Balancing primary residence vs investing in rental property

10 Replies

I am currently in escrow for a SFH for my primary residence in Los Angeles. My wife and I took out a cash out refi on her out of state rental property to use for a downpayment on this house. If we were to do a 20% down conventional loan, after improvements we will use up most of this refi money. I have been researching out of state turn key rentals and they seem like a good investment and if this property falls through the cracks I think we will use this money to invest in them rather than buy for ourselves in LA.

The question I have though is, would it be worth taking on PMI to instead put 10% down in order to have money left over in out of state turn key rental properties? Would I be able to cash flow enough money to off set the cost of the PMI?

It depends on the cost of the PMI vs. the amount you would have in your pocket.

This is really not possible to answer without knowing the details of all the mortgages, and properties involved. The good news is that it is basically a math question. I'd sit down with your numbers and your calculator and hash out some different scenarios.

But be very careful about spending all the refi money on new properties if you don't have plenty of reserves on hand to cover the unexpected expenses that often come up with a property purchase

I would almost certainly put the down payment down to avoid PMI. PMI has no return on investment, whereas you at least are buying more equity in your home if you put more money down on it. Technically it is a math problem, and I am all about using leverage, but there are some things I am willing to leverage on and somethings I'm not. PMI would fall into that latter category.

I agree with Jean. We need more info to guide you. PMI is just another expense that is similar to utilities or a mortgage. If the property can cash flow with paying the extra expense of the PMI you may want to consider paying the PMI.

I also agree with @Jean Bolger and Adam B.. If you can cash flow with the PMI and use the money you save towards a down payment for another property then it is probably worth it. But if you take on the PMI and just let the extra money sit in the bank, then it is definitely not worth it.

Thanks for the replies.  I don't have the exact numbers figured out, but will post them when I get them assuming I'm still in this spot.  I see some are philosophically opposed to it and others are not.

Also, if you're looking at an FHA mortgage for the primary and you put down less than 20%, the PMI will stay with you for the life of the loan.

You used to be able to just pay your mortgage down to 20% equity and then call it off, but now you have to refinance to get out of it.

Thanks Max, yeah I know about having to refi to get out of it.

Originally posted by @Max Tanenbaum :

Also, if you're looking at an FHA mortgage for the primary and you put down less than 20%, the PMI will stay with you for the life of the loan.

You used to be able to just pay your mortgage down to 20% equity and then call it off, but now you have to refinance to get out of it.

Man am I glad I read this. I thought that once you got to 20% you could cancel it still.

You won't be able to get anything other than a conventional mortgage on an investment property, so no issues of PMI because you'll have to put at least 20% down. But if you do find a way of getting something for less than 20% down, just add in the PMI to your cash flow calculations and see if you are still cash-flowing. There are markets out there that give a good bit of cash flow margin, so who knows, but I'd be impressed if you can go the less than 20% down route. I've only bought out-of-state properties living in LA myself and I've never found it.

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