Buy Primary Residence or investment real estate first?

Rick Alvi

OP

Investor · houston, TX · Member since 2015 · 61 posts · 5 votes

It would be great to find something that could cash flow for $1,000 a month, but I didn't think it was possible with a Single Family Home that costs between $95k-120k. There are 3bd/2baths for sale in rental areas, but most rent for $1100-1300. I'm ok in the apartment if I can find something that will help bring me extra income. I don't *need* a house to live in, I can settle for an apartment for now until I replace my current income with passive income. Thanks!

Chad W.

Real Estate Broker · Raleigh, NC · Member since 2013 · 51 posts · 24 votes

What about do both? Buy a house that fits your needs as a primary, that will cash flow if you make it a rental and house hack for now. This lets you have a place to live this is your own you can take advantage of lending that tailors to primary residence purchases and learn the ropes of property management with a roommate that will at least partially subsidize your mortgage payments. - It is not the only option, just a thought.

Your statement of not knowing what you can afford is something you need to fix. You should know what you can afford and what a good deal is to give you a better picture of your options.

Meghan McCallum

Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes

If I were mentoring you I would tell you to buy the largest owner occupant property (and by large I mean in units) and borrow as much $ as you can to do so in which the numbers make sense and you can afford to pay the rent if one of your units goes vacant. Money is cheap right now. You don't need a property manager...just keep using BP to grow your skills and ask for help. Don't be afraid to take risks. They are likely a far lesser risk than going and getting a home for yourself. :)

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

Rick, I'm answering the title without reading anything because there is nothing that would change the fact, buy your house first! Lenders like stability, a renter isn't stable unless they don't need a lender (in other words they can show they don't need a mortgage).

Your credit is best established for a commercial mortgage by evidence of paying an existing mortgage, not so much rent on your personal dwelling.

Take care of your personal business before trying to advance in the world of business. :)

Rashad K.

Flipper/Rehabber · Saint Paul, MN · Member since 2016 · 120 posts · 98 votes

I say move out of the apartment as soon as you can no matter if you buy a single family to house hack or a multi family to live in / rent out other units. If you go this route you can move out in a year and potentially do it again. Not to mention paying your own mortgage is always better than paying rent in my opinion

Donald Dickerson

Investor · Houston, TX · Member since 2016 · 36 posts · 22 votes

Do both! House Hacking would be perfect for you!

IOW, buy a duplex, triplex or 4 unit and live in one of the units and rent the other units.

The other units will pay your mortgage so you can spend your money on more important things like musical instruments and accessories.

3 Reply

Brandon K.

Chicago, IL · Member since 2016 · 29 posts · 9 votes

If you can make your finances work, buy a fourplex with an FHA loan at 3.5% down payment. Make one unit your primary residence and rent out the other 3 units. In order to qualify for an FHA loan, you must make it your primary residence for at least one year. After one year of living there, you can move out and rent the 4th unit. Make sure that the property still cashflows positive with your low down payment. This can be tricky with little to no equity in the property.

Shane Hedeen

Real Estate Agent · Saint Louis Park, MN · Member since 2015 · 213 posts · 82 votes

I totally agree with many others on here @Rick Alvi - why not both? For someone who doesn't seem to mind having neighbors, why not a small multi?

Generally speaking, the math tends to favor a 2-4 unit that is owner occupied at a lower down payment. You'll get a first hand crack at managing the property, and not have to worry about things from afar as you will be right there on site. Your cash on cash will generally be higher than a single family, as will your cash flow.

You don't have to or need to live there forever. Find an area that works for both your and your investment, and see if there is anything out there to make the numbers work.

While having your own home is something most of us all want eventually at some point in life - if you are in a place where you can sacrifice a little privacy and 'house hack' why not?

Adrienne Bryson

Flipper/Rehabber · High Point, NC · Member since 2016 · 276 posts · 183 votes

House hack! Buy a small multifamily so you can still get traditional financing, live in one unit and rent the rest. Best of both worlds. You will get a "permanent" residence AND passive income. Buying a house just to live in is a waste of money unless you have really good reason to need a detached single family...and I say this as someone who bought a primary residence first and now wish I had used my down payment on my first investment instead!

Julie MarquezPro Member

Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes

@Rick Alvi Buy your owner occupied house, but run the numbers as if it were a rental. Make sure it gets you to your goals as a rental (cash flow, loan paydown, etc.) Live there for a year, maybe rent a room, and then you can move out and now you have a rental that you purchased with nice owner occupied financing.

