BiggerPockets

Can I ask what kind of debt you have at 20 years old that costs you $700/month?

Get the debt paid off. Put every penny you can toward that debt and get rid of it.

What's your current living situation? Do you have other bills?

Is the $1900 a month net or gross? Assuming its gross, your DTI is 37%. That's too high to get a loan. Realistically, you shouldn't get a loan.

Can you get a second job to help pay that off?

Read about rental expenses in the Rental Property forum. What are prices in your target area? What are the rents?

Looking at the MLS for zip code 78731 I see the cheapest duplex listed at $279,900 with rent for one of the units showing at $970. That's a AWFUL rental, and you certainly would not live in that rent free even with paying roommates. 78757 is slightly better with $155K for a property that shows one unit having rent of $750. But that's still going to cost you money each month even with both units rented.

My suggestion is:

1) Fix your spending habits. That must be north of $25K in credit card debt (you said revolving). Crazy!
2) Get the cheapest place you can find to live. Parents would be best of all.
3) Get a second job
4) Put everything you can toward paying off that debt, including most of the $8K you have saved up.
5) Spend the time learning about real estate investing. Learn the reality from investors. Not realtors or other folks with a vested interest in you buying something.
6) Once you have your financial situation stabilized and have learned the business, look for rental properties, if that's the direction you want to go.

Congratulations on starting to think about this when you're so young. Fix the spending, fix the financial situation, and you're on your way.

If it helps you out any, I just graduated from college a year ago and took an entry level job. I make 2200/mo gross with a debt of 280/mo (Car payment), good credit, and my pre-approval was for 80K.

Your first step should be to go to the bank and find out what your approved for, then re-evaluate your situation. I honestly couldn't afford what I was approved for, so don't use that as a magic number.

Good luck!

Way to go Jeff. I think you are on the right track, with the duplex idea. You just need to keep working towards getting it done. Two issues that I see. I would imagine that the best you could do is an 80% LTV on the purchase. If you bought for $170K, then your down payment $34K. Also, a lender will probably not give you credit for your rental income until you had a signed lease. Even then, you'll be lucky to get 75% credit for it.

So, really the way to say this is that you have no debt, just $700 in monthly expenses that you run through your card. A lender would (should, who knows since it changes day to day) look only at the current balance and the minimum payment. So, you're much better off than it seemed from your first post.

The deal you describe is an awful rental. Seriously, do some reading in the rental property forum about expenses. They're much higher than you think. Here's how I'd evaluate that deal:

Gross scheduled monthly rent: $1500 ($750 per side)
Expenses: $750 (taxes, insurance, maintenance, vacancy, etc., etc. Read the sticky thread in the Rental Property forum)
NOI: $750:
Payment: $1019 ($170K, 6%, 30 years)
Monthly loss: $319.

If you get the rents you expect, its not quite so bad because of the higher rent from your roommates. When you have all the spots filled, and you actually get the rent, you'll be in good shape. But every now and then you're going to have a vacancy, or have some big bill (e.g., furnace, water heater, sewer line). And if things go really bad, you can have a much bigger bill. Be sure to read the sticky about the "possibly drug dealing tenant". That poor person can't even live in her part of the duplex because her tenant is threatening her. Shes spending thousands of dollars in court to try to get the guy out. That's the sort of thing you have to be prepared for.

If $170K is the going rate for $1500 in rent, I'd recommend not bothering. Properties like that are losers from the get-go. Realistically, you CANNOT pay more than about $110K for $1500 in rent and that's just to break even. If $170K is the retail price (i.e., you can buy those easily off the MLS), you must not pay that if you're serious about this business. You have to find a much better deal. They're out there, but they take work.

Look for someone who will sell to you with owner financing. That's how I bought my first house south of Houston many years ago.

Fannie Mae rules require rentals to be on two tax returns before they will count the income. Other guidelines may allow you to count the rental income sooner. The forumla is net rental income = (75% * rent) - PITI. That gets added to your other income for calculating DTI. So with $1650 in rent, you get $1237 - $1268 PITI = -$31. Banks will consider this break even.

Don't know. I do know there are some low down FHA loans that I think would work for an OO property. From what I hear from people flipping around here, almost all loans right now are these FHA loans. Certainly its worth researching.

DTI is going to be the bigger issue. If $1900 is net, I'm guessing gross is at most about $2300. Not sure what the FHA DTI guidelines are, either, but using 28% gives a max PITI of only $644. If they only make you qualify for the net rental income then it might work.

Jeff, you should find a mortgage broker and have a discussion.

I forgot to add bills in there!

Expenses: $825
NOI: $825
Payment: $983.50
Bills: $300
Loss: $458.50
Rent Saved: $400

Overall Loss: $58.50

But hey if $58.50 per month is the only thing standing between renting a room in a crappy part of town and owning a house in a nice part of town, I'm down!

Plus, I still have tax breaks and appreciation to figure in. I'll still profit overall!

So, now I ask you all again. Good deal?

The only reason I might have to take a deal like this and not something ideal like Jon was describing (the same rents at $110K) is because time is running out for this tax credit. I have to have whatever I can under contract by Mid-October 2009 in order to close by December 1st and get the credit.

So I guess what I should be asking isn't if this is a good deal, per se, but would YOU have done this deal if you were first starting off in real estate?

Would I live next door to my tenants? No way! Would I live WITH them as roommates? Ack!!

So, no, I would not, and did not, do anything like this.

My brother, OTOH, did. Right out of college, he bought a duplex and rented one half. Never really complained about, but he's never bought another despite moving several times. He had no enthusiasm at all when I brought up rentals a while back.

I'd keep my living arrangements and my investing separate.

But if you can put up with the neighbors (do read that drug dealing thread), maybe it will work for you.

You really need to figure out if you can even get a loan. The DTI issue may make this whole thing a moot point.

Don't rush because of the $8K credit. I think its likely it will be extended or even improved. No guarantees. But don't get into a bad deal just because you're in a hurry. You'll be far better off to find a much better deal without the credit than to buy at retail.

Keep in mind your $400 in rent not paid and $58 "loss", really does amount to $458 out of pocket every month. Be sure that's workable for you.

If you do this deal, get $5000 saved up into an untouchable pool. That will help you over the bumps which will happen.

Glad to help.

Screening is good, and you should certainly do it. But it only goes so far. The odds of you getting a tenant like that are low, but it is a possibility. There are many possibilities that are much less worse than that, but much more likely.

I'd check our Texas REIA list and go to a meeting in Austin. I didn't look at the whole list, but I see at least one. Talk to people there and ask them about good, investor friendly mortgage brokers. Your best bet is someone local, who's known to work with investors, and who's recommended by local investors.