financing my first rental property - two questions

2 Replies

Hello bigger pockets! I can't believe it's my first post here; I've been reading in the forums and listening to the podcasts for the past year trying to get educated on real estate. I've had a really good paying job for the past 2 years and at this point I'm looking to just pull the trigger and buy a house to get my feet wet. My long term goal is to retire through real estate. 2 Questions:

1) If you were to choose between buying a $300K house and a $150K house as your first rental property ever, which one would you choose (all else being equal)? In both cases I can get 3000$ or 1500$ in rent per month respectively. I'm pretty sure I can get qualified for a 300K loan. Ideally, I would rather buy two $150K homes for diversification purposes but this question is something I've been wondering about: if I choose the $150K option then the bank might not let me finance another $150K house for at least a year...  which might set me back. Is that true or false? Isn't it better to use my "first property joker card" in a larger house? 

2) My brother is in a similar situation as me - good paying job and ready to buy his first rental property. Is it better to buy properties as a 50/50% owner with him or should we just do this separately? I know this is a broad question but I am trying to view this from the perspective of getting financing for multiple properties.

Thank you so much for your help and I look forward to continuing this conversation!

@Joseph B. , congratulations on your first post!

>> "if I choose the $150K option then the bank might not let me finance another $150K house for at least a year... which might set me back. Is that true or false? Isn't it better to use my "first property joker card" in a larger house?" 

1. I haven't run into any issues with a bank not wanting to lend because you closed a loan before, although there may be some credit score impact. I think the only "first property joker card" would be an FHA loan which may get you by with a lower down payment.

The two houses vs. one is a good question.  More units does equal spreading out your risks and rewards - risk against vacancy, loss, neighborhood deterioration, but also increases some risk - the roof for the 300k property may not be as much as two roofs.  It may let you place two bets on two different neighborhoods.

A number of years ago, early in my career, I passed on a large duplex (4br each) because the rent on either would have represented too much monthly exposure if I had a vacancy.  I erred on the side of caution, and regret it every time I go past the place.

2. The partnership may work well if you (or your brother) cannot make it on your own and have to pool resources out of necessity.  Partnerships can also let you take advantage of opportunities neither one of you could access at the same time, or give you a stronger safety net by spreading out risk.  However, they can be pretty hard on a familial relationship if things don't go well.  I've got a brother and a father both in the real estate business, and although they've both been mentors to me, I don't want to mix family with business.  I am sure there are many others who have had a good experience and would recommend the other way.

All things being equal, except in some super-trendy areas, it is easier to rent out 2 $1500 homes than 1 $3000 home. If the cash flow was exactly the same - i.e. 2 homes made the same cash flow as 1 house - and I assume you've accounted for 2 roofs, two sets of vacancies, etc - your risk is somewhat diversified by having two homes, but your workload is also bigger.

If it were me, in my area, I'd take the 2 $1500 homes. $3k is a hard sell here. 

As for partnerships, I think it's better to go it alone until you understand that business. Not understanding the business is a good way to be taken by an unscrupulous partner. 

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