PMI and down payment options

[Sebastian Villacis M.]

Hi BB community,

I'm new here and so excited to join this amazing community. My wife and I are 6-7 months out from getting our first investment property. We have a beautiful 9 month old baby girl which makes the house hack approach a bit more challenging but we are hopeful everything works out. We want to get a single family house in the Reston, Sterling, Herndon area in the 500k-600k ballpark where we can add an accessory dwelling unit that will be rented out (Airbnb or long term rental TBD). Our goal is really to stay in this first property for a year before we get our second one and house hack again. Based on this goal, our questions are on the financing part of the deal: 

1. For PMI, will it make sense to buy it out or to pay it monthly. The reason I'm asking this is because even though we want to buy and hold our properties and just rent them as we move to our next deals, the monthly PMI payment will still affect our expenses. I've heard that buying out PMI when you want to stay in the house for s long time will make sense but I don't know if that will still apply for the house hack idea considering we don't want to sell our properties so our portfolio grows as we go.

2. We have the chance to put 10% but watching lots of the BB videos we saw that the best (or most?) financing option is 5% down. I guess this question goes hand in hand with the first one since 5% down will mean a longer and higher PMI. Which rate will be better for the approach we want to take.

Thank you so much to everyone for being part of this post. We are so so excited and happy for being part of the BB community.

[Sebastian Villacis M.]

Quote from @Derek Brickley:

Hi Sebastian!

A few people have responded about the PMI and I absolutely would agree with them. As a househack and starting your real estate journey, ask yourself if you are seeking cashflow or appreciation. If your main goal is to decrease your monthly expenses, then if you have the extra money to buy it out that would be the best way to do so. If you don't mind paying more each month, you could put that money elsewhere and maybe make more from it! I would say it is important to consider the opportunity cost of your choices and look over your goals.

With respect to the downpayment, I think again weighing your goals is important. The best bet is to probably discuss this with a loan officer who (hopefully) can give you more information about the exact costs. I'm not sure what your local market (Reston, Sterling, Herndon) is like, but certain markets are in a position where they may see housing prices decrease in the coming months. Putting 10% down may give you more of a cushion against this and again (if your goal is cashflow) you would have a lower payment all around with your PITI and PMI. On the otherhand, putting 5% down frees up more of your capital for other investments (perhaps adding the ADU) which would generate more income in the long run.

So no straightforward answer, but I would strongly reflect on your goals and your willingness to accept risk and decide with those in mind!

 Hi Derek,

You are absolutely right. Your feedback is much appreciated. I just wanted to know what house hackers usually do in regards to PMI (kind of a rule of thumb), but I guess there is not rule of thumb in this case since everyone's goals are different. Thank you again.