Residential property or investment property first?

Question

Hello,

My fiance and I would like to buy a residential property in CA sometime this year and also buy an out-of-state investment property this year. Both would be done through conventional financing. We currently do not own any properties.

We were thinking of getting the residential property first in order to get the most competitive rates as it is my understanding that purchasing an investment property will require 1-2 hard pulls which could hurt our credit score.

Is buying the residential property first the smart move for financing?

Thanks!

Tim J. · Answer

Of all the things to be concerned about, "1-2 hard pulls which could hurt our credit score" is the least of the issues I would consider.  If I were in your shoes I would look for a house to live in and an investment opportunity.  Buy whichever one comes along first.  Do you have enough money for down payments for both?  If so, don't sweat it.  Can your income support the criteria the bank/underwriters will look for?  If so, don't sweat it.

You may become "house poor" after buying a residence in CA...

Stacy Raskin · Answer

@Michael Hunt, one of the big factors is your debt to income (DTI) ratio. Lenders will look at your total overall debt versus your monthly income and some will lend up to 42-43% and some will lend up to around 50% with a cost being built into the rate for the higher DTI.

Getting the residential property secured may be helpful depending on your income and debt situation. I'll send you a message as well.

Jay Thomas · Answer

The real estate market in California is expensive, so you'll need to make sure that you have enough money for the down payment and other costs associated with buying a house. You'll also want to consider if your current income can support the mortgage payments over time. If so, then don't worry too much about a few hard pulls on your credit score – they shouldn't keep you from owning a home in CA. That said, be careful not to overextend yourself financially after purchasing property, or otherwise become 'house poor'. Real estate investments are certainly worth exploring, but only if you can afford it without sacrificing your quality of life. Good luck!

Michael Anderson · Answer

As others have said, a credit pull isn't much of a concern as far as negatively impacting your credit. If you plan on using a conventional loan for both properties theres a few things to keep in mind.

1. Do you currently have a primary housing expense? If you do not have a primary housing expense and try to purchase an investment property conventionally, there will be more restrictions when qualifying for the mortgage. It's just a nuance of the guidelines you should be aware of.

2. If you or your fiancé can qualify for financing on your own (not jointly) for either the primary or investment, it would be more beneficial to do so. It gives more flexibility down the road with DTI when needing to qualify for future loans.

Drew Sygit · Answer

Do the hardest task first:)

Travis Biziorek · Answer

You're over thinking it, Michael. Who cares about 1-2 credit pulls. Heck, I bought 12 rental properties in Detroit in 2 years... you think I was concerned about how many times my credit was pulled?

I'd grab that primary and then focus on an investment property but that's simply because I feel it's best to have a primary first.

Max Emory · Answer

@Michael Hunt, how do you feel about househacking the primary residence you're looking to purchase in CA? Meaning, your primary residence purchase will also serve as an investment property.

My first househack enabled me to purchase more investment properties by cutting my personal monthly expenses a ton and leveraging a HELOC I was able to easily secure since I lived in the house.

Just food for thought. The househack situation isn't for everyone but it's an awesome way to get into the game.

Eliott Elias · Answer

Look for both simultaneously, whichever you find first bite on it.

Theresa Harris · Answer

Run the numbers. In some areas it is significantly less expensive to rent than to own.  If you have the funds, why not look for a home AND rental under the same roof?  Can you afford to buy a duplex?

Scott Crowley · Answer

@Stacy Raskin has you on the right track regarding where your primary focus should start.

DTI is going to be a critically important underwriting requirement that I would focus on first and foremost. Stability of your employment history/ability to show steady W2 income the last couple years is likely needed as well. Secondly, your cash in the bank is the next big question. This isn't just in consideration of what would be needed for a down payment, but furthermore, required reserves by your lender. Just make sure whichever you decide to purchase first, you build in the new debt to your calculation.

If those things are good, don't throw yourself into a worry about things like hard credit inquiries. They are a part of doing business in a credit-based economy and won't cripple you unless you start having multiple lenders run your credit for pre-approval in a short period of time, or something silly along those lines.

I won't fixate on you wanting to buy your primary in CA, but that's the bigger wrench in this equation I can't account for without knowing more specifics. If this was my dilemma, I would ask myself "how can I make my first house an investment property, and my primary residence too?" Spoiler: house hack. Then, you can purchase a dedicated investment property with a little experience under your belt and double the number of income streams coming in you were originally expecting.

Residential property or investment property first?

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