Does buying a Rental property significantly effect your ability to buy a Residential property down the line?

Question

I want to get more into real estate investing (looking into buying my first MFR soon), but I'm also concerned about how this will effect my purchasing power down the line.

Okay, i know that's a pretty general statement, so I'll post a more specific hypothetical scenario:

Lets I'm 29 y/o and make 100k/yr right now in Los Angeles.

I buy an MFR for 500k (purely as investment, no interest in living in it), and things go smoothly with renting it out and soon enough I'm making a little bit of money on the property.

5 years down the line, I get married, have to move to Boston for work (or some other city far away), and I'm ready to buy my first real Residential home to live in. Now I'm looking to buy a 1-million dollar home.

How much will the 400K that I borrowed for the MFR effect my ability to buy my new residential in Boston... 5 years from now? Let's assume I'm now 34, making 125k/yr, and the MFR is paying for itself.

a) Will I only be able to buy a small house since I already have a 400K loan?
b) Financially speaking, what are some things I need to think about?
c) Am I no longer qualified for the FHA (assuming I never lived in my rental)?

(Sorry if this is an amateur question, I just want to know what my limitations might be down the line if I end up buying an investment before my residential).

Brian P. · Answer

JasonTwo things, I never ever had a problem with a banker saying to me you have these cash flowing properties in good areas and that might cause a problem and yes I know the banking industry has produced many, many idiots the last few decades but the only thing that started to show up for me during the pretend banker period was the number of loans that you had, no matter how good your asset sheet was. I ran into an idiot lender that if they looked at my holdings they would have found if you spread the loans out the average loan was for 40% of the value of the property and I was asking for a 70% LTV, in a desirable area for the new loan. I happened to be friends with one of the co-owners of the bank and gave him a call and I quickly got a return call from the underwriter telling me he had pulled strings and got my loan arranged. I told him thank you for using your influence and getting that done. He wasn't bright enough to add 2 and 2 and ask why he just got his ass chewed out. I really do miss the days when you could just deal directly with one of the officers of the local branch. Of course they still had jerks then too but you had a decent shot at going up one level and getting what you wanted.The second thing is where the properties are located. Are they in Beverly Hills, or Compton. I would rather go to a banker and show 3 properties in BH then 15 in Compton.

Mike Hurney · Answer

@Jason J. main thing is how they net on paper. PITI should be covered by 75% of your rents.

Elizabeth Colegrove · Answer

@Judy P. :) I feel a little nuts but go big or go home!

Elizabeth Colegrove · Answer

We move ALOT for my husbands job. He is active duty military (I had the opportunity to talk all about this in podcast 103). We have NEVER had trouble! Honestly buying personal property is MUCH easier to get qualified than investment, in my experience. If you have trouble getting qualified just try another broker. Honestly you will meet almost everyone's "rule". You will have 2 years of real estate history. You will have 4 complete years of real estate history. As long as all the units are rented with a 4 years history and you have been careful to not show a huge loss in rental income (as you will wanted your rental debt to not count against you. You should have very little trouble. Now if you buy 6 months before, it might be a little more "sticky" but still doable. This is from someone that has bought 5 houses in the past 3 years (a mix of rentals/personals) and is planning on buying another 6 in the next 18 months, with number 11 being an expensive personal :) Feel free to pm me if you have any specific questions.

Josh C. · Answer

Jason J. As mentioned above you won't have a problem, due to your debt to income ratio since it should be a self liquidating asset. But you defiantly should not be buying million dollar houses making $125k. The Jones' work until they are dead with nothing but stuff and debt to show for it; don't keep up with them. Pay cash for absolutely everything (cars, education, etc) except your house and buy a house that's 2-3 times your annual salary and you'll be financially stable to absorb the hiccups that come along with this game. Not to mention no personal debt makes you look better getting a loan. Plus the less your living expenses are the faster your investments can cover them.

Jesse T. · Answer

One thing is the ratios are generally tighter for investment properties than for residential loans. We were able to qualify for our current house before we rented out or sold our previous residence.If you are looking for a primary residence in the 1 million range - you shouldn't have any trouble with the debt from the investment property since it should be covered by the rent.It probably isn't a good idea to go beyond your salary income for qualifying for a residence.

Jerry Padilla · Answer

@Jason J. Exactly what @Mike Hurney stated. The net income that you show on your tax returns from the properties will count towards your income. It is your DTI that is going to affect you purchasing more property. You can purchase an unlimited amount of primary residence, investment properties you are limited to 10, with conventional financing.

Manolo D. · Answer

@Judy P. I am new in REI but not really new to numbers that much. 5 houses in at 150k within 3 years vs 3 houses at 500k in downtown NY would be a whole different story.@Jason J. If you check her profile, and in my humble opinion, its like comparing apples and oranges.

Jason J. · Answer

Thank you all for your wonderful and helpful responses. I'm now more inspired than ever.@Elizabeth Colegrove - very impressive background and future plans! I noticed it says you are in California.... I wish I could afford to buy 6 properties near where I live! Are you sticking towards rentals away from major cities? Would love to hear your thoughts on how you plan on tackling this huge (but awesome!) goal. I'm looking at MFRs near 400-600k around Los Angeles county, but I always love learning from the strategies of more experienced investors.

Joshua Springer · Answer

Jason the easy answer is you should be fine with your scenario. The major trip up is your net income on returns. If you don't get a good enough deal and your net gain is less then 0 the rental could count against you if the lender doesn't add back certain expenses like depreciation. If you have a gain on your taxes then after the general 2 tax year period most lenders will count this as a positive for you and you'll have more purchasing power then you would have if you never purchased the property.