buying a 2 bed 2 bath house and invest?

Question

Hello, I am interested in buying a house within a neighborhood that is marketable, probably around south Denver, not far maybe from University of Denver, where I gained a Master's degree and possibly after living in it, rent it out to tenants, possibly graduate students at DU campus. I am interested in buying a property sometime in August, live in it for a few months and then have tenants live in. I realize I could benefit from having a realtor help me manage this process. I also want to leverage my finances by having a property now that I work as a 1099 contractor for the past 4 years. It's annoying having to pay the IRS so much in taxes as a 1099 contractor. Gone are the days of being a W-2 employee, once upon a time. Any suggestions? Would this be a sound financial strategy in the long run (kind of like a buy and hold)??

Robert

resident at Denver tech center

Robert

resident at Denver tech center

Robert Uceda · Answer

Hello Basit, that probably makes sense to stay for a year and rent out the other rooms to other tenants.  I would probably have to look for properties in Southern California, where I plan to move in August.  I read that Murrieta would be a cheaper place to live and invest in property then.  Would it be feasible for me to acquire property and then after the initial payments, if I were to rent it out to tenants 2 other rooms and I keep mine, will I be able to break even on the mortgage and leverage my finances this way over the next 24 months?  I definitely want to leverage my finances when filing to HnR Block taxes, since I still have government student loans to pay off.   thoughts?

Robert Uceda · Answer

and you are right, Basit. I definitely would want to know the tax ramifications or more so know the tax write-offs I can claim on filing for 2020 next Spring 2021.

Robert Uceda · Answer

thanks for the feedback Basit and Dan.  they are all useful information.  It sounds like I would have to look into the Nevada housing market there instead. I have close friends who tell me it's cheaper to live in Las Vegas or Henderson, NV.  I have enjoyed living in Colorado for nearly 20 years and it's time for me to close this chapter.  I enjoyed the weather and quality of life there but with the thousands of transplants moving in to Colorado in the past 7 years, I would rather leave and not have to deal with the skyrocketing rent or mortgage prices.  It would probably benefit me to look for a house property in Nevada or even SoCal for that matter!  In that case, I would be willing to live in that next house for at least a year and then apply for that reduced down payment you mentioned,  Basit.  I definitely want to leverage my finances so I can make the most of the tax write-offs, not owe more to the IRS.  I have enough headaches owing $4000+ to Uncle Sam as a 1099 contractor.  Suggestions??

Robert

Basit Siddiqi · Answer

@Robert UcedaIf you intend to live within the unit for a year, you may be eligible for a loan with a reduced down payment requirement.What specifically is your goal? It seems like you want to pay less in taxes. You should know what the tax ramifications are before buying the property.Being in the property for only 3 months doesn't help too much. If you don't have the intent to live atleast a year, you don't qualify for the reduced down payment requirement.If you don't live in the property for 2 years, you don't qualify for the home owners exclusion.

Dan Mackin · Answer

@Robert Uceda what you'll need to know is that if you're planning to leverage the property as much as possible (AKA less than 20% down) you will almost always be in an owner occupied loan. With those loan types you will need to live in the property as your primary residence for a full year. If you're going for at least 20% down then you can avoid this issue.

Robert Uceda · Answer

Matt M, thanks for the tidbits about investing in a property.  I am definitely not interested in purchasing a property to house hack, and then kick the tenants months later.  I may not live there for long 3 months later and make it all accessible for all reputable tenants.  I need to maximize the chance to break even with the mortgage or cash flow. I so want to pay off the rest of my government student loans.  Definitely need them to pass the background check, so they don't wreck the property inside the house.  I would probably prefer graduate students who are probably mature, but of course you never know.

I absolutely want to leverage so I don't owe much to IRS who are sharks.  I lived just 2 blocks south of the University of Denver campus 2005-2012, and I used to house DU students as cool roommates then.  I like the DTC area with the pool and jacuzzi amenities but I doubt I would find an affordable house there since they will probably cost around the $410,000+ or above, based on looking at a real estate agent's portal fairly recently.  If you know that lender who knows how to benefit the self-employed 1099 contractor like me, that would help.   Need to claim more tax write offs, since we 1099ers don't claim tax withheld or pay off taxes from our paychecks.  So ready to leverage the finances and live a better quality of life, than owing to Uncle Sam a whole chunk these days.

Robert

University of Denver alum '03

Matt M. · Answer

Start with a lender. I've got a great one who has some awesome portfolio products that work well for self employed. I'll shoot you her info. It all really depends on your goals. Do you want to share a home and be a landlord? I've had people want to house hack only to back off when they preferred to live alone or with a significant other.

Your price is going to dictate a lot in that area. You can get bogged down with all the free calculators, etc, but figure 700-800+ per room depending on the home. Once your lender gets you an expected payment, you can see what you need to break even or cash flow.

I spent a lot of time down and around there. It's one of my favorite places to live in the city. I would also recommend buying sooner as grad students will probably have their living situation lined up before August. You'll probably want to start looking in June.

Robert Uceda · Answer

Dan Mackin, so is house hacking illegal then? or is that a reasonable way to invest?  I am definitely not zeroing on 2 bedroom 2 bath type.  If I need to buy a 3 bedroom 2.5 bathroom, etc etc.. then I suppose that makes sense if I expect the numbers to sway in my favor profit wise?

I am planning to see a lender and see what I may qualify.  I think that buy and hold strategy would suit me best.  Any suggestions on the best strategy and planning?

Dan Mackin · Answer

Hey @Robert Uceda. First off welcome to BP. You've found the right place.

Now as for your idea. You're basically talking about house hacking. Basically owner occupying a property for a while to take advantage of lower down payments, then renting the property out as a whole. Some people have tenants with them while they live there and some do not. Whatever suits your needs really.Now as a basic review of your post title I would say, no your idea does not make sense at least for that bedroom count. You will find that the numbers on a 2 bed property in most areas around here don't really line up with making sense as a rental. If you were looking at a higher bedroom count you could make the numbers start to work. The method is pretty simple and the more bedrooms you have (within reason) the better off you may be in terms of flexibility for what type of rental you want to do.

Your first step in this idea is to of course make sure you can purchase a property in the first place, especially being self employed. Let me know if you want a good lender rec to talk with so you at least know where you sit.