Buying income/investment property before my first home

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Buying income/investment property before my first home

Kwesi S.
Real Estate Agent · Brooklyn, NY · Member since 2013 · 27 posts · 3 votes

Over the past few months I have been trying to figure out ways to make some extra cash. Since I am not interested in starting a business or the stock market, I have decided to focus on real estate. My question is as follows:

Should I purchase a income/investment property before I purchase my own home? My plan is to purchase a income.investment property in a college community (walking distance from campus) and rent the property to students (actually their parents). I then plan to save the cash flow and combine it with my savings to then purchase a home for myself and down the road purchase more income/investment property. Is this a good idea?

I am meeting with a mortgage broker on Thursday to begin the pre-approval process for a loan for the investment property but just though conversation and setting up my appointment I feel that the leander is actually trying to get me to purchase my own home first.

Info about myself:

9 months married
living in rental property
not sure where i want to purchase the home I want to live in
no kids
my wife and I have full time jobs
my wife is not interested in living in a multi family home
we owe over 100k in student loans...lol

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Glenn Espinosa
Rehabber · Alexandria, VA · Member since 2011 · 446 posts · 171 votes
13y

My reasoning is this and it may be flawed but take it for whats its worth.

If I were to buy a personal residence right now it would be a distressed property with room for value adding - it's just the investor in me. I cringe when I see young couples buy huge retail homes that they don't need and get stuck with zero equity and not to mention wiped out savings due to down payments. Although, with the rates being where they are right now, you can make a great argument towards going ahead and buying a nice home...

For example, I know a young couple in their mid 20's who have great incomes and no children. They went out and bought a 3,400 sq ft McMansion for 500k+ and are now stuck paying that huge mortgage every month, have probably wiped out their savings, and have lost all liquidity in terms of making investments. Talk about jumping a few spots in the rat race but guess what... you're still in the rat race.

As for me, I'd rather invest first and then buy the home I really want later - or rather, buy a distressed home that I can turn into my dream home, then sell... for profit.

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  • Glenn Espinosa
    Rehabber · Alexandria, VA · Member since 2011 · 446 posts · 171 votes
    13y

    I used to live in one of my multifamily rentals before I got tired of being too close to my tenants (too much access, always asking me to do unnecessary stuff).

    Other than that the living arrangement was good as I was practically living for free, having others pay my mortgage, as well as putting a few hundred bucks in my pocket every month. Did I mention the tax benefits?

    Anyway, I now rent an apartment in a better part of town and do not plan on buying a personal home anytime soon. It's a lifestyle choice - I don't want to live in a SFH right now and the downtown city apts that I like are too expensive.

    If I were to buy a SFH right now I would treat it like a live in flip, hold it for two years, sell, then use the proceeds to do it all over again.

    Have you tried laying out the numbers on buying a duplex and living in one of the units to your wife? Maybe the financial benefits laid out a certain way could sway her?

    Best of luck,

    Glenn

    3Reply
  • Kwesi S.
    OP
    Real Estate Agent · Brooklyn, NY · Member since 2013 · 27 posts · 3 votes
    13y

    I have laid it out to her and her reasoning is similar to yours. She does not want the tenants to be to close by and also she does not want any uncomfortable situations to arise. I tried searching my question on google/bing many times and I have not read anything that suggest that it may be wise to purchase investment property before your own home and I just cant understand why this is not a smart idea. I understand with real estate many risk are involved, but I cant understand this is not a good idea if it is done correctly.

    The properties that I have my eye on are multi family dwellings (nothing less than 5 to 6 bedrooms) and rent it to students (all with an individual lease in their parents name)

    1Reply
  • Glenn Espinosa
    Rehabber · Alexandria, VA · Member since 2011 · 446 posts · 171 votes
    13y

    My reasoning is this and it may be flawed but take it for whats its worth.

    If I were to buy a personal residence right now it would be a distressed property with room for value adding - it's just the investor in me. I cringe when I see young couples buy huge retail homes that they don't need and get stuck with zero equity and not to mention wiped out savings due to down payments. Although, with the rates being where they are right now, you can make a great argument towards going ahead and buying a nice home...

