Which to buy first, first home or first investment property?

Question

Currently my fiance and I are renters. We have discussed buying a home many times but I have several lines of thought which I'd like to run by you all. Currently we pay $1180 a month to rent out a 1140 square foot town home and about $1536.00 after utilities. It is in the heart of the Denver Tech Center and we have been living here for almost 2 years. We enjoy the area very much and would like to stay near this area. I work in the Tech Center just 5 minutes from home and my fiance works about 15 minutes north of here.

Back when interest rates were around 6.5% I talked to some Mortgage Bankers / Brokers and estimated that if we bought a $150,000 house with a 3% down payment we would be paying the same as we are now after PITI minus tax advantages plus the increased utility bill we would be paying if we had a yard and extra square footage plus maintenance expenses. We had looked at many $150,000 homes and came to the conclusion that they were not in places we wanted to live or they did not have the space we desired (especially since we are talking about starting a family in 5 years or so). Our combined gross yearly income is approx. $95,000. Our combined income after taxes is approx. 68,400 (best guess judging 28% taken out of pay check). Right now about 27% of our combined net income goes towards rent + utilities which seems like a reasonable amount to me. My first question is, is it worth it for us to spend a little more of our income on a home and still continue to save or to stay where we are for awhile and save more each month for our future real estate investments? Should we focus on buying a home for ourselves first or purchasing an investment property first? My final question is, how will having an FHA loan affect our ability to get an investment loan? We have discussed buying a home and renting out rooms or purchasing a duplex, but the idea of sharing the house doesn't appeal to us and the latter doesn't make economic sense for where we want to live. Thanks in advance for all your responses and please let me know if any of these points need clarifying.

Account Closed · Answer

Not at all what you asked for, but I use another forum also, a legal questions forum. FYI, there are many posts starting with, "A year or so ago, me and my SO bought a place together because we were going to get married. Then everything fell apart and I left. S/He won't sign the papers to sell, and I'm still footing the bill and HELP! What can I do to get out of this? How can I get him/her to sell so I can get on with my life?"
I guess, in response to your question, I'd suggest buying the rental property first. :mrgreen:
Ofgift

Frances L. · Answer

I am news to this. I think it need some time (rehab)to learn about what Barry said.

Barry Robbins · Answer

Hehe thanks for pointing out my typo Curt. I just fixed that tiny little mistake :). It's good to know you can do things both ways. But then again who said you couldn't?

Owen Dashner · Answer

Another idea would be to buy a house, live in it for 2 years, then keep it as a rental... That's how I got started. It's the best way to get favorable financing, and it will help you gain knowledge on the joys of maintenance and repairs. After you have lived there for 2 years, you could keep the property as a rental up to 3 additional years and not pay capital gains tax if you decided to sell it.

Keep in mind that if this is your first house, you are likely not going to live there forever. So, like Diane suggested, keep a 5-year window in mind. Buy at a discount and put in some sweat equity.

Best of luck!

Keep in mind that if this is your first house, you are likely not going to live there forever. So, like Diane suggested, keep a 5-year window in mind. Buy at a discount and put in some sweat equity.

Best of luck!

Curt Davis · Answer

Barry,

First off I would like to know what you and your fiance do to make $95K per month!!! I want to do whatever you are doing. Second, I have sold 10 investment properties to one of my clients and she still lives in an apartment. It all depends on what you two want to do. I myself purchased my primary first and now I am up to 4 investment properties myself, next I will get my wife into position to buy her 4 properties. THat is what we are doing and we are very happy. Hope that helps a bit.

Don Levy · Answer

Do you like the property you're in now? If so, see if the owner would sell it or maybe turn it into a lease option so you could buy later. Pay higher rent with a big credit toward a down payment. I've had a number of people able to do a lease option in a much better neighborhood than they could buy in now and in a couple of years be able to buy it. See the Lease Option Page on my RE blog for more info. The link is below in the signature.
Good luck,
donrock

Heather Pelletier · Answer

Why not start out with a duplex? Rent out one half, pay your mortgage with the rent and when you're ready move. Seems like a win/win to me.

Barry Watts · Answer

Barry,
If you buy a rental property first, you don't have to wait until you have the 20% cash to pay down. Since most of the investment property is priced so far under appraised value find a hard money lender to carry you through the rehab phase. This is usually a 90 day loan. Then at the end of that timeframe use the equity in the house to re-finance to a long term finance solution. This is how most of our deals are done, very rarely do the folks have 20% to put down.

Diane Menke · Answer

Barry,

It seems to me you have 2 ways to look at the prospects. Cash Flow and Equity Development.

Can you buy a property to rent which will bring you added cash flow so you can get into a nice first home and a second rental property in 5 years? What do the rental properties go for in your area? What would your positive cash flow be from them? Can you get a $500 or more positive cash flow from a property? More?

I think you can probably do that but you have to do some RE shopping to see if its true. You want to shop for cash flow but also "soon to increase" hidden equity.

I always buy the house I live in under market value. Usually its what we call "an old lady/man house". Its cosmetically or stylistically challenged. Then we fix it up.

I look for neighborhoods that are changing or moving up. The area where I live now is emptying of retired folks, and young families are moving in. Many "hip" amenities are moving in too, raising property values. The local schools are great so its cheaper than living within the city and paying for private schools. If we live here 5 years we know the property value will come up a lot since there is pressure from folks wanting to move in.

So you have to look at the big picture with "5 year eyeglasses".

Seems to me you are in no hurry to move to a home so why not get the rental prop together first. You will need to have 20% cash for that to happen. Whats the best way for you to get that cash together really fast? Can you sell a car or take some PT work on? Then buy under market value and for high cash flow.

If your cash flow is good, you might be able to buy a 2nd rental prop within 24 months.

I think thats a nice plan to increase your income, your net worth, and not increase your monthly expenses for living until you can afford it. Do that later when you have added income from rental property + equity you can perhaps cash out to buy your first home or renovate it.

I think if you can develop a "what if" balance sheet and income statement, you can play with the scenarios to confirm this is a good way to go. Thats what I do to make my decisions about which move is best. Works great.

Now get the cash together and do your research.

D

Barry Watts · Answer

Wow, that's one long question. I don't think it can be answered completely in one post, but here's something to consider. Right now you can purchase property below market, so you ought to factor in the equity you will be picking up if you buy. If you can buy, I'd buy, even if its not in your most perfect area.

Which to buy first, first home or first investment property?

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