1st time buyer: Owner Occupant or Rent

1st time buyer: Owner Occupant or Rent

Member since 2008 · 72 posts · 0 votes

Okay, so I ended up starting two threads in one day but while I was stressing over where I'm gonna end up living 3 months from now:

I feel like I'm having such a hard time deciding on what I want to do because I always thought the best way to own a property just starting out with little cash is to be an owner occupant. You get better rates and you get tax breaks. But the hard part is I want to live in a nice area and nice areas tend to be much harder to get positive cash flow (assuming I imagine I'm paying myself normalized rent prices for that area).

If cash flow is so important, which it is to me since I'm basically trying to build up capital for future investments, maybe it's better if I rent some place cheap with friends and buy a less expensive property in an area I don't want to live (really south when I'm trying to stay closer north). Because where "I" want to live is becoming a determining factor in what properties I'm willing to invest in while if I just decide to rent, I can simply invest purely on the numbers.

But the real question is do the benefits from being an owner tenant outweigh the expansion of my investment opportunities?

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Frank Adams
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
20y
Well splinter; let me offer some advice from one of the "grey hairs" on the site.

I don't think you should buy any investment ppty until you own (or are paying on) your OWN PLACE.

I don't think as a new homeowner you should feel entitled to an expensive house in a nicer neighborhood. Most of us working stiffs didn't buy THE HOUSE until we were in our 40s. By THE HOUSE I mean the one that we weren't redigning in our head while we were writing the offer.

In your shoes I'd be inclined to get a place in a (hopefully in the near future) "improving" neighborhood. If you can rent some rooms out WITH A VERY STRONG RENTAL AGREEMENT, remember this is a business, not a friendship, so much the better. Then slam EVERY NICKEL in rent onto that payment, get a part time job etc. to build up some equity.

Basically this is how many of us baby boomers did it. Bought each successive house in a slightly better neighborhood and had enough equity and cash to rent it out when we moved. As we started paying them off our monthly income grew exponentially.

REI is a get rich slow proposition.

Good luck.

all cash
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OP
Member since 2008 · 72 posts · 0 votes
20y
Thanks All Cash for your reply.

When you say "slam ever nickle into rent" are you proposing I try to pay more than the actual mortgage payment? Is that what you meant by building up equity? Can you explain the philosophy behind that?

And would everything you suggested change if I told you I did not intend on living in the area but I plan on "possibly" moving in the next 3-5 years? Just because I'm originally from NYC, and I could have worked there, but I felt like I would have better opportunities to get my feet wet in real estate in Chicago since NYC prices are ridiculous.

And would anybody have any suggestions as to what would be the best unit to start out with? I wanted to do a 2-3 flat unit but I don't think I can afford that unless I live on the edge every month. so I decided maybe I should just stick with a Condo.
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Frank Adams
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
20y
Yes, that's exactly what I mean by slam every extra nickel. My reason being to build up equity, cut down on interest expenses and reduce the term of your mortgage.

With a 3-5 year time horizon I WOULDN'T buy real estate. Unless you KNOW (and you DON'T) that appreciation if going to cook in that time frame I'd just keep renting!

Again, I'm a bit more conservative than many others on here. OTOH I went through a period of DECLINING RE prices so I know it doesn't always go up. By being conservative I was able to retire in my early 50s, and could have done it sooner.

all cash
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Marvin Valencourt
Member since 2008 · 38 posts · 2 votes
20y
I too have more than a few of the gray hairs that all cash speaks of. I can only say I wish I'd listened to his advice when I got similar from my Pop about 25 years ago... I'd be retired already. My dad advised the purchase of a duplex, live in one side, rent the other to get started.

I might "modify" that advice just a bit and suggest you buy a house in a neighborhood/location you know will be a good rental in a year or two and use the owner occupant "benefits" to purchase it. Don't worry so much about where you want to live if you're not going to be there long. Read the mortgage and make sure it doesn't require you to live there beyond your "target" timeframe or plan on a possibly higher rate refi that won't. When you've (hopefully) reached a 25-30% equity position by prepaying on the mortgage leapfrog into another house using owner occupant terms. Repeat as necessary.... just one strategy but one that had I known what I was doing would have worked pretty well for me when I was young and more "mobile". Keep in mind when I bought my first home Jimmy Carter was president and interest rates were at or near all time highs. If rates go up then this way may not be all that great but still may work for you...
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OP
Member since 2008 · 72 posts · 0 votes
20y
Responding to All Cash and Emdvee:

Assuming I can only put 10% down and get an 80/10 loan---or it called an 80/10/10? you get the idea :)--- and say I can pay 25-50% ontop of my current mortgage each month, how quickly do you think I can have a decent amount of equity? does 25-30% equity position actually mean you've paid 25-30% of the value of the house? Doesn't that sound low? What exactly does prepaying on a mortgage mean?

