What to do with primary residence

Question

My wife and I are seeking out our first investment property, with the goal of acquiring a portfolio of cash flowing rentals for passive income.  We purchased our current home (SFH) with an FHA in 2010, before we had any plans of getting involved in REI.  It is a 3/2 in a nice neighborhood.  Here's the options I'm currently considering to get started:

• Stay where we are, continue to save up for a rental downpayment and simply buy what we can afford when a good deal is found.  I would be open to somewhat less desirable areas (not war zones, but not neighborhoods I would necessarily want to live in myself).
• Look for MFH rentals with the intention of moving into one of them (which would restrict the search to more desirable areas), and doing one of two things:
	
		Sell our current residence and pocket any gains to go towards the next deal, pay down the MFH, etc.
		Rent out our current residence (cash flow would be very thin or break even, but we used the homeowner credit in 2010 to do alot of improvements, and it requires little maintenance).
• Sell our current residence and pocket any gains to go towards the next deal, pay down the MFH, etc.
• Rent out our current residence (cash flow would be very thin or break even, but we used the homeowner credit in 2010 to do alot of improvements, and it requires little maintenance).

• Sell our current residence and pocket any gains to go towards the next deal, pay down the MFH, etc.
• Rent out our current residence (cash flow would be very thin or break even, but we used the homeowner credit in 2010 to do alot of improvements, and it requires little maintenance).

In the end, I guess my question boils down to whether it's worth finding a way to get out of paying our current mortgage to live for free so we can really get some momentum, or just stick with what we have for a home.  I'm also not sure if it's possible to use an FHA myself on our first rental, since my wife used one on our current property before we were married and I'm not on the title.  Maybe someone could chime in on that as well.

So, what would you do?

I hope I explained that well enough.  I can provide some numbers if needed.

Gregory Rice · Answer

Hi Account Closed . If I were you I would rent out the SFH and look to occupy a side by side duplex in an average area. In this circumstance your nut can be covered at your SFH and hopefully more than 70% can be covered by a renter at the duplex.

Albert Bui · Answer

To address your #2 strategy above:

if you rent it out where will you go? Not sure how long other banks require you to rent out your current SFR in order to purchase another primary residence but mine requires 6 months other wise you'll have to qualify for both mortgages which may or may not be okay depending on where your combined incomes are.

Derrick Craig · Answer

Account Closed

I would suggest staying where you are and saving up money to purchase your rental property. Maybe even look into applying for FHA loan you are allowed up to 4 I think based off qualifying requirements of the lender. Hard Money loans are another option but they can be pretty pricey and last but not least owner financing. I hope these help..

Good luck and happy investing

Derrick

Account Closed · Answer

Thank you all for the thorough feedback.  Quality of life is very important to us and we have good w2 income.  We have a guest room, a modest man/lady cave, garage workshop, etc, that would certainly be missed if we moved.  My gut has been saying stay put and save, but I like to consider all options so I figured it can't hurt to get some opinions.

Account Closed · Answer

@Jassem A. Agreed.  We're starting a family and quality of life is a non-negotiable at this point.  If we did the live-in rental option, we'd be focusing our search on the more desirable areas of the city, where most of the young professionals want to be.  The other upside of this, if we can find a good deal, is we'd be able to get our foot in the door as landlords in a highly desirable location which we wouldn't otherwise be able to afford if we had to go conventional 25% without being owner occupant.

Jean Bolger · Answer

Another big part of the picture that I don't think has been addressed yet is your income. That will have an effect on how quickly you'll be able to save up for other properties, and on your ability to get your additional loans (DTI, etc).

If you have good W2 income that's great- I would stay in the house and start looking at those lower priced rentals (Rochester, as I understand it, has plenty of those?).

If your income is low, then the owner occupied multi might be your fastest route. You'll have a much lower downpayment and better loan terms compared to an investment mortgage. If it were me, and I were taking this option, I would not keep your current primary. A low cashflow/ breakeven rental is the last thing you need starting out. Take your tax free gain (if any) and move on.

David Stott · Answer

Slow and steady wins the race.  I would add that it's most important to know what's important to you.   Personally, if i was starting a family and considering kids, etc . . I wouldn't place my happiness and quality of life into the hands of tenants that I'd be occupying a MFH with.   For my family, only a single family would do . . but that's just us.   Happy wife = happy life.    Know what matters to her, and go from there.

Mark W. · Answer

Figure out what's most important to you.  Do you feel your quality of life will be same/better/worse if you picked up and moved into a multifamily?

I'd argue that a multifamily that makes the most sense for you now to live in may not be the most profitable when you leave and convert it to a true income property.  There always seems to be multifamilies on the Rochester market that are priced for the owner-occupant, i.e. someone that just wants to reduce their monthly nut and live on the premises for cheap.    These are desirable, well-maintained properties in nice neighborhoods and attractive to owners and tenants alike.  Problem is, given market rents, they may not do so well as a stand-alone income property.

Either way, find a property where the numbers work regardless.

Kimberly T. · Answer

Josh, I can tell you what we did, just for an example, but our situation may be different than yours.

We bought our first house (SFR) when we got married in 2008 with the intent of buying another house in the future and turning our first house into a rental.  We started saving up money (we're extremely frugal), but when we started looking to buy again, we realized we wouldn't be making any cash flow if we bought a SFR and moved into it, or even if we bought a SFR as a rental.  We found that we could, however, get decent (but not great - we're in Orange County after all) cash flow if we bought a local multifamily.  We're looking for cash flow from buy and hold properties so that when we start a family I can afford to be a stay at home mom.  We found a triplex in 2010 that had some cash flow, so we put 25% down and bought it as non-owner occupied.  There aren't any 2 to 4 unit properties here that are in as decent an area as our house, so moving into it was not in the cards.

Sometime after that purchase, we decided we weren't going to stay in CA long-term (i.e., we won't be raising kids here), and my parents (who live in AZ) recommended we look for rentals in AZ.  We did, and put 25% down on a fourplex there in 2011.  We got a PM to manage it, and have made a few trips out there to do some of the big work on it.  We bought the fourplex next door to it a year ago.  We don't plan to move to AZ (it's one of our options, but not our first choice), but liked the idea of establishing ourselves in another market while we're young.  We're now looking at buying in a couple other states since prices in AZ have gone up so much.  Don't want all our eggs in one basket anyway.

So, I guess what I'm saying is, you have to decide what's important to you - equity build-up, cash flow, the neighborhood you live in, whether you plan to stay in the area long term, etc.  We plan to start a family ourselves in the next year or two, and we wouldn't want to do that in the neighborhood our triplex is in (not a war zone by any means, just not as nice as ours, and not as much space).  We're giving up some extra cash flow so we can stay in our house - it's a trade off we were willing to make.  By keeping our house rather than selling it to buy something else, we've increased our equity a good chunk with the recent gains in home prices.  Of course, that would have happened with anything else we bought, but then we would have paid the selling and buying costs for those transactions.  Also, that recent pop in prices has leveled off, so planning on that same equity build up is pure speculation (and not good speculation, in my opinion).  And since we plan to leave CA in the next, oh, 3-7 years-ish, it doesn't make sense for us to buy more here (we'll be selling our properties here when we move, not keeping them and using a PM).

Well, I hope that helps give you some insight into our thought processes and goals, and helps you determine what is best for you.  Good luck!

Brian Gibbons · Answer

Living in 1 of 2-3-4 multi and renting out the others is one way many have gotten started in REI.

You are living with your tenants, and you just started a family.

Rochester is a nice place for student housing.  Look at grad students at RIT.

What to do with primary residence

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