Take advantage of first time home buying benefits or not?

Question

Hey Fam,

Stoked to finally be joining as an investor here soon! A few years ago the focus seemed to be to accumulate real estate with as little cash as possible. I don’t hear that as much anymore but wondering if it makes sense in my situation.

My wife and I are buying an investment property but it’s our first home (we prefer renting because we don’t know where exactly we will be in the next 2-3 years). We plan on buying more single family’s and/or multifamilies even by the end of this year.

Should I take advantage of first time home buying and put only 5% down? We have enough for 20% but shouldn’t we take advantage of not having to at least this once?

P.S. I understand the implications of a possible lower rate and no PMI

Ryan Irwin · Answer

Hey @Ryan McKenney (awesome name btw) welcome!  Love the thought process and @William Sing laid everything out very well.

I want to focus in on #4 above.  Taking that extra 15% and investing that capital into the market.  When you are analyzing this, make sure you are considering all the benefits and ways to make money (cash flow, depreciation, debt paydown and equity) to name the most common.  I believe that when you add those up it would likely outweigh PMI.  For an added bonus, if you can house hack your primary, even better.

All the best!

William Sing · Answer

Hey @Ryan McKenney,

Welcome to the investor community! It's great to hear about your enthusiasm and plans for diving into real estate investment. Your strategy of accumulating properties, even while preferring to rent personally, is an interesting one and definitely has its merits depending on your long-term goals and market conditions.

Regarding your question about down payments, it's true that the landscape of real estate investing has evolved, and strategies that were prevalent a few years ago might not be as beneficial today. It's all about balancing your financial flexibility, risk tolerance, and investment goals.

Putting down 5% as a first-time homebuyer can certainly free up capital for other investments or expenses. However, it's important to consider the trade-offs, such as higher monthly mortgage payments and the cost of PMI, if applicable. While you mentioned understanding the implications of a lower rate and no PMI, here are some questions and considerations that might help you make a more informed decision:

• Cash Flow Considerations: How does the choice between a 5% and 20% down payment impact your monthly cash flow? Would the additional cash freed up by a lower down payment provide significant opportunities for other investments?
• Interest Rate Impact: Have you calculated the long-term cost implications of the interest rate difference between putting down 5% and 20%? Sometimes, a lower down payment can lead to a slightly higher interest rate.
• Market Conditions: How do current market conditions in your target investment areas influence your decision? In a highly competitive market, a larger down payment might make your offer more attractive to sellers.
• Investment Diversification: If you opt for a lower down payment and invest the remaining capital, what are your targeted returns on those investments? Are they significantly higher than the cost of mortgage interest?
• Risk Tolerance: How comfortable are you with the level of debt and the monthly obligations associated with a smaller down payment? It's crucial to assess your risk tolerance and ensure you're comfortable with your leverage level.
• Future Plans: Given your uncertainty about where you'll be in the next 2-3 years, how does this affect your investment timeline and strategy? Are you looking at these properties as long-term investments, or are you considering potential exits in the near term?

It's commendable that you're looking to take advantage of the first-time homebuyer opportunity. Just ensure that your decision aligns with a broader financial strategy and your comfort with the associated risks and commitments.

If you'd like to discuss this further or need help analyzing specific scenarios, feel free to reach out. I'm here to help!

Best of luck on your investment journey!