Challenges to buying a new primary residence every year

Ryan Cleary · 2023-03-03T05:58:05-08:00

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

Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes

3y

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.

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Chris Davidson

Real Estate Agent · Boise, ID · Member since 2016 · 1k+ posts · 888 votes

3y

It makes sense, but most don't/ can't do it year over year over year due to DTI, boredom or just not wanting to move. The key is if you get started and just do it when you start hitting hurdles you will be able to find a way around or pivot and do something else. Also if you have to skip a year and save up an additional downpayment so be it. Or sell and roll the equity into a straight investment.

Action beat overthinking every day!

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Lawrence Potts

Real Estate Agent · Member since 2018 · 459 posts · 414 votes

3y

@Ryan Cleary, I can understand the frustration in this. I think lending is tightening up for everyone. Maybe it's more realistic to say every two years now? Either way, it may be a few years until we can implement that strategy again. It brings up the frustrating topic of the BRRRR strategy that some people don't talk about either: the refinance part can take over a year depending on the lender. They may require 1 year of bank statements of rental income on top of a signed lease. That means your capital invested for the down payment, rehab, etc., is stuck in the house. And if the market value drops, you might not be able to recapture all of it. Not including holding cost (property taxes, utilities, insurance, cost of borrowed money, etc.). And lost opportunity cost because your capital is trapped. So sometimes it frustrates me how easy they say the BRRRR is. Lending can kill the velocity of money.

I would say to keep looking around with different lenders, underwriters are all different and some more flexible and understanding than others. You can at least LOE your way into home #2. But it’s conceding for home #3 and on if it’s come to this.

Maybe the strategy needs to pivot to a different play for the time being? Maybe they're concerned with DTI so you need to show more income? Maybe they want to see more experience or skin in the game so you need to bring on partners? Or be creative in your financing? I wholesaled a house leveraging a partner's IRA. I've bought a bundle of homes out of state using seller financing. It'd be nice to just follow this owner occupied strategy and get x10 homes in 10 years with 3-5% down but don't limit yourself to this strategy. Look at anything that makes sense, solve problems that other people are having, and you'll be better for it. Hope that helps!

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Nick Velez

Lender · Member since 2019 · 250 posts · 219 votes

3y

@Ryan Cleary

Lenders typically want to see that you are upgrading your primary residence if you are moving around in the same area each year. This is to prevent you from using low down payment loan programs to acquire rental properties, even though the intention is to occupy it for a year. Either way, there is usually a way to justify a move to an underwriter.

As you scale, debt to income should be LESS of an issue if you are playing the game right. You can use departing primary income to offset the mortgage payment so you should not need to qualify for both the old and new mortgage. Once your rentals are reporting on your schedule E, you should be showing net positive income (not including depreciation which is added back) and you can use that income to qualify for more down the road. No one wants to pay taxes but everyone wants to keep buying properties and remain bankable. Pick your poison and decide what is more important to you, I would rather pay taxes and continue to buy real estate.

2 Reply

Jonathan Taylor

Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes

3y

@Ryan Cleary its the lending market mostly. When rates were hovering in the 4s pre covid and we were frolicking through the fields of stable markets, lenders did not have a reason to question moving every year since it is compliant with conventional lending. After one year of primary occupancy, you can move out and convert to a rental. Simple as that. Now the pressures of housing and scrutiny (but not rules) are coming down on lenders, UW are more inclined to question this strategy.

Also, rates and purchase prices make cash flowing tough after one year, as you mentioned. But remember that you date the rate and marry the property. Markets are cyclical. It wont be like this forever.

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Jonathan R McLaughlin

Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes

3y

if you do every 2 years you can utilize the capital gain tax exemption if the property appreciates. I know people who did this very successfully with lake houses.

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Challenges to buying a new primary residence every year

Challenges to buying a new primary residence every year

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