I definately wanted to think about doing a duplex but the only ones in my price range are in suburbs. Does anyone have any thoughts on townhouses or converted condos? Like when they might be considered a good investment and what to watch out for? (i.e. really really old building?)
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Frank Adams
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
20y
An 80/10/10 means that 10% is your down payment, 80% is your first mortgage and the other 10% is a second mortgage. The reason for it is to avoid paying PMI. PMI is a BAD THING, at least IMO. It's essentially a "paid for" second mortgage.

Traditionally mortgages are for only 80% of a ppties value. Private Mortgage Insurance covers from the 80% up to the amount you put down. Here's the kicker, YOU pay for it but it protects only the LENDER. IIRC it's about .07% of the amount borrowed, PER MONTH.

So if your first mortgage is $100K your PMI is $70 PER MONTH. That's a big chunk of dough, more than homeowner's insurance or ppty taxes in many jurisdictions. And you'll be paying it for a long time. I think current rules are the lender must drop it when your loan balance drops to 79% but you may have pay for another appraisal. Having a 10% second means you never would have had the PMI to begin with, but the second mtge would have come with a higher interest rate and higher fees.

If you've got the ability to put that much extra down each month, you can probably just save up additional down payment and go with an 80% loan and not bother with the second mortgage.

all cash
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OP
Member since 2008 · 72 posts · 0 votes
20y
All Cash,

Yep, I am definately trying to stay way from PMI. So I pretty much won't go into any financing deal if that is required. I got preapproved already so I don't think it should be a problem for now. I mean I told my broker my situation about only being able to put down 10% down and I didn't want PMI so unless they somehow switch it up on me the last minute...

One question I did have was regarding Rehabbing costs. Do most people get a separate loan with that? Or are you suppose to come up with that cash yourself?

And I realize how important it is to "slam every nickle" into the mortgage because when I used one of those mortgage calculators, adding an additional 100-200 dollars makes a HUGE difference in the amount of interest you would pay out for the life of the loan. Thing is, there seems to be diminishing returns as to how much money you save the more money you put in per month. When I set it at 100 extra a month the savings was close to 10k...at 200 it was 6k..and at 300 it was 2k only. So I'm not sure if slamming "every" nickle is so wise but definately adding extra is a good idea. Maybe there is a better strategy as well. I had a friend who had mentioned over the dinner table about splitting up your mortgage payments into two payments so you pay twice a month. Effectively you have 24 payments a year but you still end up paying the same amount. At the end of the loan you are suppose to be able to cut a few years off and some interest. I mean, it makes sense in theory, I'm just wondering whether it's worth the hassle.

And one more question..sorry for asking so many...

How often does a lender have stipulations on paying your loans off early? Because I know some can, but is that normal?

Thanks in advance for everyone's time for reading my questions.
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Frank Adams
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
20y
Well splinter; let me try to answer in sequence.

I'm not sure what calculator you're using but there's no way that paying $300/mo extra would save you less than paying $100/mo extra. It is true that the MORE you pay EARLY, the bigger the savings, but the total savings continue to add up.

Here's an example using my amortization schedule that is on my Microsoft Excel. I used $100K @ 7% for 30 years.

Total interest over 30 years =$139,509
Adding $100/month drops it to $89,002 and 247 months
Adding $200/month drops it to $66,813 and 193 months
Adding $300/month drops it to $53,863 and 180 months

$100/month = $24,700 additional P to save $50,500 I, 2.04 ratio
$200/month = $38,600 additional P to save $72,696 I, 1.88 ratio
$300/month = $54,000 additional P to save $85,641 I, 1.58 ratio

That last bit is only for those that are numbers freaks like ME.

The rule used to be that GNMA/FNMA (conforming) loans as well as FHA and VA loans had rules against prepayment PENALTIES. I'm not sure that they still have them. Best to check your documents (actually have your attorney check them) carefully and don't do those deals that have them.

BTW, all the loans on which I amd the LENDER have a prepayment penalty. Usually 6 months interest if prepaid in the first two years. After that I'll accept additional principle and they generally balloon in 5-10 years.

I'm not sure where most people get their rehabbing funds. Sometimes I think HD or Lowes run deals where you can get one of their crediti cards with no interest on the initial purchase for the first 90 days. That might be one way.

all cash
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Marvin Valencourt
Member since 2008 · 38 posts · 2 votes
20y
Originally posted by "all cash":
...I'm not sure where most people get their rehabbing funds. Sometimes I think HD or Lowes run deals where you can get one of their crediti cards with no interest on the initial purchase for the first 90 days. That might be one way.
all cash

HD does indeed have a "Home Improvement Loan" program in addition to their credit card, I used it to buy a standby generator for hurricane season but could just as easily have used it as rehab funding. They offered me about $7500... your mileage may vary. Not sure if the no interest for 90 days is an all the time thing or a promotion... splinterlfe, you may want to consider joining a community credit union, they're pretty good about personal lines of credit and home improvement loans, at least mine is.
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OP
Member since 2008 · 72 posts · 0 votes
20y
all cash,

Using the same calculator I found online to do my original caclulations in my original example, and plugging in your variables, I came out with the same numbers.