I bought a rental property first (with 20% down), because the area of Seattle where I rented for $600 - $900 (I had a killer deal), houses cost on average $1mil. My rental house is an hour away from Seattle. I don't regret my decision and I have not had any issues with the the fact that I still rent but own a rental home.

KK A.

Property Manager · Richmond, VA · Member since 2016 · 32 posts · 15 votes

Rick, thanks for asking these questions, it has been very helpful for me as well. Does anyone know what the loan options are for multifamily with less than 20% down? Is FHA the only way to go?

Clint E.

Investor · Saint Charles, MO · Member since 2016 · 118 posts · 91 votes

I'd prefer to be in a multi-family property and have my housing costs paid for.

Jacob Voncannon

Investor · Houston, TX · Member since 2016 · 12 posts · 6 votes

@Rick Alvi I did exactly what you're talking about. Bought my first investment before buying a home in Houston. This was back in January. The house is in Missouri City. Here are the deal values that I had:

You just got to make sure you buy under market value.

Madeline Burke

Real Estate Agent · Fort Collins, CO · Member since 2016 · 183 posts · 72 votes

@Rick Alvi You're getting a lot of great advice and I'm not sure what your feelings toward housemates are but I have had a lot of success buying as big a place as possible that's in rentable shape and taking in a housemate or two. It might not be ideal long term but its how I paid my mortgage while living rent-free.

Ben Zimmerman

Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes

There are some great pieces of advice in here, househacking, multifamily ect.

You can definitely use those ideas, however to the core of the question you should always buy your house first. It doesn't matter what you type of property you buy, you should live there. Be that a single family home, or a duplex and rent out the other half, as opposed to staying in your apt and renting out both sides of the duplex.

The reasons for this are several. First, as a primary residence you qualify for more types of loans, at more favorable interest rates, and using less down payment. Generally speaking you will pay roughly 0.5% higher interest rates on an investment property all else being equal. And you will be required to use more money for the down payment, typically 20%. Even if you only live there for a year and then move to a different location, you still get the benefits of the cheaper loan for the next 29 years.

Second, landlording isn't exactly fun. Why would you buy a SFR and be forced to be a landlord when you could just live there yourself and not need to worry about a tenant? A spin off of this, is that no tenant on earth will take as good of care of your property as you will if you live there. Property damage from a reckless tenant can get costly very quick. So by living there yourself for a few years, you have guaranteed that your place will have a great 'tenant' (you) for those few years, greatly limiting the amount of repairs needed.

Third, some states have homestead laws and if I'm not mistaken Texas is one of them, where in a worst case scenario it is difficult for creditors to come after your primary residence in a worst case scenario if you get into financial trouble.

Fourth, from a pure simplistic financial aspect it doesn't matter. Sure you might cashflow if you rent out the property instead of living there, but then you are realistically just turning around and paying that money to YOUR landlord. After all your landlord is likely cashflowing as well.

The biggest pitfall to living in the property yourself, is that people typically have 'standards' on the type, size, location, layout ect of the house that they live in. You don't need a 2000sq foot home if 1500 will do. Buy what you need, not what you want. Analyze the deal as if it were going to be a rental, because it likely will be one in a few years when you repeat the process again securing another cheap loan as your new primary residence.

Ryan Evans

Rental Property Investor · Cleveland, OH · Member since 2016 · 653 posts · 769 votes

I haven't done it myself, but my friends in the same situation have done quite well getting a bigger 4-5 bed place to themselves and renting the rooms. You can get some basic landlord experience, but be around to keep an eye on things. They'll pay your mortgage and you won't have as much pressure when looking for the next place. Since you're young and a musician, you could probably draw in some likeminded tennants that you might not mind living with while looking at the next deal.

Marian Smith

Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes

I vote for buying a home for yourself first with conventional financing so no pmi. If you can find a duplex/triplex in an area you can see yourself living in and enjoying for a decade, buy it. If not, buy a sfh in a nice area....You want to rent to people like you. It is also nice to live in a place for a while to fix everything prior to renting it out..and get to know your product.

Brian Garlington

Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes

Do both......the sooner the better.....FHA Loans are only 3.5% Down and if youve served in the military you can use a VA loan and literally the only thing you have to pay for is the home inspection. Your agent can write it in the contract for the seller to pay up to 3% toward your closing costs.

