Im 23 with a house, point me in the right direction.

7 Replies

Hey everyone, first time poster I found this forum through the awesome podcast done by Joshua and Brandon. I want to tell you my story and get some advice. I am a blank canvas yearning for direction in the real estate game. Lets go.

Ok so im 23, Im finishing up my bachelors in Exercise Science at Sacramento State University. While going there I have been working for my friends dad on X-ray equipment for the last 6 years which has allowed me to buy a house here in Roseville CA with my girl friend. We have a 3 bedroom, 2 bath house with 3 roomates (1 couple, 1 single girl). All the while we are rehabing it ourselves with the help of my GFs dad who is a contractor. While I rehab this house the investment will be minimal but the return will be great! We bought for 285,000 and in 2 years hope to be near the 400k mark. During this time we can ride the market on the house and hope to get some equity and I can finish school before getting my real estate license. Since we only put down 5% we have PMI but are hoping that after a few months of rehab (full kitchen remodel, paint, laminate flooring and bathrooms) we can get an appraisal of 80/20 and get our mortgage down so that we can live rent free.

Im not sure if I was misled, but my bank (UMPQUA) said that in order to buy another house that wont be a primary residence, you need 20% down. Is this correct?

Here are my questions: if you were in my situation what would be your next move? What would you do with the house before or after 2 years? 

Welcome! Look at your big picture of debt. how much do you have in student loans? If I were in your situation, I would look for a steady job and then over time ease into real estate as it won't provide you a livable income from start. 

Originally posted by @Brad Farmer :

Im not sure if I was misled, but my bank (UMPQUA) said that in order to buy another house that wont be a primary residence, you need 20% down. Is this correct?

Here are my questions: if you were in my situation what would be your next move? What would you do with the house before or after 2 years? 

20% down required on non-owner-occupied investment property is correct. I find this across the board from conventional lenders to even portfolio lenders these days.

If you can refinance out of the PMI to save money, that'd be great. You "could" try to tap the extra equity via a HELOC to put that 20% down on another property to purchase as a rental

You could also just sell the house all together as well. If you've lived in the property for 2 years or more, you can sell it for up to a $250k capital gain without paying tax (since you're not married). You'll still have to drop about 6-10% of the sales price for agent's fees etc though. You can buy another property with a low down payment. 

You could also convert the property you live in now to a rental after you refinance, then make another owner-occupied purchase and move into a new home with a low down payment.

@Brad Farmer   you are off to a great start! @Mehran K. is absolutely right about the taxes and has some great advice! Another single family investment purchase is actually 15 percent down and multi family investment purchase is 25 percent down. With your primary residence you also have the option of a cash out refinance after 6 months of ownership and to avoid PMI you can cash out 80 percent of the appraised value. This will give you a chunk of money in your pocket, with only one mortgage at a fixed rate and no PMI. You can use that chunk to purchase another single family and rent out and fix up and do the same thing! Again you are off to a great start.

Jerry Padilla, Lender in NY (#NMLS 1084877)
585-204-6923
Originally posted by @Mehran K. :

You could also convert the property you live in now to a rental after you refinance, then make another owner-occupied purchase and move into a new home with a low down payment.

I thought about that, but what about loan qualifications? How would I qualify for a second house? Even with the PMI gone I dont know how I would be able to qualify for the mortgage.

After 2 years of rental income on your tax returns, conventional lenders will use rental income in your DTI ratio calculation.

Keeping it short as I'm on my phone! 

Originally posted by @Mehran K. :

After 2 years of rental income on your tax returns, conventional lenders will use rental income in your DTI ratio calculation.

Keeping it short as I'm on my phone! 

 And what if I dont have my roomates on my tax returns? 

I would use your existing house's equity and get a HELOC on it. On a primary, I think some banks will do up to 90% LTV. So theoretically, if the house appraises at 360k and you owe 285, you can get a HELOC of 75k.

The nice thing with that is that you're not paying any interest unless you're using it.

And if you use it to buy an investment property, the rents should be able to cover the payments and then some (I know its california but I would hope you would only invest in something that cash flows).

Qualifying for another mortgage might be tight because of the 2 year rule. But some lenders will count 70% of the rent even if you haven't been a landlord for 2 years. Just need to fish around.  Then the potential rent can be used to offset the debt payment.

And, to be honest, it doesn't make sense for them not to count a portion of the rent if they're  going to count your debt payments on it.

After all, there are no debt payments unless you own the house. And once you own the house, you will get rent....

But starting out with a 75k heloc is a great way to free your options up. And it won't cost you anything (other than a $300 initial fee) to get one so if you don't find a deal for 6 mos, you're not paying anything on it while you're waiting.

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