First time homebuyer

[Eric Kump]

My wife and I are about 6 months away from buying our first home. We are planning to buy a home in Arizona (East Mesa most likely). What tips would you give to a newbie who is looking to turn their first home into a rental property in the next 3-5 years?

[Shiloh Lundahl]

@Eric Kump I am going to go contrarian about the location beIng of primary importance. Instead, I would say safety, stability, and cash flow are the 3 most important things.

Safety

You don’t want to get a property in a “D-Class” neighborhood where you feel unsafe walking to and from your car at night or you fear that your house will be broken into when you’re not home. It is important to help your family feel safe where they live.

Security

“A-Class” neighborhoods are the top notch neighborhoods and they may look really nice, don’t they tend to create much cash flow and they can be riskier during a downturn. You will want to get a house in a neighborhood that is lower middle class where people are working during the day but there is no competition to see who has the best yard. A neighborhood that is pretty clean and quiet but where houses still sell below the median price points or the area.  This “C-Class” neighborhood will have the highest demand and will be where most buyers can afford.

Cash flow

I would encourage you to get a property in a “C-Class” neighborhood where the cost to rent ratios tend to be better than in other class neighborhoods. I would encourage you to do a live in flip where you buy the property well under market value, fix it up over time and then sell the property after 2 years of it being your primary residence (in case you want to sell it). This will minimize tax liability and it will likely help springboard your investing career. I’ve mentioned this strategy to many of my friends but they all just want to live in a pretty house they like so they go about it the American way of buying a house at market value that they can just barely afford because it’s in a good neighborhood and they want to live in a nice neighborhood. The debt to income ratio makes it difficult for them to invest in real estate after buying their home so eventually they put the idea to the side and forget about it.  They get along well enough but still struggle in secret financially and miss out on a lot of things that they would like to do because of a lack of money.

After you refinance the house and pull out as much equity as possible you can rent it out and most likely still be able to cash flow on the property. But now you are about to take that 50 - 70k you got from the cash out refi and you can use it to get into your next home in a similar or a little better neighborhood and you can keep the first house and use it as a rental or do a lease option with it.

I hope this helps.