New York, NY · Member since 2017 · 7 posts · 1 vote
Hello fellow BP'ers!
I am currently considering purchasing my first property. The property that I am looking to purchase will be in the 500k range and I currently DO have the 100k 20% down required.
Since I am a first time home buyer - should I be considering getting an FHA loan for this same apartment and only put 3.5% down and use the rest of my capital in another RE transaction?
In any of the two cases an additional question I have for you BP'ers is that because this is my first property, should I always live in it for a year for the loan to be considered "owner occupied", for the better interest rates / Down payment differences?
Note that I currently live with family, so if I end up living in the property that I purchase instead of renting it right away, it is especially for the purchase to be considered Owner Occupied.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
9y
Tom, this is a debate on risk in my opinion and is something YOU have to decide yourself, but I'll try to help weigh the pros and cons:
FHA:
Pros: Get in for significantly less capital --> use remaining capital to buy another property
Cons: Higher debt amount, if property values fall, you'll be "under water". You'll have higher monthly mortgage payments, which will reduce your cash flow (but almost certainly a higher Cash-on-Cash return).
PMI payments
Ultimately, you'll only get in to trouble on the FHA after you move out and the market experiences a downturn and your rents drop.
Traditional:
Essentially switch the pros and cons from FHA. Biggest benefits are no PMI, and having more equity in a property significantly protects you in a downturn. You lose a property when your monthly payments exceed your cash flow and that occurs if you monthly payment is too high and the rents are too low.
If it is intended to be a rental property, which you can rent for a minimum of $4500/month, leverage will definatly be to your advantage if you can still produce positive cash flow. If 20% down is required to produce descent cash flow then it is not worth investing in the property.
Do your numbers based on a hypothetical 100% financing and if you still get positive cash flow take the FHA loan otherwise walk away.
To confirm, you suggest that in a hypothetical situation whereby 100% financing produces positive cashflow, take the FHA, move into this property for a year, take the loss then move out and start renting?
San Jose, CA · Member since 2017 · 7 posts · 6 votes
9y
Also, depending on what area of the country you are looking, the strength of the offer matters. Out here in the Bay Area, where there is a lot of cash to go around and offers are typically above list, the more down you put the stronger your offer looks, and the higher percentage that you're offer will get selected over the other dozen offers. We put down 25% into our current primary residence for that very reason.