    For example, I know a young couple in their mid 20's who have great incomes and no children. They went out and bought a 3,400 sq ft McMansion for 500k+ and are now stuck paying that huge mortgage every month, have probably wiped out their savings, and have lost all liquidity in terms of making investments. Talk about jumping a few spots in the rat race but guess what... you're still in the rat race.

    As for me, I'd rather invest first and then buy the home I really want later - or rather, buy a distressed home that I can turn into my dream home, then sell... for profit.

    4Reply
  • Elliot Mendoza
    Homeowner · El Paso, TX · Member since 2012 · 81 posts · 22 votes
    13y

    I don't see anything wrong with purchasing an investment property before a home first. You get a better deal with lenders on OO properties for loans though.

    It's just a suggestion, but purchasing a quad as OO, then you can choose to move into it for the year that i believe most banks require OO homes to be lived in, or not. Then rent out the other 3, or all 4 units and continue living in an apartment until you build up your savings. At least, thats what I would personally do in your situation.

    0Reply
  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    The lender is probably pushing you towards owner occupant because it is probably much easier for you (and, by default, easier for him) to get a loan that way. Investment property will most likely mean 20% down, no special first-time home buyer incentives, higher rates, points, fees, and reserves, and you'll probably need 2 full years of rental income before you can actually use that income towards qualifying for anything else. Banks just seem to be more lenient with owner occupants, especially first--time home buyers. It is too bad your wife is not interested in living in a multifamily for a year or two. You'd get a loan with low to no down payment (special 0-down options still around for first-time home buyers), having tenants pay most if not all of your mortgage payment, and learning how to be a successful landlord while building equity in investment property. Plus, after even just one year (probably 2 if you need to use your rental income to qualify), if you don't like living that close to tenants, you can turn around, rent it all out, find another place you like better for yourself, and actually use another owner-occupied loan with owner-occupied rates and down payments.

    2Reply
  • Prashant P.
    Real Estate Investor · Philadelphia, PA · Member since 2010 · 283 posts · 81 votes
    13y

    If you purchase an investment you may lose any first time buyer mortgage programs that you may qualify for.

    I would also suggest looking more for a residential rental than a college rental. In my opinion it is much easier for a first time landlord. You turnover is very high, maintenance is usually more, more legal issues with unrelated people living together.

    A residential rental will allow to build your rental team and learn about landlording.

    1Reply
  • Mark Maire
    Silverdale, WA · Member since 2012 · 32 posts · 15 votes
    13y

    If your wife doesn't like being so close to the tenant, I recommend don't being the landlord then. Live there being the role as a the property manager. Many owners live in duplexes, tri's, quads without their tenants suspecting the owner lives in the same complex. Create a LLC, tenants pay to LLC.

    2Reply
  • Kwesi S.
    OP
    Real Estate Agent · Brooklyn, NY · Member since 2013 · 27 posts · 3 votes
    13y

    Thanks for the help guys!! I really appreciate it. I have always been interested in real estate and would like to make some extra cash on the side. I want to purchase my first investment property in Buffalo, NY (which is where I went to college) and i am really familiar with the housing market. I currently live in New York City and the cost of properties here in my opinion are really expensive and often does not make any sense. You can easily pay 300k for a home and still be afraid to walk down your street at night.

    Lynn, having the %20 - %25 down is not the issue I just want to know what my best option is at this point. My job is pretty stable but you never know what can happen and I feel if I purchased an investment property now (while I have the funds to do so) I can be building towards something long term.

    I would really like to hear from people who have used this technique (bought an investment property that was not owner occupied before buying their first home) just so I can get a little more insight.

    Just want to make sure i am making the best decisions for my family and I

    0Reply
  • Michael B.
    Apopka, FL · Member since 2012 · 207 posts · 120 votes
    13y

    Here's the important part:

    Not something to laugh about, either out loud or silently.

    Clean up that mess first. That comes before investing or buying a personal home. To use a Dave Ramsey phrase -- When broke people buy real estate they become broker.

    I really don't see a need to wait until after buying the personal house to start investing. However consumer debt comes to the front of the line. Clean up the student debt over the next few years, and also any other consumer debt laying around (credit cards, cars, etc.). Then you'll be ready to invest in real estate.

    Until your personal balance sheet is in order don't go borrowing more for real estate.

