuming it's a typical home). 

Also: Paid off rental properties cash flow extremely well. 

If rates decrease significantly in the next 1-4 years (and there is no significant increase in supply), prices will increase. 

[Tim Swierczek]

@Gabe Morrell There has been a lot of good advice, rather than repeat it. I would suggest you want to get the HELOC in place no, because you want to be ready to act if something comes up. Although, this is one of the toughest cash flow markets I've seen you can still occasionally find deals that make sense when combining strategies such as value add and rent to own, or short/midterm rentals. The point being you never know what will pop up and being ready with a HELOC in place is a good idea in my opinion.

[Calvin Ozanick]

Quote from @Gabe Morrell:

My wife and I are certain future real estate investors (Minneapolis-St. Paul greater area) who would love to enter the market sometime within the next 1-4 years and acquire our first rental property. We both are drawn to either single family long term rentals, or STR's in the right locations.

Right now we have $20k cash available for immediate investment, with the ability to increase that to $60-70k in the next 3 years through savings and bonuses at our day jobs. We also have approx. $140 equity in our primary residence that we'd be open to getting a HELOC on (would love feedback on if people recommend this or not).

Given our limited available resources for down payment, high home prices, and higher interest rates, is now a bad time for first time investors to enter the market? Is there a chance that rates and prices decrease in the next 1-4 years as our cash reserves increase, thus creating a better scenario for us first time investors?

We would GREATLY appreciate feedback from experienced investors on how best to start out on our REI journey.

Starting out is always difficult to time. If you are seeking for prices to drop, I would not anticipate a crash with the hopes of timing the market. Rates should decrease, but the issue with that is that when rates drop, people can pay more. So the rates coming down does not help investors as much as many people are planning on. 

I would argue you should also be looking for a property that you can take down. If you are marketing for deals, there is seller financing and other creative ways to finance the right deal. 

It comes back to the old Brandon Turner saying from his time on the BP Podcast, if I found you a $1,000,000 property and could sell it to you for $500,000 with no strings attached, you would figure out the financing! 

Best of luck in your search, if you need assistance along the way, do not hesitate to let me know!

[James Hamling]

Quote from @Gabe Morrell:

My wife and I are certain future real estate investors (Minneapolis-St. Paul greater area) who would love to enter the market sometime within the next 1-4 years and acquire our first rental property. We both are drawn to either single family long term rentals, or STR's in the right locations.

Right now we have $20k cash available for immediate investment, with the ability to increase that to $60-70k in the next 3 years through savings and bonuses at our day jobs. We also have approx. $140 equity in our primary residence that we'd be open to getting a HELOC on (would love feedback on if people recommend this or not).

Given our limited available resources for down payment, high home prices, and higher interest rates, is now a bad time for first time investors to enter the market? Is there a chance that rates and prices decrease in the next 1-4 years as our cash reserves increase, thus creating a better scenario for us first time investors?

We would GREATLY appreciate feedback from experienced investors on how best to start out on our REI journey.

Ok Gabe, let's reverse engineer this a bit to get to a fact-based answer vs opinion or feelings. 

By fact of you questioning infers that you question todays market, ok. So, let's define what IS a "good" market to start in? 

Are you thinking maybe a market where interest rates are in the, say, 3% range again?    So what does a 3% rate market look like? Sellers rule the day do they not? Multiple offers in the dozens within days right? Home prices shooting through the roof because, cheap-$ right.     We just went through this and investors were wailing how "bad" a low interest rate market was because of sky-high competition, prices going up-Up-UP and feeling squeezed out.    So reality is, low %rates = problems on getting a buy and pricing issues. 

Are you maybe thinking where prices are lower, a bit more stability in prices? That would be today, right.     What makes prices more stable or lower? Because $ to buy isn't dirt cheap, right, meaning, higher % rates. 

Here is the thing, picture a scale, on one side is interest rates, on the other is price. As rates DROP (one side down) it raises the other. And to get price side down, well, the other side (interest rates) go UP.     How do you get BOTH to go down at same time???? Ya gotta BREAK the scale, meaning, the system itself BREAKS. 

This has happened a grand total of 1 time in our entire lifetimes. ONCE. And it required the breaking of the entire financial system to get there. 

I get it Youtubers talk about "it's coming, it's coming" and know why???? Because it get's CLICKS. Youtubes SELL-CLICKS, that's it that's all, full stop. That is why they all say it's Entertainment, it's to get people to watch, that's it.    If "Hobo Boxing" was top of click chart guess what would happen in following days, you got it, they'd all be about that.    And I don't blame them, it's literally there livelyhood. 

So I'd say, what are you waiting for? Perfect? 

Perfect does NOT exist. 

