Advice for strategy as a first time home buyer & investor

[David Neubauer]

Hello all, 

I am currently living in a small apartment which I am renting. 

Within the next 2-3 years I plan on buying my first home. 

Currently, my parents are looking to downsize their home, and I came up with the idea to purchase a 3-4 unit multifamily investment home, where I can live in 1 unit for a year, they live in another, and we rent out the other 1-2 units. I am hoping to purchase the property in their name, and put it in a trust for later down the road. 

- How does this strategy sound to you experts? 

- Will this strategy impact my long home buying abilities 2-3 years from now when I am looking for my long term residence, and if so how? 

- With the property I intend to purchase 2-3 years from now I would hope to get a 15 or 30 yr conventional loan, but what should I consider for the investment property (hoping to put down as little as possible).

Thank you all in advance! :)

[Steve K.]

Hey David,

I like this idea, but a couple things to consider:

1. Do you have a good relationship with your parents and are you comfortable collecting rent from them, addressing maintenance requests for them and things like that? If they can be difficult to work with, then I'd be careful renting to them as it's not worth ruining a relationship.

2. Why do you want to put the property in their name? Why not just purchase it yourself?

3. If you live in the property there are some great owner-occupy loans available, like FHA or low money down conventional loans. You'll want to talk to a few local lenders to get a better idea what you'll qualify for and what the terms of the loans are.

4. You can live in the property for a year and then move out, buy another multifamily to live in, and use another low money down owner occupy loan. You need to live in the property for at least a year but you can repeat this year after year if you don't mind moving. 

5. If you live in the property for two years and want to sell, you won't pay capital gains tax, so that is just another thing to keep in mind. 

6. Buying a multifamily shouldn't impact your ability to get a home loan for a single family in the future, so I wouldn't let that deter you. I'd just make sure the multifamily is cashflow positive when it's fully rented out (as in after you've moved out and rented the unit).

[David Neubauer]

Quote from @Steve K.:

Hey David,

I like this idea, but a couple things to consider:

1. Do you have a good relationship with your parents and are you comfortable collecting rent from them, addressing maintenance requests for them and things like that? If they can be difficult to work with, then I'd be careful renting to them as it's not worth ruining a relationship.

2. Why do you want to put the property in their name? Why not just purchase it yourself?

3. If you live in the property there are some great owner-occupy loans available, like FHA or low money down conventional loans. You'll want to talk to a few local lenders to get a better idea what you'll qualify for and what the terms of the loans are.

4. You can live in the property for a year and then move out, buy another multifamily to live in, and use another low money down owner occupy loan. You need to live in the property for at least a year but you can repeat this year after year if you don't mind moving. 

5. If you live in the property for two years and want to sell, you won't pay capital gains tax, so that is just another thing to keep in mind. 

6. Buying a multifamily shouldn't impact your ability to get a home loan for a single family in the future, so I wouldn't let that deter you. I'd just make sure the multifamily is cashflow positive when it's fully rented out (as in after you've moved out and rented the unit).

 Hey Steve, 

Thank you for the response! Below are some of my takes on your questions, and some follow up questions:

1. I do have a good relationship with my parents and would have no troubles with renting to them. My father is a handyman, and he is willing to help me fix up the place & with any maintenance that may arise once its rented out. 

2. I am considering putting the property in their name in order to still qualify for any first time home buyer offers when I am looking for a single family home 2-3 years from now. Would you say this is a valid concern? 

3. I would am willing to live in the property for 1 year at most, but afterwards would need to move into a single family home. Future multi family homes I purchase could not be with FHA loans if I am understanding correctly?

4."Buying a multifamily shouldn't impact your ability to get a home loan for a single family in the future". If the multi family home is in my name, would its loan I have not be weighed against me when trying to get a single family home? 

Again, thank you so much for the assitance!

[Steve K.]

Quote from @David Neubauer:

Quote from @Steve K.:

Hey David,

I like this idea, but a couple things to consider:

1. Do you have a good relationship with your parents and are you comfortable collecting rent from them, addressing maintenance requests for them and things like that? If they can be difficult to work with, then I'd be careful renting to them as it's not worth ruining a relationship.

2. Why do you want to put the property in their name? Why not just purchase it yourself?

3. If you live in the property there are some great owner-occupy loans available, like FHA or low money down conventional loans. You'll want to talk to a few local lenders to get a better idea what you'll qualify for and what the terms of the loans are.

4. You can live in the property for a year and then move out, buy another multifamily to live in, and use another low money down owner occupy loan. You need to live in the property for at least a year but you can repeat this year after year if you don't mind moving. 

5. If you live in the property for two years and want to sell, you won't pay capital gains tax, so that is just another thing to keep in mind. 

6. Buying a multifamily shouldn't impact your ability to get a home loan for a single family in the future, so I wouldn't let that deter you. I'd just make sure the multifamily is cashflow positive when it's fully rented out (as in after you've moved out and rented the unit).

 Hey Steve, 

Thank you for the response! Below are some of my takes on your questions, and some follow up questions:

1. I do have a good relationship with my parents and would have no troubles with renting to them. My father is a handyman, and he is willing to help me fix up the place & with any maintenance that may arise once its rented out. 

