First time homebuyer loan worth pursuing in RI?

Question

Hi everyone.

I'm a long time Providence RI resident looking to purchase my first home. My goal is to buy a multifamily/triple decker in the West End and live in one unit and rent out the rest. I've got great credit, solid income, and enough cash saved up for 20% down for most triple deckers currently for sale in the West End. I'd love to hear any tips for trying to close on something.

Also - is it worth pursuing a loan through a RI first-time homebuyer program (RIHousing)? I'm under the impression I'll get a worse interest rate, but 5% down and other tax incentives make it look like an attractive option. Also is the $492,000 max loan through that program a hard cap?

Thanks so much for your insight.

Best,

Jax

Christopher Lynch · Answer

This is a great idea. Many of my clients have used first time home buyer loans to buy their first income property. House hacking is an excellent way to get your portfolio started.

I myself have used this same strategy to buy my first Duplex. I started with a FHA loan 3.5% down and then refinanced into a conventional loan once I had enough equity in the property. The main reason you should consider refinancing is to get rid of PMI which is an expense you do not want to carry long term.

With that being said, if you find a great property and it cashflow's even with PMI I would say it is worth making the purchase. The great thing about that is you will also have left over capital if you find another great deal you want to invest in or even if you just want to make updates and add value to your first property.

If you have any questions feel free to message me. Buying your first property is always a lot of fun.

Anthony Thompson · Answer

@Jackson Cantrell glad that was helpful. I'll send you a couple of agents I've worked with repeatedly, who I've had good success with.

Jackson Cantrell · Answer

Thanks Anthony and Luan. Your comments are really helpful.

It’s good to know I’ll have an option for an FHA loan even if I end up going conventional. I don’t think another property is in the cards for at least two years, so I’m not too worried about maximizing more real estate purchases. However, it could be nice to keep some extra cash around for new opportunities.Do either of you have buying agents you’d recommend?Luan, are you saying I could get pre-approved through a conventional lender and then turn around and go with an FHA loan (say at 10% down)? Will that turn off sellers? My plan is to reach out to a few lenders this week about getting pre approved.

Thanks again.

Joe Rodriguez · Answer

@Jackson Cantrell Definitely consider FHA as @Luan Oliveira mentioned. I have done it twice now after refinancing the first one to a conventional loan and then buying the 2nd with FHA again. Of course as @Anthony Thompson mentioned, it gets tough when trying to beat out other offers. So in that case, when using FHA, I would wait until properties have been on the market for over a week before pursuing them or you could use 20% during the first week to beat out other FHA users.

Anthony Thompson · Answer

@Luan Oliveira not recently, that's true. But yes, I have seen it, 10-12 years ago. I've had to offer free rent just to fill an apartment, especially on the 3rd floor.

Real estate happens in cycles - I guarantee you it will happen again, though of course I can't say when. But if it's a 30 year loan, I would bet all my property that it will happen at least once (and probably several times more than once) in the span of that loan.

Luan Oliveira · Answer

@Anthony Thompson Honest question here - Have you ever had an issue with filling a vacancy in the PVD area? All the times I've listed something for rent there have been so many inquiries that I've been able to fill it as fast as I could turn it over. Of course, I've only been investing the last few years so I've only see "good times".

Luan Oliveira · Answer

Hey Jackson,

Looks like you're about to make a great decision!

Have you looked into FHA? I recently closed on an FHA loan at 2.375. With 3.5% down, you should have plenty leftover and a solid start for a down payment on your next property. It may be worth comparing that to a RI housing loan. If you need a lender, I can recommend a solid one I've used a few times. At the end of the day, I'd recommend getting a preapproval first. After your offer has been accepted, you can then have multiple lenders give you real numbers. That'll allow you to make a better comparison.

Also, try to get a preapproval for a conventional loan (5% down). This will look more attractive to sellers.

Anthony Thompson · Answer

Hi @Jackson Cantrell I don't think the RI Housing loan necessarily has higher rates compared to other low-down-payment options, however RI Housing loan processing is notoriously difficult to work with, so you might be at a competitive disadvantage making offers with that kind of financing.

If it's an on-market property (MLS), and the seller gets multiple offers, chances are good that the listing agent is going to tell the seller, all other things being equal, RI Housing is a PITA and s/he is going to recommend that the offer with different financing is going to be easier to get closed.

It's really up to you, based on what you're seeing out there with competitiveness. I can certainly see the attraction of putting less down and using the first-time homebuyer option, especially as you only get to use it once (though I think you might be able to use it once every 5 years if you haven't owned for several years - there are some technicalities but basically the easy answer is that it's a one time use).

If you put less down now, that leaves you more down payment to use on a second property (either now or in the future).

But I would caution you to make sure the #s work OK on this first property, if you go with the low-down, high-leverage option. It's true that you can buy more properties if you use more leverage (less down in each property), but that also means your fixed mortgage payments are higher which means you have less flexibility / breathing room if things don't go well or as expected (i.e., it's higher risk).

At this stage of the market I see a lot of virtue in choosing a lower leverage (20% down) option, but again that's really a personal choice. I'd recommend you do some "stress testing" or look at some scenarios, if you're seriously considering the higher leverage option like RI Housing or other first time buyer, 3% down type loan. What if one unit is vacant for 2-3 months? What if both units are vacant for a month or two? What if you have a surprise 10K repair that needs to be done ASAP?

I'm not trying to scare you into using a lower leverage loan and acquiring fewer properties, just trying to encourage you to be cautious and understand what you're committing to if you do choose the higher leverage option to be able to buy more properties.