I was a Real Estate Investor in 2009, do you think everyone was saying what a great time to be in real estate it was? Nope, it was the exact opposite. Everyone was saying how HORRIBLE it was to be in real estate, how it would all keep dropping, that an REI would go bankrupt.

In 2009 it was all talk about where was the bottom, and everyone said you couldnt flip homes because price would keep dropping. I as a REI was a contrarian.

2010,11,12 it was about a false bottom, false recovery, and that the dollar was about to go to $0, a W recovery, and the country falling apart and that one should be prepping, buying food packs NOT doing REI. Again, I was a contrarian.

It wasn't until nearly COVID times until everyone got on this bandwagon of how "great" the post '08' "opportunity" was. The same people who were, at the time, saying how BAD a time it was. 

Then COVID and again "the end is neigh".... Well, did the sky fall???? 

All the way up to today, STILL saying how "bad" today is. Exactly how accurate is there forecasting track record? Damn near perfect for being OPPOSITE of correct, right. 

Warren Buffet said it best when he said it's NOT about timing the market, that it's all about Time IN the market. 

It is ALWAYS a GREAT day to get in and get started, A-L-W-A-Y-S! The only thing that changes is HOW. 

Every "problem" market opens the door to a market OPPORTUNITY. 

Today, higher interest rates then what they were, conditioning people to feel they are high (yes, my words are exactly accurate, check the data, rates are NOT high today, it's a perception) swing wide a GREAT opportunity for buying on seller financing, and that's a form of private financing is it not? Ability to negotiate terms, rate etc.. 

And all this in an inflation market meaning rents going up, values going up, as dollar purchasing power goes down. 

Shure, there is blips in variable months but economics is a far slower moving machine, a month is a nano-second in economics time-line. I guarantee in 4yrs people will again be saying how they "wish" they had bought in 2024. 

As for rates coming down significantly any time soon.... OMG the Fed keeps saying over and over and over again exactly when this will happen and exactly what needs to exist for it to happen, there is 0 guess work needed as they keep telling us directly. And as the Fed keeps saying, it WONT be anytime soon. As in years off. 

Fed DEMANDS inflation to get down around 2%, they've only said it about 470 times now. 

AND, what happens WHEN the Fed DOES start dropping rates? How many people sitting the sidelines of home purchase, what do they do? Yup, they start coming off the bench don't they. And what does real estate prices do? At MINIMUM it holds it up, and in all expectations of reality it RAISES them. 

1 scenario and 1 scenario ONLY do real estate prices significantly drop, and that is CATASTROPHIC calamity of assorted kinds. WWIII and 30 million dead Americans over night. Home Builders discovering Genie and shazaming 6 million new units into existence over night. The entire planet removing the USD as world reserve currency and making whatever, Yuan, the new world reserve currency......    Were talking EPIC crazy WAY-out there stuff and truth is that stuff happens you will be more worried about where you get your next meal than your dang real estate, EVERYONE will be in default. 

So here is what it boils down to: 

If you want to live a life of the 2%, then get your head wrapped around ignoring the chatter of the 98%....... 

[Chris Rich]

Quote from @Gabe Morrell:

Jacob, thanks for giving me a great straight answer to my $20k question. Seems like the sensational answer would be to direct me to a YouTube video explaining how to acquire property with “no money down.” Haven’t quite figured out how the math works yet on that strategy…

Dennis, patience is a great recommendation. Much appreciated. Personal finances are under control. Not looking to move out of current home as it fits us perfectly in our current season of life (with a 3.375% interest rate). Haven’t quite gotten to deciding how many beds/baths are desirable for future rental. A future step to consider. Likely would look in the $250-350k range.

I'd agree that $20,000 isn't enough unless you are considering really low end properties and I'd argue they aren't worth the headache.  I think waiting a little longer to build up those capital reserves makes sense, especially if rates aren't going to come down much in 2024 (presumably.)

My two cents -- If you are looking for SFR, I'd say 3-4 beds, 1300-2000sq ft is the sweet spot for LTR. If you look at tenant preferences over half prefer apartments with about 30% wanting an SFR.

I see you mentioned a low interest rate, do you have a lot of equity?  My wife and I are in the Orlando area and had a 2.99% when we wanted to upgrade.  We took out a HELC and leveraged the $200K in equity to turn our primary into a cash flowing rental... just another option. 

[Gabe Morrell]

Quote from @Chris Rich:

Quote from @Gabe Morrell:

Jacob, thanks for giving me a great straight answer to my $20k question. Seems like the sensational answer would be to direct me to a YouTube video explaining how to acquire property with “no money down.” Haven’t quite figured out how the math works yet on that strategy…

Dennis, patience is a great recommendation. Much appreciated. Personal finances are under control. Not looking to move out of current home as it fits us perfectly in our current season of life (with a 3.375% interest rate). Haven’t quite gotten to deciding how many beds/baths are desirable for future rental. A future step to consider. Likely would look in the $250-350k range.

