Live Before you Rent?

Question

Hey everyone! I’m completely new to real estate investing but have been eyeing on buying a rental property for a few months now. However, I heard from others that you would have to live in the property you bought for a year before you rent it out to tenants. Is this true? I live in the greater Seattle area, not sure if it’s a rule exclusively for WA?

Brian Hughes · Answer

I'm pretty sure you can use most any of the 'owner occupied'  retail loan  types  for anything 1-4 units if you will live in the property,   but you will pay a slightly higher interest rate on multi unit,  but is like .25% or something.   You may however be required to put down more than you would on a single unit property,  especially if you are depending on rent income for qualification.   Note they will usually let you use about 2/3 of gross rent toward qualifying, last time I checked.    If the rent is proforma,  be very conservative.

definitely aim for a 3 or 4 unit house hack  (live in one of the units) to start -  but with prices right now you will likely find that you will still be paying some cash at the end of the month to cover all the expenses and these kinds of properties are very, very competitive if well located,   and finding one that additionally has a vacant unit will make it more difficult.   I got lucky and I did get started with a triplex house hack,  so it can happen,  but I had to go for a neighborhood that (at the time) was nowhere near top of list.  Its worked out well though :)   Don't house hack a duplex unless you are certain you can afford the place with zero (or even negative income) from the one unit being vacant or worse,  occupied by a nonpaying tenant.   Odds are always nonzero of a no income situation with any investment property of course,  but going from 1 to just 2 units cuts the odds of that from low-but-can't-be-ignored to fairly remote for a well managed property.   Renting rooms can be lucrative but it is a major cat herding proposition and you are renting to people with many times no better options,  so expect constant drama and only consider this if property is close to a college/university or some other major institution that attracts a lot of transient attendees/employees, like maybe a hospital.

If you haven't learned how to run numbers on a property yet,   do that for some properties you see available on the market.   Note that most cap rates I see advertised are between 1 and 2 points higher than the actual, realistic cap rate.    Listed properties they generally ignore maintenance and property management fees and do the math assuming 100% occupancy rate.    Even if you will be managing yourself,   run the numbers as if you will hire a PM,  because at some point you may want, need (or even be required) to.

Note that laws are changing fast right now so be sure you are up to date with all the latest WA laws and any rules in the jurisdiction of a property you are considering,   and stay away from Seattle.   Note also odds are still really good that in the next year or two we get rent control.  So don't plan on being able to raise rents more than about 5% annually except on turnovers.   This may make some otherwise good looking properties a risky proposition.

Shawn L. · Answer

FHA would require you to occupy the property for some period of time (probably 12 months) barring extenuating circumstances that force you to move before that. You can use FHA on up to 4 unit properties, perhaps you can look into that?

Only way you're likely to get lower than 20-25% down payment on an investment loan is with a private or portfolio lender (probably only realistic if you have a killer deal), or maybe a rich uncle or something. Anything under 20% down is probably going to be very difficult to find.

Account Closed · Answer

@Raphael Enrico When you get a mortgage it will be either “owner occupied” or “non owner occupied.” Owner occupied loans are for people buying a home for themselves. These loans typically have lower interest rates, and can be had for less than 20% down. Non owner occupied (investment property) loans typically require 20% down, and will have a slightly higher interest rate. If you buy an owner occupied home, you are allowed to move out and rent it to a tenant, but only after living there for one year. Talk to a mortgage broker and they will explain your options.

Sherief Elbassuoni · Answer

@Raphael Enrico, if it is an owner-occupied loan, you can typically put low money down with low-interest rate.

If it is a pure investment, you will need to put more money down and a higher interest rate

Brie Groves · Answer

Hi Raphael,

That just depends on what type of financing you are using. If you're paying cash then you can do whatever you want, but if you're obtaining a loan you'll want to discuss your plans with your lender to make sure you have the right program for what you are trying to do.

Raphael Enrico · Answer

Account Closed,

What if I’m looking to do a FHA loan? I heard that if I qualify for the loan I would only need to pay around 3% down payment. Would I still be able to use this loan for investment purposes?

Shawn L. · Answer

Your best bet may be to use an FHA for an owner occupied multifamily. Live in one unit, rent out the others while taking advantage of the low down payment.

Private/portfolio lenders have other hurdles, generally speaking if you can get a conforming (i.e. fannie/freddie) loan the terms are likely to be better. You can look at those options once you have some deals under your belt.

Raphael Enrico · Answer

@Shawn L.

Thanks for clarifying! So using a private lender is more the conventional way of getting an investment loan? I just finished school and don’t have much capital but wanted to get my feet wet in real estate.

Raphael Enrico · Answer

Hi @Brie Groves,

Thank you for the reply! I Sincerely appreciate it!

Live Before you Rent?

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