    1Reply
  • Kwesi S.
    OP
    Real Estate Agent · Brooklyn, NY · Member since 2013 · 27 posts · 3 votes
    13y

    Michael, so you are saying I should use my savings to try to pay off my student loans before I purchase investment property? I am sure you have more experience than I do but I dont see how that can be a good idea. I want to use any potential cash flow to actually help pay the student loans faster and not continue paying a few dollars extra above the minimum payment.

    0Reply
  • Ben Yoon
    Real Estate Investor · Brooklyn, NY · Member since 2013 · 26 posts · 2 votes
    13y

    NYC resident? Buffalo resident?

    Me. too! so, hello!

    You know - the idea you have is not a bad one. I wanted to do the same. But theory doesn't execute seamlessly in reality, especially if you are borrowing money. The "lender" will want some say in what you are using the money for.

    As a lender, if the borrower is renting, but they want to buy an "investment" property, then the lender will be thinking many questions:

    "what kind of investment experience does this guy have?"
    "how will this guy operate this investment property?"
    "Can he float two housing payments (rent and mortgage)? How strong is his income?"
    "what if he defaults? We don't want yet another property to foreclose on.."

    The only way that I could see a lender being comfortable with this scenario is if a borrower can show enough liquid cash to buy the property outright, but they are opting to use a loan to improve the return. Shorthand: choosing a loan while not necessarily needing a loan..

    So, it could be conceivable that the loan originator might not want to even start the work coz all of those questions would need to be answered to get the underwriters to approve.

    The previous answer was probably closest to the mark: Banks like Owner occupied. More vested in the property by the borrower, which makes the lender feel more secure in their loan.

    not to say that it can't be done. Just have to find a company or individual that is ok with your plans - ok enough to make the loan to you.

    2Reply
  • Michael B.
    Apopka, FL · Member since 2012 · 207 posts · 120 votes
    13y

    That's exactly what I'm saying.

    You're leaving out the concept of risk. Investing always involves risk. Sometimes becoming a landlord works out well and you make money. Sometimes it doesn't and you lose money. If you make lots of money then it becomes easier to pay off loans. If you lose lots of money it gets much harder. And if it goes really badly remember that student loans can't even be discharged in bankruptcy.

    You have a very long time horizon to invest (assuming you are of the normal 'just married' age). And I realize that paying off debt isn't nearly as sexy as buying houses. But my advice is to use that long time frame to your advantage.

    Prepare yourself to invest. Get out of the hole you're in. Use this time to learn about investing options. Get your income up so you have more disposable cash to invest.

    Prepare yourself first and you will have many more options when the time comes.

    2Reply
  • Luke Fitzsimmons
    Involved In Real Estate · London, Central · Member since 2008 · 2 posts · 0 votes
    13y

    I think if you can get the mortgage then it is a good plan. Student accommodation can be a lot of hassle to manage though so look for a good specialist management company, you will lose a percentage of the yield but it will be easier and more professional for you and of course the management company will help with finding the student tenants, year on year so you should be able to achieve good occupancy. Student accommodation when managed correctly can achieve almost 100% occupancy.

    That said if it was me I would have a char with my wife to consider living in a multifamily home for a year or so so you can save money and like a few of the guys said above it would be easier to get a OO mortgage.

    0Reply
  • Kwesi S.
    OP
    Real Estate Agent · Brooklyn, NY · Member since 2013 · 27 posts · 3 votes
    13y

    Thanks for the help Ben. Giving our Buffalo/Brooklyn connection, I would love to talk more about my ideas with you.

    0Reply
  • Ben Yoon
    Real Estate Investor · Brooklyn, NY · Member since 2013 · 26 posts · 2 votes
    13y

    Sure! we can have coffee, i sent you a pm

    0Reply
  • Kwesi S.
    OP
    Real Estate Agent · Brooklyn, NY · Member since 2013 · 27 posts · 3 votes
    13y

    Thanks Luke. I appreciate the response. Living in NYC can be really expensive, however the amount that we pay in rent is a steal. because of this over the past 3 years we have been able to save a bunch of money. All of this money is just sitting in the bank and not serving us any purpose. We figure we want to make this money work for us now. We plan on renting for at least another year or so. We figure if we take about 18k from our savings and purchase an investment no more than 65k (2 family between 5 and 6 bedrooms) we should be able to make our initial investment back in hopefully no more than 18 months. Once we have made our initial investment we would then start looking for a home for ourselves.

