Challenges to buying a new primary residence every year

[Ryan Cleary]

I hear all the time that an easy way to slowly build your portfolio is to buy a new primary residence property every year with a low down payment, live in it for a year and then rent it out. However, I see multiple hurdles with this method. First, you can only have one FHA loan at a time and it seems as though they are cracking down on giving mortgages to investors to build their portfolios. So that leaves you to rely on conventional mortgages which require a minimum of 15% down for a multifamily (not the end of the world but not as nice as 3.5%). Secondly, in this market, if you do start out with a low down payment, even in one year you are probably still going to be negative cash flow even with some value added.

I will provide my scenario, I purchased a 2-family property last year with an FHA loan. This year I am buying a single-family home at 5% down since I am restricted to using a conventional mortgage. I am getting hurdles from underwriting and they want to consider my loan a rental property unless I can provide valid reasons why I am moving. This really isn't too big of a deal but this begs the question. If this is my second year doing this... how will this process go next year if I try again?

Curious if anyone else shares these concerns or has solutions.

[Mohammed Rahman]

Hey @Ryan Cleary - good question and I've run into this scenario as well as I've used an FHA loan on one of my current multifamilies. The answer to the question you're asking is: it depends.

What I've learnt after putting some skin in the game and networking with other investors too, is that finding funding for your investments isn't difficult as long as the deal makes sense on paper. Yes you still have to come up with cash to show your skin in deal, but I feel the mistake you're making is assuming that you'll be using your W2 income to keep qualifying for more and more mortgages. 

At some point, you're not going to be able to keep doing that to scale because your DTI is going to be over leveraged (and I think you probably already knew this).

P.S. Using an FHA loan on decent properties in class B & up areas is expected to negative cashflow, you can't have your cake and eat it too. Low down payment means you eat the loss for a year or two in negative cashflow before being able to rent out the empty units and raise market rent.