Hi, we're going to be looking into investing in buy and hold SFR. Everythings approximated because I'm in the very first stages, as in deciding if we're really going to do this. But say we decide to bite the bullet. By the end of August we should have everything in order. About $50000 cash, decent credit and 25% DTI. Is it better to put the 20% down on one house (approx $180000), or 10% on two with the hopes of getting LPMI. Say we put 20% on one, leaving a 144000 loan at 4.25%, payment $708, tax and ins $200. Trash and water? 80ish. Rents for $1400, about $400 cash flow. Remember all estimates, numbers could be more or less. Now in theory say we do two at $180000 with 10% down on each, leaving 162000 on each at 4.5 (higher for LPMI). Payments would be 820 plus tax ins and utilities, bring it to $1100 each, rents for $1400. Leaving $300 cash flow each. So is two better than one? It it too much to start? More cash flow rules right? We aren't dependant on cash flow, I'm thinking college tuition or retirement, so setting ourselves up for at least 10 years in the future. Not opposed to selling when opportunity knocks or any other reason.

@Michelle Melchione 2 is better than 1 in your scenario. You sound like you are in a good spot financially and could withstand a few bumps in the road. Now it's time to find the properties! Good luck!

@Michelle Melchione I wanted to make a few notes to address some of the financing questions that have been brought up throughout this thread. #1 When it comes to down payment amounts, you must put down at least 15% to purchase a single family home as an investment as was stated previously. It should also be noted that only putting 15% down will carry a pretty hefty interest rate compared to 20% or 25% down. If you choose to go the multifamily route, Fannie/Freddie will require a minimum of 25% down assuming you don't intend to occupy. #2 Another thing to keep in mind is reserve requirements. Conventional lenders will require 6 months of PITIA in reserves for the subject property and additional reserves for each non-subject property once you acquire more. Reserves do not necessarily need to be cash in the bank. Acceptable forms of reserves include cash in checking/savings; investments in stocks, bonds, or mutual funds; a CD; money market account; cash-value in life insurance; and a percentage of vested retirement accounts. #3 As far as DTI, Fannie/Freddie will typically allow up to 45%. A loan officer worth their salt should be able to help you run investment numbers and understand the impact of those numbers on your DTI both immediately and down the road. If you're making wise investment decisions, your DTI should remain stable and ideally go down as you acquire more properties because you're generating cash flow over and above the liability of the financing. #4 Lastly, when you initially acquire an investment property, the lender will take 75% of the gross monthly rental income less your monthly PITIA. The remaining income or loss will be reflected in your DTI. Once you've owned the property for over a year and it begins appearing on your tax return, income or loss reported in the Schedule E of your tax returns will be used for future mortgage qualification. I hope that answers any lingering finance questions that were out there. Happy investing. :)

Think of lease options as like a rent-to-own strategy. You set up a lease contract with an option to buy after a specified length of time. You can specify the amount you will purchase for and the length of time, and you have first right to purchase then. Your lease payments will go toward the purchase if you decide to exercise the option. If you do not exercise the buy option after the specified amount of time, the owner can then sell the property to anyone or just keep it, but you were renting it out the whole time, so it is a win-win for everyone.

@Michelle Melchione you need some more education. Generally speaking, your grandmother's way is a great conservative way to invest. Get rich slow. It is very plain Jane and does not yield the highest returns. It's fairly safe and fairly slow. @Robert Herrera has a much more sophisticated approach and IMO requires a more than average level of knowledge and understanding to pull off. While he is able to execute it, I don't think that more than 1 in 10 investors would be able or willing to take his approach and make it work. I'm not saying this to in any way discourage you from doing what he is doing. I just want you to have some perspective. Real estate is not just numbers. You have to find what fits you and what you are comfortable with. That takes some time. @Scott Trench alluded to this but when you invest and use conventional funding (mortgages from big banks) the rules change for investors. You will not find conventional funding with only 10% down for a home you do not live in (known as non-owner occupied). You will pay a higher interest rate on a loan for a property you do not live in. @Joseph Graeve also pointed this out. Your excitement is great and keep digging. My suggestion would be to leverage off your grandmother and lean on her for advise. It may turn out that she can do more for you than you originally thought. Real estate is not hard but can also be brutal if you don't know what you are doing. I tend to think that @Mike F. has some good advise. Slow and steady wins the race and there is no one right answer. Another option not mentioned is to buy a new primary residence and use the old one as a rental. Not sure what the numbers are but that can be a very easy transition to learn on. If you want better returns after you learn the ropes in a couple of years. Sell it and invest the equity.

