Investment property before primary?

[Ryan Dunner]

Hey everyone,

I am weighing the options between buying an investment property before a primary. 

I am still staying at home, my girlfriend has one more year of law school and then we will stay with my parents for one year before looking to buy our primary home with joint income. So she can have a years income at least to show. 

I have a real estate mentor who is helping walk me through the whole process, nothing crazy. On top of all this I will still be working and saving. 

Should I look to dive into a rental property or just wait to buy one after we get our primary? I feel it’s better to start building the foundation early. 

Looking forward to the thoughts and opinions here

[Gregory Schwartz]

I have had many clients who invested before buying a primary. 

In one case, the client lived in a small house on his parent's land rent free. So he had already decreased his living expenses as much as possible. No need to house hack. He had an opportunity to deploy his savings into a fixer-upper that would and is a great midterm rental. Perfect for his situation. 

Feel like this is similar to your scenario. 

Dont feel like you need to rush into a primary home. But keep in mind that an investment property can hit your Debt to Income (DTI) which may make it harder to buy that primary home once you're ready.

Good luck!

[Ryan Dunner]

Quote from @Gregory Schwartz:

I have had many clients who invested before buying a primary. 

In one case, the client lived in a small house on his parent's land rent free. So he had already decreased his living expenses as much as possible. No need to house hack. He had an opportunity to deploy his savings into a fixer-upper that would and is a great midterm rental. Perfect for his situation. 

Feel like this is similar to your scenario. 

Dont feel like you need to rush into a primary home. But keep in mind that an investment property can hit your Debt to Income (DTI) which may make it harder to buy that primary home once you're ready.

Good luck!

 Hey Gregory! 

Appreciate the response. I do think that scenario is similar. I agree with the not rushing into the primary. My girlfriend is on the same mindset as me with building up the investments. The only things I feel I need to consider is we will be planning on getting married and I have to pop the big question. Other than that the number one goal is buying the first investment property to start building this portfolio. 

Now I do understand the DTI will be affected but now I have another question for you— the property will be bought under an LLC, does this change the DTI in anyway?

Not that I want to or will stretch myself thin, however I am curious about this. 

[Gregory Schwartz]

Owning the property in an LLC does help with your debt-to-income (DTI) ratio, but it can make securing a loan more challenging. Most conventional investment property loans, which offer lower interest rates and 30-year amortization, require the property to be in your personal name.

As a result, many investors initially secure the loan in their personal name and then transfer the property into an LLC. This is a common strategy, but it's important to note that because the mortgage remains in your name, your DTI is still affected.

If you opt for a commercial loan, which typically comes with a higher interest rate and a 20-year amortization, you can purchase the property directly in an LLC. This approach shouldn't impact your DTI.

This is why it's crucial to work with an investor-friendly real estate agent and lender. They can help you navigate these complexities and find the best financing strategy for your investment goals.

[Gino Barbaro]

@Ryan Dunner

If it was me, knowing what I know now, I would buy the investment property if I wanted to invest in real estate.  

You can always take your time and find a primary residence, especially if you are living with parents. 

You never know? Your primary residence may have a second unit on the property.

[Jonathan Greene]

You aren't buying your first property in an LLC. You would need to pay cash to do that or work with a local bank who will allow you to do that. So you can take that off the table.

Buying an investment property first would be smart, but you can actually set yourself up with a unique option if you do it correctly. If you bought a 2-family and started renting both sides, when one tenant leaves, you could choose to move in and then house hack and refinance at that time and get money out and buy a second property.

[Nathan Gesner]

Quote from @Ryan Dunner:

It's very simple math. What will it cost to buy a property vs. what will it cost to rent? What would expenses be over the next 1-5 years.

If you buy a $500,000 home in New Jersey with 10% down and a 7% mortgage, your monthly payment will be $4,000 or more (including taxes, insurance). Then you have to take responsibility for maintenance.

You can rent a comparable home for $3,000 and the landlord handles maintenance.

It makes sense to rent for a year or more until prices balance and you can save $1,000 a month towards a down payment in the future.

