20% down with cashflow or 5% without?

Question

My first investment, I am looking at 2 options.. I can co sign with my kid and he will be one of 3 renters in the condo, it won't cashflow but I can put just 15k down and hopefully the tax breaks will be worth the investment. Turn key in Utah doesn't cash flow.

Option 2, I found a property with a current lease in place for another year that I will have to put 44k down but it will cash flow 200/month and once the lease expires it will cash flow 350/month.

Which is the preferred method? I don't think I can do both but I'm looking into it. THOUGHTS?

PS I'm a realtor so I can use the commissions toward lowering what I have to put down which helps and I didn't include that in the math yet.

Zac Newell · Answer

@Jen Hunt I agree with @Twana Rasoul.  I think if you run the numbers you'll find the overall return with owner occupied financing is much better if you can absorb the initial lack of cashflow (Sounds like you can).  I've been evaluating similar options and when you take into account all the wealth generators (Cashflow, Appreciation, Debt Paydown, Tax advantages) the 5% down has come out with a higher overall return in the scenarios I am looking at.

Nicholas Aiola · Answer

@Jen Hunt If the goal is tax breaks, you should speak with a tax advisor before purchasing anything to make sure you will actually receive the benefits you are hoping for.

If either you or your spouse are not a real estate professional, your net rental losses will not offset nonpassive income (W-2, RE agent income, etc.) if your income exceeds $150k. The losses would be suspended and carried forward to future years, offering you no immediate tax benefits.
If your income is under $100k, you can use up to $25k of net rental losses per year to offset nonpassive income. Income in between $100k-150k causes the maximum deductible loss limit to phase out.

You shouldn't make an investment for tax breaks only - spending $1 to save $0.30 isn't advisable but if that's the goal for you, you should take proactive steps to ensure you will be achieving that goal with your investment.

Twana Rasoul · Answer

@Jen Hunt how often do you get to take advantage of having to purchase with owner occupied financing with having your kid live there. Definitely to that and put less money do. Starting off a little negative is not the end of the world in good markets that appreciate, especially putting so little down.

Best of luck!

Laura Johnson · Answer

We plan to do option 1 with our kids, but not a condo. We are thinking multi. Something we can buy together, add value through updating/renovating, have them live there for a few years, then we can cash out refi to get them money for their own down payment on something else, or we can sell and split the profits. Something to help them start out.

We are still 5 years away from this situation, but time flies.

We also live in Utah.

Becca Summers · Answer

I'm going to say don't use your son's owner occupied first time home buyer status for an investment property for you. When the time comes that he can buy a property he'll have to put at least three and a half percent to 5% down and can't take advantage of first time buyers loans because he already owned home. Or if you do take that option away from him maybe give him his down payment.

Jen Hunt · Answer

Great advice guys! Yes my total income is right below 100k so I will benefit from the passive losses and it gets my foot in the door to future cash flow potential and appreciation. I've been watching from the sidelines too long. PLUS it will really boost my kid's FICO. When he moves out it will actually be closer to cash flowing since I'm cutting him and his roommates a teeny break.

Theresa Harris · Answer

Assuming your kid is responsible and will be contributing to the mortgage payments, I'd go with option 1.  It is less money down, gives them a chance to learn and you can do it again in a few years.  Whether it cash flows or not is a different story as the rent is paying down your mortgage, so you are benefiting that way.  The question is, does it cost you money out of your pocket?

Put things in writing with your kid, so they know how much they have to pay and what they are responsible and what you are responsible for.   as you are paying the entire down payment, you may want them to pay 1/3 of the mortgage, taxes, utilities and help look after the place, you pay the remaining 67% and get all the rent from the 2 other units.

Jen Hunt · Answer

Ok so the goal is tax breaks. I have a w2 job and Realtor income and I own my own house that I plan to stay in for at least another year before turning it into a rental.

I can qualify on my own for an investment but then I pay 20% down. If I put a kid on my loan and he moves in to the property it becomes an owner occupied loan and I only need 5% down.

Since he is paying rent to someone else, I figure why not have him and his friends rent rooms from my rental property? Plus I know it's cared for and I can access it freely and make improvements. It won't cash flow at all for a few years. But the downpayment will get me into the market, start my deductions, start appreciation etc. And my bank account will not notice even with a couple hundred in losses each month for a couple of years.

The investment property that has tenants won't be worth as much for depreciation and my account will be mostly drained. I will only cash flow 200/month and I don't know the tenants.

Option 1 allows me to buy again in 1 year with another owner occupied and only 5% down and I will have the cash to do so each year if I don't blow it all on a 20% down investment.

Dell J. · Answer

Im not sure I understand option 1. It seems like alot going on. Do you need a cosigner to qualify?  is the main goal the investment or housing for your kid?  Your kid will be renting from you but he is a cosigner on the loan? but he would not be cosigning if its option 2?

We dont have much information to go by but I prefer option 2 because it seems more straight forward.   However the cash flow may be low compared to how much you have to put down.

Dont feel like these are your only 2 options, you may want to consider to continue to look.  Also you may want to figure out the non-financial questions first.  is the goal to provide housing for your kid? if so, that is only accomplished with one of the options.

20% down with cashflow or 5% without?

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