2. I am considering putting the property in their name in order to still qualify for any first time home buyer offers when I am looking for a single family home 2-3 years from now. Would you say this is a valid concern? 

3. I would am willing to live in the property for 1 year at most, but afterwards would need to move into a single family home. Future multi family homes I purchase could not be with FHA loans if I am understanding correctly?

4."Buying a multifamily shouldn't impact your ability to get a home loan for a single family in the future". If the multi family home is in my name, would its loan I have not be weighed against me when trying to get a single family home? 

Again, thank you so much for the assitance!

 Hey David,

That's great and the fact that your father is handy is a huge plus! If it were me I would put the multifamily in my name. You wouldn't be able to use a first time buyer loan in the future but there are other owner occupy loans you can use that require little money down. There are conventional loans that only require 5% down now. There are also other loans that your local banks likely offer that only require 5-10% down when you occupy the property. I would reach out to several local banks to get more details on that but I wouldn't get too hung up on it. 

In my experience having mutli-family properties have not been a factor in getting a loan for a single family. I bought a single family house last year using a VA loan and at the time I had 12 units. They used a percentage of the cashflow from those to put towards my income.

As I mentioned before talk to a lender but I don't think you'll have a problem buying a single family down the line if you own a mutil first. I think starting with a mutil family, adding value to it (making improvements if needed and raising rents), is a great way to get started.

[Daniel Baker]

Hey David, I was in your same situation a few years ago, here is my advice.

- How does this strategy sound to you experts?

I think this is a great strategy especially if you can partner with your parents.  One thing to consider is how big of a 3-4 unit you will need.  If your parents want a 4 bed two bath and you want a 3 bed 2 bath plus one or two rentals make sure you budget correctly.  Real estate is like anything else, you can talk about it and read about it all day but you really don't truly understand it until you do it.  I see a lot of people doing all these crazy calculations on 3 and 4 flat deals (When I started i did it too, ha).  If you can't do a your first 3 or 4 flat deal on the back of a napkin, it is probably not the deal for you.

- Will this strategy impact my long home buying abilities 2-3 years from now when I am looking for my long term residence, and if so how?

If the deal is in your parents name it will not hurt you at all in the future.  Just make sure it is completely in their name and it does not show up on your credit report.  To the bank you basically just live in your parents home. 

- With the property I intend to purchase 2-3 years from now I would hope to get a 15 or 30 yr conventional loan, but what should I consider for the investment property (hoping to put down as little as possible).

I would look at the new 5% down program from Fanie Mae. FHA is 3.5% down but anything over a 2 unit requires a cash flow test, with rates where they are I hardly ever see anything in Chicago that would work. The max for a 4 unit right now is 1,396,800. With rates where they are you will likely have a hard time cash flowing unless it is a big value add deal. I got close to using the 5% down program about a month ago on a Bucktown 3 flat. There was a job change at the last second and I had to go a different route, but it is a great program.

Hope this helps.  Let me know if I can answer anything else for you.

[Sarita Scherpereel]

Great points @Daniel Baker. The FHA self sufficiency test is the so difficult for the north side of the city and parts of the west and south sides.

@David Neubauer The standard is now shifting toward this 5% down program. FHA also has a second inspection that spooks sellers. The 5% down program doesn't have an additional inspection.

2 units get a bad rap because they don't have the cash flow opportunities that 3 and 4 units have BUT there are advantages. Numbers show 2 units appreciate higher and faster than 3 and 4 units. Sometimes a non-conforming space also helps with the numbers if you can find one that has egress and safety standards met. There are also grant programs for 2 units that have NO PMI and don't require 6 months of reserves. This is a great way for buyers to get started that don't have enough saves for 3 or 4 units and want to find an opportunity faster. Since theres more competition with 3 and 4 units.

Happy to talk more about your goals offline. Best of luck! 

[Paul De Luca]

Quote from @David Neubauer:

Hello all, 

I am currently living in a small apartment which I am renting. 

Within the next 2-3 years I plan on buying my first home. 

Currently, my parents are looking to downsize their home, and I came up with the idea to purchase a 3-4 unit multifamily investment home, where I can live in 1 unit for a year, they live in another, and we rent out the other 1-2 units. I am hoping to purchase the property in their name, and put it in a trust for later down the road. 

- How does this strategy sound to you experts? 

- Will this strategy impact my long home buying abilities 2-3 years from now when I am looking for my long term residence, and if so how? 

- With the property I intend to purchase 2-3 years from now I would hope to get a 15 or 30 yr conventional loan, but what should I consider for the investment property (hoping to put down as little as possible).

Thank you all in advance! :)

Why wait 2-3 years to buy? And why not just house hack this first property in your own name?

Naturally if you have more mortgages in your name that will affect your DTI (debt to income ratio) and ability to obtain more loans/mortgages in the future. How much it will affect your DTI depends on your existing debt obligations, income, the mortgage of the primary home you want to buy, and the mortgage of the house hack property.

I recommend using the 5% down conventional loan product to house hack and only use FHA if you have to since there are more restrictions involved.