Primary residence -> future investment?

10 Replies

Hey everyone.  I wanted to see if anyone purchases their primary residence only after running the numbers to see if it would be a profitable rental once you move out (I know the numbers would most likely change so maybe you can't truly tell) or do you buy a primary residence and just see if it would work as a rental when you're ready to move out.  In short, should you make a purchase based on gaining another rental property, or should you buy what you personally want in a home and then be pleasantly surprised if it ends up being a good rental later on and if it isn't just sell it?

@Erik E.

In my opinion, I think you should buy your first couple properties with the intent of them becoming rentals right out of the gate. Mainly because you're only allowed to have so many mortgages available to your own name. The other reason is, you have to live somewhere so if you sell the property you'll probably lose what you spent on closing costs. Not to mention, you'd be giving up the years put into the 30 year mortgage while you were living there.

Also owner occupied gives you some of the best financing available in terms of rate and down payment, so wouldn't hurt to keep a property like that as a rental.

Overall, looking at it from a yield perspective, the less total cash into a deal that still has positive cashflow, the higher the percentage of yield.

Just my two cents, best of luck.

- Dave

@Erik E. , I am in the military so I move every three years, roughly. That is the exact model that I use. I calculate what the rental numbers will look like when I move out, based on current year numbers. I can't predict the future, or I would use those numbers. Then I work backward to figure out what my loan amount can be. I factor in property management, although i don't always use it, CAPEX, repairs, etc.... The nice thing about living in the property for a couple of years is that you get a great look at what the expenses actually are.

I am currently getting ready to move, this summer, and my numbers estimates were extremely accurate.  In addition, the rents have gone up more than I expected over the last two and a half years, so that is an added bonus.

One intangible thing to remember, if you are living in the property then you have the mortgage advantage of lower down payments up front. This does equate to a higher mortgage of course, but your ROI can be greater as well. Just something to consider.

I am right in your neck of the woods, so happy to discuss more if you like.  Good luck!

Remember when purchasing a SFH with the intent of some day renting you must do the math before you buy. SFHs often are not suitable financially as a rental due to the fact that they are not purpose built as rentals. Home buyers will pay far more per square foot for a home than a rental is worth.

It is often very difficult to get SFH rents high enough in relation to the purchase value of the property to cash flow. If rents are not high enough a SFH is a money pit. Additionally having a SFH as a rental when you decide to sell can devalue the resale of the property. A large percentage of potential buyers will be turned off by tenants.

As the others have said, I think its a great idea of buying/analyzing a property with the intent of eventually turning it into a investment property. My only concern is how your DTI ratio is affected when purchasing your 2nd and then your 3rd home? Maybe @Dave Van Horn or @Kevin Hunter  can answer.. From the start, do lenders take into account the fact that you're going to rent out your property?  I thought you had to give them at least 2 years of solid rental history before they are willing to allow 70+% of the rent to be put towards income for covering the mortgage.   

@Erik E. , @Christopher Giannino is exactly right that the DTI is something you need to consider. In my experience, and you hear this a lot on BP, the larger banks will look at your DTI without the rental income from that property that you just moved out of. They have their "standard" wait time for the rental income to count, some one year some two year. However, smaller banks are more likely to consider the rents but you have to have certain things in place. First, a long-term lease. A year minimum, but the longer the better. Proof of deposit funds help, although not a must. Lastly, they will want to look at your checking account to see that the rents have gone in every month as you stated they have. If those three are in place, they will generally accept the property as a rental. It is, of course, like anything else, in that you may have to call a couple to find one that will work with you, but you will definitely find one!

@Christopher Giannino

I agree with @Kevin Hunter , but keep in mind there are a lot of factors that go into DTI.

Firstly, as time goes on, we don't want to make the assumption that one's income isn't going up or financing requirements stay the same (or are the same at every bank). 

We also have to keep in mind that rents also rise, and how you rent the property could affect your true DTI (i.e. house hacking or AirBNB may get you more rent for example). There's also other compensating factors like appreciation.

Kevin's right though, shop around (preferably with an investor friendly mortgage broker) until you find what you're looking for!

Best of luck.

Dave

@Erik E. , it depends honestly. Am I buying the house because it's my wife's dream and that is where we want to raise our kids or did we buy it because we needed a place to live for a few years? If it's the later then definitely run the numbers.  The only primary residence we might not thinking about running the numbers on is if we decide to buy something with 20 acres, secluded, and doesn't have a strong rental market.  

We are moving to the beach from about 30 minutes inland.  We paid our first home down to where it will work as a rental and we have to move to be closer to kids school.  We have plenty of credit but I am going back and forth about how to approach this.  The way I see there are three options.  The first is just buy your dream home and hope for appreciation.  The second is to try and find a home that would make a decent rental after we live in it, leaving left over credit to invest in investments with traditional financing.  Third would be to try and force equity through a rehab or live in flip.  The area we are looking (jax beach) seems to lend itself more to this strategy but it it scary as I feel like the market is getting a little frothy.  

We are moving to the beach from about 30 minutes inland.  We paid our first home down to where it will work as a rental and we have to move to be closer to kids school.  We have plenty of credit but I am going back and forth about how to approach this.  The way I see there are three options.  The first is just buy your dream home and hope for appreciation.  The second is to try and find a home that would make a decent rental after we live in it, leaving left over credit to invest in investments with traditional financing.  Third would be to try and force equity through a rehab or live in flip.  The area we are looking (jax beach) seems to lend itself more to this strategy but it it scary as I feel like the market is getting a little frothy.