Where to Start, Personal Residence or SFR Rental?

Question

Hello BP,

In the last two years I moved back in with my parents, paid off my remaining debt, and saved a little over $100,000. I consider myself firmly planted in the learning/preparation phase of my investing.

For the last few months I have been feeling some worry set in about what to do with my money. As of now everything is sitting in a regular savings account. This is what has led me to BP and RE in general.

I am single with no children and do not feel any pressure or desire to move out of my parents house right now because the situation is truly a blessing. My loose plan as of now is to buy a single family home in a more affordable area in southern California that is in good shape and cash flows $100-200 a month after accounting for expenses. My mindset is that I can learn from this first investment while still having the security of home if I were to make a mistake or something were to go wrong.

However, the issue I am running into is eventually I am going to have to move out and have my own place. As of now I am planning on doing that a year after buying the first rental using the VA loan.

My first question is should I purchase my own home first, before purchasing a rental?

My second one is if I purchase the rental first how greatly does that impact my ability to qualify for another loan later on?

Account Closed · Answer

Hi John,

Thank you for your service!

Why don't you do the best of both worlds and try to find a duplex/triplex.  Move into one of the units and rent out the other?

It's great you saved the money, but if I were you, I'd wait until there is a big dip in the market.  There is a great Chinese proverb that says "never try to catch falling knives" and that's what's happening right now in this market.

Hold onto your cash until the media says the sky is falling and that's when you know you can go in and swoop on a good deal.Stay patient yet vigilant!

Best!!!

Darius

Nicholas Coulter · Answer

Hey John! You could do a small multi family depending on qualifications from your lender. I might be able to help answer any questions you may have!

John Coons · Answer

Thanks for all the good advice I appreciate it!Please excuse my ignorance on the topic, but if I were to buy a muli-family or single family and house hack would that hurt my ability to purchase more property in the future with regard to my debt to income ratio as well?  For example right now the average house price in my area is around $500K with the monthly mortgage being over $3k with no money down (VA loan).  This is more than half of what I make a month after taxes.  As was mentioned above I am going to keep waiting for prices to drop.  From what I hear there most likely won't be a crash, but a correction will happen and that is what I am waiting for.

Darius Ogloza · Answer

By all means, take advantage of the favorable financing available to first time home buyers.  Live there for at least a year.  Then rent it out.  Many follow this blue print for success.

Nathan Gesner · Answer

I agree with Darius. Your best option will be a house hack. You can purchase up to four units with an FHA loan and pay 5% down. Live in one unit, rent out the other three. After the required seasoning, you can do it again. That will give you seven rentals and one apartment to live in, all within three years. If you do well enough, you may have the cash flow to pay for a single-family home with the cash flow from the apartments.

Jason Wray · Answer

John,

All good questions and although it's a different answer for each individual.  I think if you look at from a money savings angle I would say buy a primary.  Reasons are you can do both live in a unit and rent out the other units.  Buying a multi-family and using a VA loan for example will allow you to save money on the down payment.

You can also apply this to a SFR - single family home and in just 6 months transition it into a LTR - long term rental.  You can also earn income having a roomate who helps pay the bills/mortgage.  Either way buying a primary first allows you to break into the home onwership with no down payment.  To answer your question Yes, buying a rental does effect your ability to buy a primary due to debt to income ratios.

If you buy a rental you would have to wait 12 months to file your tax retunrns and show the rental income as a profit.  You cannot use the income until you file your tax returns so before the 12 month mark it would be a negative as a debt with no income.  So unless your income can afford both mortgages rental and primary it would be a waiting game of 12 months.

Keep in mind the best way to use the VA loan is to buy a primary and in as little as (6) months of title seasoning you can refinance into a conventional loan.  That will allow you to use the VA loan once again to buy a primary.  Never move out of the VA primary until you have refinanced because rates on an investment property are higher than primary refinance.

Where to Start, Personal Residence or SFR Rental?

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