Primary Res to Rental and Repeat

[Bradley Mair]

Has anyone found success in turning your primary residence into a rental, buying a new primary with 3-5% down and repeating each year?

Thanks. 

[Jaron Walling]

@Bradley Mair It's not rinse a repeat strategy like you described. The problem is if you work with conventional financing (most investors do starting out) lenders won't approve a 3-5% DP for the next property. You'll need at least a 20% DP to purchase the next primary, and probably a signed lease proving rental income. As you can imagine capital starts drying up quickly "trapping" 20% into each unit. Keep in mind this doesn't account for rehab, repairs, and reserves necessary to maintain rentals. Don't buy rentals without reserves (cash) on day 1. 

The BRRRR strategy is touted a lot in forums for good reason. It fixes some of the issues above and preserves capital. If your new to REI we encourage investors to study the strategy. You "create" the 20% DP by completing value add remodels on distressed properties. You're flipping the property to rental quality, creating a SOW, hiring contractors, or swinging hammers DIY to get it done.

If you do this you can rinse and repeat quite a few times before switching to other forms of financing. The sky is the limit after that! Cheers. 

[Bradley Mair]

Thanks for the thorough reply, Jaron. My understanding is if you live in the residence yourself for a year and a day, you can get a traditional mortgage as it’s not considered an investment. Is that off base?

[Jaron Walling]

Quote from @Bradley Mair:

Thanks for the thorough reply, Jaron. My understanding is if you live in the residence yourself for a year and a day, you can get a traditional mortgage as it’s not considered an investment. Is that off base?

Bradley, yes it's conventional but again... most lenders will hit you with the 20-25% DP. It's a capital road block. When I started out I had $25k cash to my name. Every dime had a purpose and the majority went into the rehab. Market appreciation helped but the remodel was a key component. I would have ran out of capital on property #2 if I didn't loosely follow the BRRRR strategy. Instead were sitting on equity, a handful of SFR, cash reserves, and looking for the next opportunity. It's conservative but that's what my wife is comfortable with. Happy wife, happy life!

[Bradley Mair]

Ha!  I get that. Thanks!

[Eric DeNardo]

@Bradley Mair,

Speak to the right lender and you can buy another primary residence for 5% down and turn your existing property into a rental. It depends on what your debt-to-income ratio is and what you can qualify for. If you have a lease in place for the property, you can count that towards the monthly expense, but not always easy when you need a place to stay. 

[Sam Shueh]

Anything under 20% is problematic.Wanting income you get a multifamily on the next.

[Bradley Mair]

Quote from @Sam Shueh:

Anything under 20% is problematic.Wanting income you get a multifamily on the next.

Sam, you think a multifamily is a better option?  Even out of my local area/state?

[Chris Rich]

Quote from @Bradley Mair:

Has anyone found success in turning your primary residence into a rental, buying a new primary with 3-5% down and repeating each year?

Thanks. 

I've only done it once, but working out well so far.  The challenge I think you'll run into currently is the rates being prohibitive when it comes to the mortgage payment.  Depending on your market I doubt you'd be able to find a property where the rent would cover the mortgage with the current interest rates. 

[Koren Lavi]

@Bradley Mair Yes!

This is a strong investing strategy and is known as the nomad method. My wife and I have been doing this since 2019 in the Denver area and its treated us well. 

The minimum time that lenders like to see you living in a primary residence is at least 12 months (although there are exceptions to this rule on the grounds of “life altering events”). 

And to clarify with some of the above responses, you CAN keep putting 5% down on subsequent primary residences. Not only can you put a low downpayment, but you also will get a lower interest rate on your mortgage each time you do this. The beautiful thing is when you move out of your primary residence and rent it out, your interest rate will stay the same 👌

[Brian Bohrer]

Another way to supercharge this strategy is to mix in the power of assumable loans!  My wife and are implementing this "Nomad Strategy" and are about to start looking for our 3rd property here in Colorado Springs.

The major issue right now is interest rates, and the fact that if you only put down a 5% DP and borrow the other 95% at a 6.5% - 7% rate you will not even come close to covering your mortgage with the rent when you move out next year.

So, we found a VA assumable loan (FHA loans are also assumable) with a 3% rate and a seller who had an overpriced listing because he was pricing to break-even after paying off his debt and closing costs for selling the home. Because he was overpriced and I was the only one willing to pay the amount he wanted, he ultimately signed over his VA entitlement and allowed my (a non-veteran) to take over his loan! This allowed me to save over $1,200 per month on my payment and also increased my principal paydown by over $400 per payment compared to financing a new "high interest" loan! But, the best thing of all is that I will be able to rent this SFH for more than the debt payment when we move out!

If you are interested in learning more about this strategy, check out my forum post here :)

https://www.biggerpockets.com/forums/922/topics/1175338-maxi...

I wish you the best in your RE Adventure!

Take Care,

[Grant Schroeder]

Quote from @Bradley Mair:

Has anyone found success in turning your primary residence into a rental, buying a new primary with 3-5% down and repeating each year?

Thanks. 

Yes @Bradley Mair! We have done this 6 times in 7 years, and I help many of my clients do the same. Let me knwo if you would like to connect on a call and we cna get it scheduled to talk about details for this!