I have the downpayment! Not the DTI... Advice?

Question

Right now I'm a 3rd year university student working a part-time job (25-30 hrs per week during summer and 15-20 during academic year). I only earn 12-13k a year before taxes. I only opened my first credit card a couple of months ago (should have done it sooner) and my current FICO score is 667. I live with my parents and I generally don't have expenses besides personal leisure. I have 5k in savings and there are properties that I am eying on Zillow (should I use an alternate search engine?) that are in the range of 70-90k. They are urban area condos. I want to use short-term rentals (like Airbnb) to finance this mortgage since the rate of return seems to be better than regular long-term rentals (for studios or 1-2 bedrooms) so that I can establish an equity credit line (if I understand correctly) and save up a bit more money and have a head start for when I graduate university. Nobody that I know is willing to cosign a loan for me, but my parents are willing to take furniture out on credit for me if I decide to do the short-term rental gig.

Of course eventually I would love to get a mortgage for a multifamily home to rent out to multiple tenants especially since there is a lot more hassle with short-term rentals, but I don't think that given my economic situation I can get a multifamily.

Anybody have any advice on how I should start out through rentals, not wholesale or flipping?

Thanks.

Of course eventually I would love to get a mortgage for a multifamily home to rent out to multiple tenants especially since there is a lot more hassle with short-term rentals, but I don't think that given my economic situation I can get a multifamily.

Anybody have any advice on how I should start out through rentals, not wholesale or flipping?

Thanks.

Patrick Orefice · Answer

It's great that you're thinking about all this now Richard B. that waiting is a good option for you right now to build up some reserves.  Something always comes up.

Short term rentals can be great for cash flow, but there are some things to think about:  Does your area have a market for it; do your local laws allow it; the cost to furnish it (you mentioned your parents would be willing to help, but this is a very large up front cost with furniture, artwork, sheets, silverware/dishware, etc.); your availability (meeting with tenants, exchanging keys, cleaning and maintenance after each stay).

Brie Schmidt · Answer

I think you should wait until you are in a better financial position to start.  If you are going to buy this as an investment property you will need 6 months of PITI payments in the bank plus the down payment to qualify for the loan.  I would also build up additional reserves because you don't know how long it will take to get the rental ready

Patrick Orefice · Answer

I recommend talking to some lenders in your area and see what they will do for you.  I looked at buying a condo recently as a primary and couldn't find a lower down payment than 10%.  Condos can be a different animal than SFR and the financing works differently.

As an example of the unknowns and reserves: I recently bought a new primary residence (SFR).  Inspection and closing all went smoothly but two weeks after moving in my shower backed up with sewage, and I needed to replace the entire waste line in the yard unexpectedly.  Cost $3500 to fix.  Things happen.

Account Closed · Answer

Yes my sister made the mistake of purchasing her first condo in a huge apartment building. The unexpected assessment costs are causing her a lot of trouble..

P.S. Sorry for quoting and then making a post right after. First time using this forum on my phone.

Account Closed · Answer

I currently live in the suburbs about an hour away from Chicago. The market for short-term rentals there is very great (as with most big cities in the US). Managing the property would also be easy for me since my university that I commute to daily is also located in Chicago.

But most importantly, what kind of reserves are we talking about here? If I make enough money for the 3-4% down-payment, would lenders overlook my awful DTI from my part-time job?

Account Closed · Answer

I've been working the same job since the beginning of November 2015; I just traveled quite a bit my first couple of months and that's why I didn't save as much as I should have. Would that still qualify as have "6 months of PITI payments in the bank?" I've had a debit card for 2+ years - it's just I very recently got a credit card. What do you think I can afford given my current income and savings? How much should I save up before I can begin an investment?

Brie Schmidt · Answer

Couple of things, you are talking a low down payment loan, which has a 1 year occupancy requirement.  So you must live there for 1 year otherwise it is mortgage fraud and the fine is up to $250k.  With an owner occupied loan the reserve requirement is 3 months payments plus the down payment

Secondly, I would never buy a condo in Chicago as an investment.  The HOA can implement renting restrictions at any time and then you are SOL.  Read this:  https://www.biggerpockets.com/forums/311/topics/27...

http://www.chicagomag.com/Chicago-Magazine/October...

https://www.biggerpockets.com/forums/99/topics/599...

Also read about the proposed ordinance that could change things for you

https://www.dnainfo.com/chicago/20160517/downtown/...

Michael M. · Answer

@Richard Bronshtein Here are a few tips:

1. Special assesments can be challenged as the HOA BOD has a fiduciary duty to its members. Ask for a payment plan if this is an unexpected financial burden to the property owner. Special assessments are usually a tell tale sign of an underfunded HOA, sadly this is the norm.

2. Banks look closely at HOA owner vs rental occupancy and often won't lend past 5% rental occupancy. Banks tend to favor newer developments that are 95% owner occupied. Discriminatory IMO, but banks are not the only game in town.

3. As previously mentioned I'd eye an SFR as you have more control over the asset. Avoid HOA if you can.

I have the downpayment! Not the DTI... Advice?

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