More money down + bigger property or 20% down + smaller property for eventual rental?

Question

Hi everyone,

I am looking to buy my first property, in the San Diego area (PB if you are familiar with the area). The average home here in Pacific Beach is over $1M and the market is very competitive. My plan is to live in the home for at least a year to qualify for a conventional loan, and then turn it into a rental and move into something else.

I am quite conflicted on what to do given my current financial situation. Talking with lenders, it looks like a rough estimate for what I will be approved for is $1.1M-$1.2M with %20 down. I can probably get into a fairly nice condo or smaller house (~1.2-1.8k sq ft) at that amount. I am trying to figure out if I should just put more down (additional ~$200k) to get into a bigger/nicer house, and wondering if this would have a positive impact on my cash flow later down the road when I turn the place into a rental. I realize that a more expensive house comes with a more expensive tax bill, but I’m assuming the appreciation will be higher? I am just very confused and all over the place so would love to hear all of your thoughts.

Edit: I’m also in a weird situation where my cash ($1.5M) is much much larger than my salary, I am trying to leverage this to get a larger loan but unsure how to. Any thoughts would be appreciated.

Michael Porche · Answer

hey @Pablo Weber, a pleasure to be acquainted. So, it really comes down to what your goal is. I would rather be in a position where I'm putting less down on my own cash on anything, especially if I know I can make greater returns than what the interest rate actually is. So for example, if your interest rate is 6% or 7%, then I'm going to try and put as less down as I possibly can because I know in my other investments with that same amount of money, I can make way more than 6% on my money. Then the other thing I would consider is if you're looking to just not have to pay as much down, I mean, putting more down is really not going to change your monthly payment as much as you think in comparison to what you could be making in your other investments.

Now if you're on these forums like most people, which is essentially to gain financial freedom or financial independence, then yes, that would be great to buy a home in San Diego at over a million dollars for the sake of appreciation, but not so much for cash flow. So if your end goal is cash flow, I would reconsider. If your goal is appreciation, then it would work really well. Ultimately. What are you trying to accomplish?

Kenneth Donaghy · Answer

Hi @Pablo Weber,

You have done a great job putting yourself in a good home buying position.

Your loan amount will be based on your DTI (debt to income ratio), so the more you put down the higher the purchase price will be.

In your situation how much to put down will be your preference. I personally like to be higher leveraged with a lower down payment, so I have more funds for my next investment. I also pay attention to my return on equity. If I can get a better return on investments elsewhere than locked up in my property I rather do that.

Some of my investor friends and clients want a lower monthly payment so will opt to put more money down, and have more equity in the home.

I always ask my clients about their goals. Having more clarity about where we want to go, narrows down or next best moves.

I am a strong believer in househacking, that's buying an owner occupied property, and renting out a portions of the property, that can be rent-by-the-room or purchasing a small multifamily 2-4 units and renting out the other units. Supplementing the mortgage that way.

If you were willing to put more money down, you may be able to buy a larger asset to rent out the other units. I have also witness people play small, buy up 100s of condos, to eventually exchanged them for larger properties.

It really comes down to your goals, risk tolerance, having the right realtor, lenders, coaches, you trust to guide you through the process and help you achieve your goals.

Hope that helps, and we can always jump on a call for more clarity.

Tim Ryan · Answer

Pablo,  In my opinion, you should be looking to invest in rental properties and not buying a primary residence that will become a rental later. This is because a $1m property in San Diego will not have positive cash flow but your cash could get enormous cash flow when placed in specific rental properties in growth areas that are still at lower prices.

Steven Eifert · Answer

Pablo,

I second the notion that buying a 1.2-1.8K sqf home for more than a million isn’t ideal for cash flow.

Regarding your nest egg, have you considered borrowing against that cash? I recommend finding a solid financial advisor to manage your cash when it’s not tied up with real estate and talking to your lender about using that account as collateral in a short term loan. Then BRRRR your way to greatness.

To a better life,

-Walker

Twana Rasoul · Answer

@Pablo Weber If you plan to live in the property only one year, in a condo where you will likely have a mortgage in the range of $7,500/Month including HOA just know that you will be extremely negative on the property after one year.  Depending on what you plan on doing after year 1 will determine if the above is a good idea or if there is a better path to take.  Based on the little I've gathered from above, its better to either spend a little more on something that you think you might stay in for the next 5-7 years or not purchase anything at all, if you plan on leaving the San Diego area after 1 year.

Steve Meyers · Answer

@Pablo Weber As someone who lives in the crown point area of PB myself, I'm very familiar with the area.  A house vs a condo is always going to provide you with more flexibiliy as far as rental options and strategies.  In my opinion what I would do is look for a house that has a decent size lot to build an ADU on and build a 2/1 or a 1/1 ADU in the back.  After a year of living in the front house the ADU will probably be ready for you to move into and then you can rent out the front house as a STR or a MTR.  Both would do very well in this area.  This would be Tier 2 for STR on the ordiance page and the licenses for this are unlimited.  Let me know if you would like some help with coming up with a strategic game plan on finding a place here in PB to do this.

https://www.sandiego.gov/treasurer/short-term-residential-oc...

Nolan Chandler · Answer

Hey, @Pablo Weber.

When I have worked with lenders, although the large cash sum is great for the down payment and cash reserves, depending on various factors, lenders may want to see a sufficient income/DTI ratio that will satisfy requirements to obtain the loan.  If you are able to house hack, that could help in possibly cash flowing while owning/residing at the property if you do end up obtaining financing.  Have you discussed this with multiple lenders yet to get a feel on which one(s) may be able to make it work?

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More money down + bigger property or 20% down + smaller property for eventual rental?

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