Using your numbers (and mine), Total interest over 30 years =$139,509
Adding $100/month drops it to $89,002 and 247 months
Adding $200/month drops it to $66,813 and 193 months
Adding $300/month drops it to $53,863 and 180 months

The way I made my conclusions were:
Adding $100/month saves 139,509 - 89,002 = approx 50k
Adding $200/month saves 139,509 - 66,813 = approx 73k
Adding $300/month saves 139,509 - 53,863 = approx 86k

So at an additional $100/month, you save 50k
So at an additional $100 on top of the $100/month ($200 total/month) you save 73k-50k=23k more.
So at an additional $100 on top of the $200/month ($300 total/month) you save 86k-73k=13k more.

So with every additional $100 you add, you get less and less savings per extra $100. That is what I meant when I said diminishing returns. The intial $100 gave you 50k, the next $100 gives you only 23k, and the next $100 gives you 13k.

Does that make sense? Am I looking at the cost structure in a wrong way?
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OP
Member since 2008 · 72 posts · 0 votes
20y
Emdvee,

What are the details of the Home Improvement Loan? Like APR etc...? And what exactly is a community credit union and how is it different from a bank or some other financial institution?
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Marvin Valencourt
Member since 2008 · 38 posts · 2 votes
20y
Don't have it on hand but a call or trip to the service desk at your local store should get you the current info.

Their website has a "Credit Center" too, look in the lower left of the main page. Link is loooooooooooooong and I suspect session based so probably wouldn't work if I posted it. Make sure you ask about the loan AND the card, there are differences.

How to explain a credit union vs. a bank? Not my forte but try this... http://money.howstuffworks.com/bank3.htm
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Member since 2008 · 21 posts · 0 votes
20y
From JUST the Mortgage lender side of things..........

Many banks will NOT give a first time buyer a Non-Owner Occupied Loan. Also these same banks will define a first time buyer as someone who has no active mortgage history for the last 5 years.

You could always buy a place and rent out a room. This would reduce YOUR payment AND give you all the tax benefits of ownership.

Woods
www.LoansInAnyState.com
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Member since 2008 · 78 posts · 1 vote
20y
Originally posted by "all cash":

In your shoes I'd be inclined to get a place in a (hopefully in the near future) "improving" neighborhood. If you can rent some rooms out WITH A VERY STRONG RENTAL AGREEMENT, remember this is a business, not a friendship, so much the better. Then slam EVERY NICKEL in rent onto that payment, get a part time job etc. to build up some equity.
Basically this is how many of us baby boomers did it. Bought each successive house in a slightly better neighborhood and had enough equity and cash to rent it out when we moved. As we started paying them off our monthly income grew exponentially.

REI is a get rich slow proposition.

Good luck.

all cash

Talk about "right on the money." This is exactly how I started. Bought my first house when I was single and rented out two of the three bedrooms. Moved up to something nicer in a few (five) years and rented out one room. In the meantime I had added a second house in a working-class, blue collar neighborhood, which I rented by the room to singles initially (don't try this at home, I was young and stupid at the time and the house was less then ten minutes away--still, I was there 2-3 times a week) which really jacked up the rent I was able to get over renting the entire house to a family. After a couple of years the hassle wasn't worth it and I moved a family in but the equity situation had swung well in my favor.

Now in my forties, I have multiple houses with positive cash flow in better to upscale neighborhoods. Always keeping a toe in the real estate water in case a really strong deal comes along.
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Lynn Z
Member since 2008 · 689 posts · 23 votes
20y
my credit union will not do any investment loans--at all...and they do alot of business. my daughter's first purchase was a brick bungalow in a great neighborhood. She moved in a lawyer as a roommate, he paid 1/2 of everything and she did the cleaning. Bought at $110; sold it a year later at $135. It was only 1350 sq. ft. and needed no work. She put the money from that home into a triplex in the same neighborhood and bought up. She dumped alot of cash into improvements over a six year period. It's now worth alot of money. I did finance the early deals until she could qualify for a mortgage. If you have someone you could partner with and live in the house (rent a room) you'd be surprised how fast the numbers work.

Rehab money can come from a commercial type banker where you borrow and finance on a 15 or 20 year am basis and balloon in five years. The closing costs aren't much and you can go to a bigger bank or mortgage company to refinance the short term money to include your improvements. That works every day in our city for alot of investors. There aren't many sources but enough to make it work. Also, if you see a house you can call the banker and they'll approve it verbally or ride by and say "yes" or "no" quickly and you can make a cash offer and save money on the buy. You need speed when you buy at a good price in my opinion.
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Member since 2008 · 6 posts · 0 votes
20y
Hey everyone. I have a question related to splinterlfe's question. I am probably going to be buying a townhouse and renting a room out. As far as agreements and documents, does anyone have a template or something I could refer to or maybe advice/suggestions? I remember when I dormed on campus during my under grad days the RA's on campus always made us sign a roommate agreement and housing contract, so I remember some things, but any other help would be useful. Feel free to PM me. Thanks so much.
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