First time buyer (owner occupied) after investment purchase

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First time buyer (owner occupied) after investment purchase

Chris H.
Lakewood, CA · Member since 2016 · 11 posts · 4 votes

Hello BP community,

I'm looking for some help. I currently rent and do not own property. I'm looking to purchase an investment property first because buying a house for my family right now, financially isn't in the cards and I want to begin my REI path. So my question is this, how will buying a (non owner occupied) rental property first, impact buying a primary residence later (hopefully in a few years) with a low percentage down or first time buyer type loan ? I'm concerned about not being unable to take advantage of something like that because I technically won't be a first time buyer.

HELP ?

Chris H.

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Scott SmithPro Member
Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
10y

@Thomas Franklin thank you for clearly defining the issues. A thorough response as always.

I have my own take, and as any attorney will say, this is not legal advice...

For the asset protection purposes you need both (1) insurance and (2) properly structured company for litigation protection, an LLC/LP/etc.

Insurance protects your from nuisance that occur on the property; i.e. slip and fall

The company structure protects your assets from litigation liability; i.e. gross negligence (health and safety, alleged known hazards, fraud in the sale of the property) as well as someone getting to your assets by suing you personally (e.x. you got into a car wreck that exceeded the coverage of your policy, now they can go after your assets)

The due on sale clause is often a concern, but me and my colleagues view it as a very low risk for a number of reasons. This risk can also be further minimized by placing the property in trusts which appear to be for estate planning purposes but in actuality are in order to move them underneath the protection of your LLC. If you want to know more about this, please PM me.

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  • Account Closed
    Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    In short, the programs you are talking about are "First Time Home Buyer" programs. They are not first time house buyer programs. Here is the HUD definition of "First Time Home Buyer".

    "An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers). A single parent who has only owned with a former spouse while married."

    If the house cash flows, and once you establish stable rental income it should not be an issue.  Before that you probably would not meet the Debt to Income Ratio requirements.

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  • Steven Torrez
    Real Estate Investor · Salem, OR · Member since 2015 · 60 posts · 16 votes
    10y

    Have you considered house hacking? Buy a duplex and rent out the other side. That way you could use a FHA loan, with less than 20% down.

    0Reply
  • Eric Dowling
    Real Estate Agent · Los Angeles, CA · Member since 2015 · 201 posts · 82 votes
    10y
    Chris H. I would agree and point you toward house hacking a 2-4 unit. You can get a FHA loan, 3.5% down, and potentially live for free. When you buy your primary residence in a couple years you will move out and have a cash flowing investment. I know there are opportunities for this in your area.
    0Reply
  • Chris H.
    OP
    Lakewood, CA · Member since 2016 · 11 posts · 4 votes
    10y

    @Account Closed

    Gentlemen, Thank you.  You've given me much to consider, I appreciate it !

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  • Thomas FranklinPro Member
    Real Estate Investor · Miami, FL · Member since 2010 · 939 posts · 739 votes
    10y

    @Chris H. I am not a fan of "house hacking." Yes, you can purchase a 2-4 Unit Residental Property. You would put 3-5% down, live in one unit, and let your tenants pay the mortgage. You would have to live there a minimum of one year, to satisfy FHA Requirements, before you can move out. The problem is you have no Personal Asset Protection. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own.

    Some Investors try to out fox the lender and Quit Claim the property, from their personal name, to the name of a LLC. What the Investor does not realize is he or she risks having the lender discover a Title Transfer occurred and initiating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within x number of days. These clauses are contained, in all Promissory Notes nowadays.

    Another disadvantage is by not closing, in the name of a LLC, you cannot take full advantage of the Federal Tax Code and minimize your Tax Exposure.

    I hope this information allows you to make an informed decision. 

    0Reply
  • Jerry PadillaBusiness Member
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    10y

    @Chris H.

    I agree with all to others and think starting out with an FHA Mortgage is a great way to go.

    For personal protection, you can also look into an umbrella insurance policy. It is the route we choose to go. You will find it difficult to obtain financing and won't get into a primary residence with little money down if you go the route of an LLC.

    [email protected]585-204-6923
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  • Inna Smulansky
    Investor · Brooklyn, NY · Member since 2016 · 12 posts · 3 votes
    10y

    I suggest you buy your investment property as a primary residence.

    This way you will take advantage of the fact that you don't have a primary residence now and will take advantage of lower interest rates and lower down payment.

    You will worry about your next steps later, when the time comes.

    0Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    10y

    @Thomas Franklin thank you for clearly defining the issues. A thorough response as always.

    I have my own take, and as any attorney will say, this is not legal advice...

    For the asset protection purposes you need both (1) insurance and (2) properly structured company for litigation protection, an LLC/LP/etc.

    Insurance protects your from nuisance that occur on the property; i.e. slip and fall

    The company structure protects your assets from litigation liability; i.e. gross negligence (health and safety, alleged known hazards, fraud in the sale of the property) as well as someone getting to your assets by suing you personally (e.x. you got into a car wreck that exceeded the coverage of your policy, now they can go after your assets)

    The due on sale clause is often a concern, but me and my colleagues view it as a very low risk for a number of reasons. This risk can also be further minimized by placing the property in trusts which appear to be for estate planning purposes but in actuality are in order to move them underneath the protection of your LLC. If you want to know more about this, please PM me.

    IF YOU LIKED THIS POST PLEASE VOTE

    Podcast Guest on Show #109
    2Reply
  • Melissa Gittens
    Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    10y

    Great question, there is a great chance that you will qualify for the first time home buyer incentives at that time. I do more research about it before making making that step. Also why not consider house hacking now?

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