    If we were to purchase an OO in NYC, first off our mortgage will definitely be more than we currently pay in rent. We will also run the risk of our tenants not paying rent on a monthly basis which would then cost us an additional expense.

    Maybe I just need to do more research? Do my ideas make sense? Anyone have any suggestions on were I can go to do more research?

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    My first was a live in flip. I lived in it the home sale exclusion and then sold.

    I don't borrow money for anything other than an investment.

    -Steven

    [email protected]224-381-2660
    1Reply
  • Sichao Ma
    Berkeley, CA · Member since 2017 · 1 post · 1 vote
    8y
    Originally posted by @Kwesi S.:

    Thanks Luke. I appreciate the response. Living in NYC can be really expensive, however the amount that we pay in rent is a steal. because of this over the past 3 years we have been able to save a bunch of money. All of this money is just sitting in the bank and not serving us any purpose. We figure we want to make this money work for us now. We plan on renting for at least another year or so. We figure if we take about 18k from our savings and purchase an investment no more than 65k (2 family between 5 and 6 bedrooms) we should be able to make our initial investment back in hopefully no more than 18 months. Once we have made our initial investment we would then start looking for a home for ourselves.

    If we were to purchase an OO in NYC, first off our mortgage will definitely be more than we currently pay in rent. We will also run the risk of our tenants not paying rent on a monthly basis which would then cost us an additional expense.

    Maybe I just need to do more research? Do my ideas make sense? Anyone have any suggestions on were I can go to do more research?

    Hi Kwesi,

    I am having the exact same situation right now. I am living in a high cost area-SF bay area, I graduated from the Midwest (where rent/house ratio is high). I have decent income but not enough to buy a nice home in the Bay area. I have 50k cash in the bank but don't have a good way of utilizing the money in the bank. Now I am thinking of buying a multi-bedroom apartment in my college town and rent out. I think it is a great idea but it's really hard for me to find similar information online until after I saw your original posts! Would you mind sharing with me how it went finally for you? And any recommendation for me if I want to do the same thing as you did? My major concern right now is whether I may lose any first time buyer mortgage programs that I may qualify for when I actually buy my home later after this investment?

    Thanks,

    Sichao

    1Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    8y
    Originally posted by @Sichao Ma:
    Originally posted by @Kwesi S.:

    Thanks Luke. I appreciate the response. Living in NYC can be really expensive, however the amount that we pay in rent is a steal. because of this over the past 3 years we have been able to save a bunch of money. All of this money is just sitting in the bank and not serving us any purpose. We figure we want to make this money work for us now. We plan on renting for at least another year or so. We figure if we take about 18k from our savings and purchase an investment no more than 65k (2 family between 5 and 6 bedrooms) we should be able to make our initial investment back in hopefully no more than 18 months. Once we have made our initial investment we would then start looking for a home for ourselves.

    If we were to purchase an OO in NYC, first off our mortgage will definitely be more than we currently pay in rent. We will also run the risk of our tenants not paying rent on a monthly basis which would then cost us an additional expense.

    Maybe I just need to do more research? Do my ideas make sense? Anyone have any suggestions on were I can go to do more research?

    Hi Kwesi,

    I am having the exact same situation right now. I am living in a high cost area-SF bay area, I graduated from the Midwest (where rent/house ratio is high). I have decent income but not enough to buy a nice home in the Bay area. I have 50k cash in the bank but don't have a good way of utilizing the money in the bank. Now I am thinking of buying a multi-bedroom apartment in my college town and rent out. I think it is a great idea but it's really hard for me to find similar information online until after I saw your original posts! Would you mind sharing with me how it went finally for you? And any recommendation for me if I want to do the same thing as you did? My major concern right now is whether I may lose any first time buyer mortgage programs that I may qualify for when I actually buy my home later after this investment?

    Thanks,

    Sichao

     Looking back in the Midwest could be a great idea. The housing here is very affordable and the rents are going up. You do not need to look in a college town for a good stream of income. College students tend to stay 12 months or LESS which means you are constantly preparing for new tenants and having vacancies. Areas, where there is a good mix of rentals and owner/occupants, might be better. Those tenants tend to stay longer. 

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