[Theresa Harris]

If the numbers make sense and won't prevent you from buying your own home in a few years, then go for it.  

If you are living with your parents and plan on doing so for the next 2 years, I'd make sure you are paying rent and by that I don't necessarily mean to your parents but putting that money aside and not touching it.  Living rent free (again not assuming that is your situation, but guessing many parents with adult children at home don't charge them rent), it can be easy to spend that money and then when you are on your own, having problems budgeting.

[Crystal Johnson]

In the 4th Quarter of 2023, Fannie Mae introduced a new product allowing for a 🤩 5% down payment on owner-occupied properties with up to 4 units.🔥 This can be a great way to start building passive income immediately.🤑 By purchasing a fourplex, living in one unit, and renting out the other three, you could effectively live for free while simultaneously building equity📈 and generating passive income.😊💰

You'll need to occupy the property for at least 12 months.⏳ After that period, if you decide to move out to purchase your primary home, a lender can use 75% of the total rental income from the fourplex to enhance your overall income for qualifying purposes.😀 This can be a fantastic opportunity for those looking to invest in real estate while managing their living expenses.

[Erik Estrada]

From a financing perspective you will most definitely need to start saving aggressively so you can qualify for investment property loans as they require a minimum of 15-25% down. I would also advise to save for reserves.

But there isn't a universal right path. It's whatever makes sense for your financial status and lifestyle. Some people get started house hacking. Others employ a BRRRR method or do wholesale deals/flips to have cash to invest long term.

[Crystal Johnson]

Erik, you stated above, "investment property loans require a minimum of 15-25% down." While that was the case in the past, isn't it true that is not the case today?  

[Christopher Plummer]

I lived with my dad rent free while I was in grad school until I was 24. I bought my first rental when I was 21 (in 2017), 5 years before i bought my primary residence with my wife.

I an extremely glad that I did so. Buying my primary first would have just delayed the start of my portfolio and the 6 years of increasing cashflow / appreciation have been really nice, which I wouldn’t have had if I bought my primary first.

I did get a little lucky, i think, because 1. I had a place to stay for free with my dad and 2. The rent growth and appreciation since 2017 has been nuts. Everyone who bought real estate in 2017 looks like a genius now, to be fair. But i think the general principles still apply.

[Samuel Diouf]

Quote from @Ryan Dunner:

Quote from @Gregory Schwartz:

I have had many clients who invested before buying a primary. 

In one case, the client lived in a small house on his parent's land rent free. So he had already decreased his living expenses as much as possible. No need to house hack. He had an opportunity to deploy his savings into a fixer-upper that would and is a great midterm rental. Perfect for his situation. 

Feel like this is similar to your scenario. 

Dont feel like you need to rush into a primary home. But keep in mind that an investment property can hit your Debt to Income (DTI) which may make it harder to buy that primary home once you're ready.

Good luck!

 Hey Gregory! 

Appreciate the response. I do think that scenario is similar. I agree with the not rushing into the primary. My girlfriend is on the same mindset as me with building up the investments. The only things I feel I need to consider is we will be planning on getting married and I have to pop the big question. Other than that the number one goal is buying the first investment property to start building this portfolio. 

Now I do understand the DTI will be affected but now I have another question for you— the property will be bought under an LLC, does this change the DTI in anyway?

Not that I want to or will stretch myself thin, however I am curious about this. 

Have you looked into DSCR loans?

[Crystal Johnson]

Quote from @Christopher Plummer:

I lived with my dad rent free while I was in grad school until I was 24. I bought my first rental when I was 21 (in 2017), 5 years before i bought my primary residence with my wife.

I an extremely glad that I did so. Buying my primary first would have just delayed the start of my portfolio and the 6 years of increasing cashflow / appreciation have been really nice, which I wouldn’t have had if I bought my primary first.

I did get a little lucky, i think, because 1. I had a place to stay for free with my dad and 2. The rent growth and appreciation since 2017 has been nuts. Everyone who bought real estate in 2017 looks like a genius now, to be fair. But i think the general principles still apply.