Lots of theories on here as to SFR vs. Multifamily.....I'd go owner occupied duplex.....multifamily.....live in it for a two years so that you can count 75% of the rental income as your own, then refi, take a little cash out and buy a triplex..........repeat the process two years later to get a fourplex....and repeat that process every two years.....imagine ten years from now you will have at process every two years and in ten years you have rental income coming in from 20 units.

Envision 75% of THAT income being counted as your income and then picture the sort of house you'd REALLY like to buy because you'd be able to....

Denny Robert

Rental Property Investor · St. Louis, MO · Member since 2013 · 194 posts · 100 votes

I bought a triplex for my first property. I used FHA financing with 3.5% down. The two other units pay my mortgage, and my wife and I host international exchange students for fun and profit in our spare bedroom. I second what others have said. Money is so cheap right now. Buy as much as you can afford in property that cashflows, and house hack if you can make it fit your lifestyle. Manage your own units while it makes sense.

Rick Alvi

OP

Investor · houston, TX · Member since 2015 · 61 posts · 5 votes

edited

Rick Alvi

OP

Investor · houston, TX · Member since 2015 · 61 posts · 5 votes

@Denny Robert @Brian Garlington @Marian Smith @Ryan Evans @ben

@Ben Zimmerman @Madeline Burke @Jacob Voncannon @Clint E. @kk

@KK A.

Thank you guys. I'm self employed so it may make it tough to qualify for a multi-family that I want. Most of the multi-family properties that look appealing are around $275,000-500,000. I'm self-employed so I write off as much as I can in terms of business expenses. Over the last two years of tax returns, a certain bank offered me a $130,000 pre-qualification for a Single Family Home at 5% down with PMI required for only two years. I never spoke with him (the bank) regarding possible Multi-Family purchases. I hope I can qualify for a Multi-Family property in the $275,000-500,000 range but I'm not sure because of my existing pre-qualification amount for the Single Family. I'm going to assume here, that a mortgage broker or bank may consider the performance of the property + my two years of reported income to determine what I'm eligible for in a Multi-Family loan. I like everyone's ideas but they still seem to be split down the middle pretty strongly. The two opposing thought processes regarding buying a SFH vs. Multi-Family go on in my head 24/7 and I can't make a decision! I'm a Libra, so that doesn't help (joke)!

Meghan McCallum

Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes

Rick, everyone here will have an opinion, you have to do what is best for you. Try buying from a seller directly and see if they will sell to you on contract (they are the bank). Get tennants and roommates and save that money as you fix it up. As you own it you are proving that you can both pay down a debt and landlord already. Or, try buying a HUD home which will allow you to buy a steal of a deal. OR find a partner . Either way, the only wrong answer is to do nothing out of fear.

Julie MarquezPro Member

Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes

@KK A. Just start talking to your local banks and lenders. I believe some will do conventional loans for less than 20%, everyone is different, you just have to ask.

Matthew A.

New Haven, CT · Member since 2016 · 90 posts · 99 votes

You qualified for a $130,000 on a single family, I'm not sure how you are going to qualify for 275-500k multi with only 15-20k in your savings account. Lenders will take 75% of the non owner occupied unit's market rent (unless you have a lease already in place) I don't think that would even bring your qualification from 130,000 to 275,000 let alone 500k man. 3.5% minimum down payment on 275 is 10k, not including closing costs, which you will have to roll every single thing into just to secure the loan. If you are trying to purchase anything other than a Duplex, you will have to have 3-6 months of reserves. You will have a lot of PMI, and it will never go away unless you refinance. You would of course hope your home appreciates because if not or goes the other way, then it's a big big problem.

I guess others will come on here and tell you it can be done with no or low money, and blah blah even if none of them have even purchased a first home. I just don't think you have enough income (judging by your approved amount) or enough saved to be investing in multi families.

Focus on buying yourself a small, well kept home in a decent area that falls in line with what you are paying for rent now and save more, or find a way to make some extra income.

If you invest all of your savings of 20k, and you make $200 net each month, it will take you 100 months just to make your money back. The only other way, would be through appreciation, and that is an unrealized gain until you sell. Like I mentioned earlier, if you buy a home for 275 and you aren't making the type of gains you thought PLUS depreciation.. you would be in for a world of hurt.

If your music career isn't advancing, find something else and save as much as you can. Although i'm a huge fan of putting down the absolute least possible to secure any type of loan, I don't think it's the time for you to be investing.

Don't take any offense to anything I say, just trying to help.

Matt