@Michelle Melchione I would recommend looking hard at those car loans before paying them off. Most car loans carry a pretty low interest rate. My car loan right now is 2%. Why would I pay that off and then turn around and borrow the money back that I just used to pay off the car against a rental property at 4-5% ?? Pay off credit cards boats snow machines etcetc. Build a cash reserve and then you are off to the races. As for rentals in pueblo I have been land lording there for 7 years. A 50k house therethat rents for 8-9 hundred a monthis damn rare unless it's on the east side. (War zone). Most rents in pueblo don't make the 1% rule (50k house rents for $400-$500 a mo not $850). Appreciation in pueblo is low compared to Collins,Denver,and other aresof CO. This is due to the steel mill running at a reduced capacity and a slightly depressed economy. MFR's typically appreciate less than SFR's but are a little less risky as has been stated on this thread already. Pueblo has the highest insurance premiums in the state due to the hail storms tearing up roofs. Typical duplex is around 8-9 hundred a year. A triplex in pueblo is considered commercial and the rate doubles. It's just as cheap to insure a 4 plex as it is a triplex. Hope this helps a bit. RR

I have found that maximizing cash flow for long term rentals is very important. I choose to take the options that make my monthly nut smaller.

It seems the majority of investors on these forums buy for cash flow, but Colorado is great for appreciation which is where your net worth comes from. Your grandmother is worth what she is not because she has 2 million dollars in real estate debt with some cashflow, she is where she is at because she bought and paid off and has equity which is net worth. A SFH is a great investment in Colorado as it has the best appreciation rates. I say to buy one property first, get your feet wet, learn the ropes, go slowly. Conserve your capital, nobody went broke from being underleveraged with money in the bank. Get that first rental, have some cashflow and put every dollar back into paying off that mortgage. Be wary, think long-term, the market today may not be the same in a year, don't put yourself in a leverage position that could put you at jeopardy if the economy goes in the toilet. Your grandmother got where she is slowly, nothing wrong with that.

Starting out- Go big or go home?

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

10y

Hi @Michelle Melchione

Alas, 15% down is the bare minimum for SFR investment property purchases that you are likely to find. Interest rate pricing isn't particularly attractive.

$50k.... any reason you don't have your eyes on an entry level multi-unit?

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Michelle Melchione

OP

Pueblo, CO · Member since 2016 · 42 posts · 7 votes

10y

Well, having more tenants seems like more work and vacancies. Also a family who can afford a SFR in theory is less likely to flight by night, be late on rent, destoy things. Also my grandma has mostly SFRs and she's always been the most successful person I know, not that I know many. Although I don't really know all the ins and outs of what she owns and why, I've never thought to ask, because I've never thought I'd have money to invest. It's all very sudden, so I'm not set on anything, yesterday I thought duplexes or 4 plexes are the way to go, but the last article I read made it sound like SFR is the way to go. But it does also seem like 90% of people say Multi is the way to go. So I'm on opinion overload right now. Also my grandma may have a house she'd sell me (we didn't discuss details), and she said she could manage a property for me. I could probably manage myself as I don't have a paying job, but I'm 2 hours away in Denver and she already offered, so why not?

Starting out- Go big or go home?

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