I'd agree that $20,000 isn't enough unless you are considering really low end properties and I'd argue they aren't worth the headache.  I think waiting a little longer to build up those capital reserves makes sense, especially if rates aren't going to come down much in 2024 (presumably.)

My two cents -- If you are looking for SFR, I'd say 3-4 beds, 1300-2000sq ft is the sweet spot for LTR. If you look at tenant preferences over half prefer apartments with about 30% wanting an SFR.

I see you mentioned a low interest rate, do you have a lot of equity?  My wife and I are in the Orlando area and had a 2.99% when we wanted to upgrade.  We took out a HELC and leveraged the $200K in equity to turn our primary into a cash flowing rental... just another option. 

Hi Chris,

Yes, I'd agree that $20k feels light to us. I think our goal for now is in the $90-100k range to be in a comfortable, wiser decision making spot.

Yes, we have an interest rate at 3.375% on our primary residence with about $140-$170k worth of equity (depending on what we could sell it for). I've heard of people using HELOC's, however I'm not sure I'm totally comfortable leveraging one asset against another. Seems unnecessarily risky...

[Chris Rich]

Quote from @Gabe Morrell:

Quote from @Chris Rich:

Quote from @Gabe Morrell:

Jacob, thanks for giving me a great straight answer to my $20k question. Seems like the sensational answer would be to direct me to a YouTube video explaining how to acquire property with “no money down.” Haven’t quite figured out how the math works yet on that strategy…

Dennis, patience is a great recommendation. Much appreciated. Personal finances are under control. Not looking to move out of current home as it fits us perfectly in our current season of life (with a 3.375% interest rate). Haven’t quite gotten to deciding how many beds/baths are desirable for future rental. A future step to consider. Likely would look in the $250-350k range.

I'd agree that $20,000 isn't enough unless you are considering really low end properties and I'd argue they aren't worth the headache.  I think waiting a little longer to build up those capital reserves makes sense, especially if rates aren't going to come down much in 2024 (presumably.)

My two cents -- If you are looking for SFR, I'd say 3-4 beds, 1300-2000sq ft is the sweet spot for LTR. If you look at tenant preferences over half prefer apartments with about 30% wanting an SFR.

I see you mentioned a low interest rate, do you have a lot of equity?  My wife and I are in the Orlando area and had a 2.99% when we wanted to upgrade.  We took out a HELC and leveraged the $200K in equity to turn our primary into a cash flowing rental... just another option. 

Hi Chris,

Yes, I'd agree that $20k feels light to us. I think our goal for now is in the $90-100k range to be in a comfortable, wiser decision making spot.

Yes, we have an interest rate at 3.375% on our primary residence with about $140-$170k worth of equity (depending on what we could sell it for). I've heard of people using HELOC's, however I'm not sure I'm totally comfortable leveraging one asset against another. Seems unnecessarily risky...

It can be, but depends on your situation and do the numbers make sense (and are your jobs secure lol). When we did the math for our situation, we had just over $200,000 in equity at the time we did it and the house was valued at $405,000. My market analysis indicated we could rent it for $1,000-1,100 over the mortgage. We opened a HELC for $100,000 and used some of those funds for the down payment on the new primary and some renovations. The former primary ended up renting in 4 days $1,000 over the mortgage.

With our HELC teaser rate of 3.75% we were paying about $160 a month in interest on the total we ended up drawing (used HELC for pool resurface and shower remodel).  The rate just went up when the teaser expired to 6.25% and we are paying ~$240 a month in interest. 

Now, we obviously can't assume anything in terms of future appreciation, but the way we looked at is absolutely worst case scenario we would have to sell the rental, and in that situation, would we be able to sell it for enough to cover the outstanding mortgage and the HELC balances.  In our market (Orlando), I would say yes.  Even if you look at the 2008 crash, the absolutely worst value decrease was 20-22% for the worst 2 years.  Assuming that highly unlikely event reoccurring, 22% on $400,000 means we are selling for $350,000 and still covering both loans. But the opposite has happened.  Our rental is now valued (low end)at $425,000. Our new primary appraised at $7,000 over contract price and has increased ~$12,000 over that. 

Much like focusing solely on interest rates, I think if you look at the big picture a LOT of people are in great situations considering a recent report indicates 46% of residential properties are equity rich. So I don't think it is THAT risky to leverage the equity if you are in a strong market with no signs of the normal 3-5% appreciation continuing.