Is it worth paying PMI to get into REI quicker, or save for 20%?

Question

Something that I’ve been debating for a while now. I am an existing homeowner $125K value with $895 monthly payment. My other debt payments total $251 per month. My income is $75,000 annually. I’m 23 years old and want to dive into real estate early so I can drop this 9-5 bs eventually. My real estate strategy is roughly:

$150K Price Point

Central Pennsylvania

3 2BR- $900/mo or $2700/mo Otherwise

2000+ Sq Ft

Initial Investment

$30K Down Payment at 20%

$10K Rehab Fund

$10K Emergency Fund

My question is, should I wait until I can save a full $50K before diving into this, or does it make sense (if the cash flow works) to buy on a 3.5% down mortgage with the added PMI. I think this problem/dilemma is solved by the BRRR method. If completed right I should be able to increase equity to refinance out of PMI, no?

Thanks for any and all input.

Andrew Postell · Answer

@David DuCharme the heart of your post here is what we ALL face as investors as our biggest challenge...CASH OUT OF POCKET!  And you hit it on the head that the BRRRR method SOLVES this problem.  I'll speak in generalities, but generally speaking we target OFF MARKET properties in need of repair work.  We buy them at a deep discount, rehab the property to create equity in that property.  That's the concept at least.  Feel free to ask anything additional that you need but I come out of pocket just a few grand (if even that much) on properties that I buy and hold.  And it's because I follow the BRRRR method.

Bob Okenwa · Answer

You cannot purchase an investment property with only 3.5% down. You're looking at 15% minimum. If you're house hacking and will turn your existing home into a rental and use the new investment home as your primary residence, then you can use a lower down payment as you have stated.

As for saving 20% down, how long will that take and how much more expensive will homes be in that time? One must consider the time value of money and see if it makes sense to wait or pull the trigger now as prices may continue to increase as well as interest rates and those cost increases need to be taken into account to make a sound decision in regards to moving forward today or waiting until tomorrow.

Theresa Harris · Answer

Bob hit the nail on the head.  How long will it take you to save the money for a down payment?  If you are making $75K per year with ~$250/month for other debt and $900/month in mortgage on your principal residence, you should be able to save quickly.

Dan Chevreux · Answer

@David DuCharme

An FHA loan at 3.5% will require you to pay PMI throughout the life of the loan. Even if the cash flow makes sense, PMI is a pain. If you plan on house hacking, look into conventional owner occupied financing at 5%. Owner occupied financing offers attractive interest rates and low down payment requirements. In addition, you’ll only be paying PMI until you reach 20% equity. Worth it in my opinion for 1.5% more on the down payment. Good luck!

Is it worth paying PMI to get into REI quicker, or save for 20%?

Most Popular Reply