Buying my first home to eventually rent it out in a couple years.
My wife and I are purchasing our first home. We have 130k in savings combined. She find a town house she loves which is new construction in a great area for 256k. My plan would be to live in the house for a couple years then buy something else but keep the townhouse as a rental. My question is should we put down 20% which makes the mortgage payment 1577 or put down a lot less since I intend to rent the property out in a couple years? Similar homes in the are are renting for 1900-2200 a month. Any thoughts ?
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I actually like the concept of your first rental being your former home in some cases (and recall it is a popular gateway to investing from a recent BP poll). You have the financing in place, know the neighborhood, and the maintenance history. This also looks like no fuss no muss type property, too (newer, not a large footprint, etc).
It looks at first glance like it could cash flow if your 1,577 is everything...but run the rental calculators (including HOA, even repairs and CAPEX, though with a new property replacement items may be well in the future).... make sure the HOA has no rental restrictions (in letter or spirit)... I would check the comps (like in person) too and the vacancy rates. How it looks on paper and in reality can vary. I would even figure in your own time (like 8-10% management fee) because (1) your time is valuable and (2) you may want to hire out management and make it work.
Also, Mike G makes a good point about how the dream home does not always make a good rental if the finishes are too fragile. If you have fancy floors, high end counters and dangling fixtures, it could be a concern (or select tenants carefully).
A plan "B" if you get some nice appreciation would be a tax free sale of your home after a couple of years (not a bad way to go either if the market warrants it).
I think you have a high quality problem with a nice chunk of change for a down payment. You could preserve capital for other investments by going with a lower down payment program as mentioned (a popular route for many real estate investors) or load into the property with a higher down and increase cash flow and maybe plan to own it free and clear in a short time (sort of a Dave Ramsey type real estate investing). I actually see some merit in both as nothing cash flows like paid off rental, but if you want to grow into more rentals, you will probably need the money for expansion.
So I would think about the down payment in terms of your larger strategy... If you see yourself as a one or two rental property owner (part time buy and hold landlord) or maybe expanding into it as a larger enterprise (like an apartment or maybe a half dozen single properties).... You will need the capital for the latter. If the former is your goal, a larger down makes that smaller portfolio cash flow more and get paid down rapidly...
Also important, check if the town home your wife loves fits into your plan of making it a rental property (for tenants that may or may not show it the same affection)..One downside of the rental to home transition....the tenants can scratch that railing you enjoyed or drop a sharp object on those floors you adored....
Best of luck!