Buying your own home while building your rental portfolio

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Buying your own home while building your rental portfolio

Laurie Williamson
Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes

I am a new investor -- just bought my first single-family rental about six months ago. I would like to transition to multi-family as soon as I can save up enough capital. However, I just had a baby in September, and now that my husband and I have two small kids, we would like to move to a newer, larger home within the next 2-3 years. This has put my investment goals on hold, because I want to make sure that we are easily approved for a loan to buy the home we want together, before I buy my next rental. My question is, what is the best way to invest (or save) my money in the meantime?

I would love some advice from the BP community. I apologize for this question being kind of long. I could not figure out how to say it much faster. I would greatly appreciate any advice you could give, and THANK YOU in advance if you take the time to read this!

A little background: We own our home now; just paid it off. We would like to sell our house, and use the money as the down payment on our new home, probably taking out a loan for 300k. I bought the rental in my name only, and put 25% down. I owe about 90k on that loan. I am self-employed, and am able to save up some money through my bonuses each quarter. How much I can save varies each year, but it is possible that I might be able to save 20-30k/year if I work very hard and am frugal. I am considering the following options:

(a) Use the next 3 years to pay off my rental property. Then, after we buy our own home, sell the rental and use the money as a down payment on a small multi-family. (b) Keep the rental, which is earning about $300/month in cash flow. Put my bonuses into a savings account, and after 3 years, buy our new home, and use my savings as a down payment on a multi-family, but KEEP the single-family rental. (c) Keep the rental, and purchase 1-2 more SFH in the meantime… if I can get approved for a loan. <- but, if I do this, will it make it hard for us to buy a house for ourselves?

We both work full-time, but since I am self-employed, it was a little challenging for me to get the loan for the rental using traditional financing. My husband is supportive of my real estate goals, but he is not investing with me at this time. I'm doing it all through my own funds. One more thing to mention is that the reason I got interested in real estate is because I wanted to increase my income so that we could buy a larger, better house. While I do care about saving for retirement, it is really important to me personally to be happy and enjoy life right now — so I’m not interested in buying a fixer-upper or living in ¼ of a quad.

So, what makes the most sense – a, b, or c? Or is there a “d” option I have not considered? Thanks again for your advice and patience reading my long question. Love BP!!

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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
11y

simple answer.... make more money. this way you can afford everything in life. 

btw, real estate is one of the ways you make more money.

you think 99% of the US does not want a bigger house so they have more room for their kids? the 1% already lives in a large enough house.

we have 17 rentals and live in 1k sq. ft house. guess which one takes priority in my household? 

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  • Eric Thomson
    Real Estate Broker · Conroe, TX · Member since 2012 · 165 posts · 46 votes
    11y

    Hey Laurie,

    There's always an option d (as well as probably thousands of others)! To help you narrow it down, I will try to answer some of the questions I can. 

    Being self-employed is already going to create some struggle when trying to get a loan on your next primary residence. It's not impossible by any means, just more hoops to jump through. Buying more rentals will add some more hoops. Your current rental should not pose any issues if you keep it because you will be able to easily show 2+ years of positive cash flow on your taxes, which will help your debt-to-income. Buying rentals between now and then could cause some issues if you don't show 2 years of cashflow on them when you are purchasing your next PR. Again, this is not impossible, but you will have to meet other requirements with the amount of equity and a certain level of positive cashflow. If you have a good lender/mortgage broker then all of these can be easily managed. 

    Of the options presented I would prefer option C, with the understanding it could pose issues when trying to purchase your next home. Worst case you can sell the rentals that may be holding you back from getting a loan when the time comes. I would not recommend option A. Paying off that unit should not be necessary for you to qualify for the loan on your next home. However, if you are deciding between option A or having that cash sit in a savings account, I would choose option A. You would be saving more in interest than what your savings account will pay you. 

    If you are able to save $20-30k per year I would consider flipping homes to build capital to put towards your next home as well as your first MFH.

    1Reply
  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    Thank you, Eric, for the very thoughtful reply. I've been hesitant to try a fix and flip since I can't do much hands-on work with small kids, but maybe it would be worth it to subcontract. I will definitely think about it.

    0Reply
  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    How would the numbers look on your current house as a rental?  How much of it could you finance?

    If you want to be somewhat creative and the numbers would support it - you could pull out equity from your current house to put toward a down payment toward your next home.  If you can qualify for the financing on your current house - you will be in the position of owning two financed rental properties.  That plus money you save up will likely put you in a good position to acquire a mulit-family property when you want to do that.

    1Reply
  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    Hi Jesse,

    Thanks so much for taking the time to read and answer my post. I really appreciate it! Both you and Eric have brought up some ideas I had not considered previously. I am not sure how the numbers would look on our house, but I will ask a realtor to check rents for me, in order to get a good idea of what I could charge — and also to give me an idea of what the sale price would be. 

    I had dismissed the idea of renting our house in the past, because it's more expensive than the rentals I was looking at for ideal cash flow. For example, the rental I currently own was $122,000, and rents for $1250/month. After paying property management fees and my mortgage, I get about $300/month from that property. Our home was bought for $169,000, but may be worth $180,000 - $200,000 now. I'm not sure -- property values have gone way up all across the Dallas area, even though we are in a suburb. However, I don't know if my house would rent for much more than $1250/month... Our suburb, Garland, is more of a working-class area and not a high-rent place. (People would rather be in Dallas, or Frisco, or Plano. Garland just isn't "cool" right now. :)

    Since our property is paid off, I suppose that if it did rent for even as little $1250/month, it would still bring in $15,000 before property taxes and insurance... if 100% occupied and no maintenance problems. (Ha ha.) But, if I pulled out equity to finance our second house, that would affect my cash flow, right, because I would be re-mortgaging it?

    Hmmm... I will do some reading on home equity loans. I had never considered them in the past, but if it makes financial sense, it would certainly be worth looking into. Eric's comment on fixing and flipping also has me thinking about whether it would be worth it to do some renovations on our house (bathrooms and kitchen), to help us get more money when we sell it. Again, due to our neighborhood and Garland in general, I'm just not sure if it is worth it to put more money into our house. Maybe I can get some help from my realtor friend and run the numbers.

    Thanks for the excellent idea!


    0Reply
  • George P.
    Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
    11y

    simple answer.... make more money. this way you can afford everything in life. 

    btw, real estate is one of the ways you make more money.

    you think 99% of the US does not want a bigger house so they have more room for their kids? the 1% already lives in a large enough house.

    we have 17 rentals and live in 1k sq. ft house. guess which one takes priority in my household? 

    3Reply
  • David Stefanovic
    Investor · Inverness, IL · Member since 2015 · 124 posts · 35 votes
    11y

    Hi Laurie,

    Another option possibly to consider. If you are able to sell your current house that you live in, you can hopefully be able to use the 100% equity in your house to purchase a bigger and nicer house through a short sale or foreclosure at a deep discount. This will give you the best opportunity to maximize your equity and hopefully still be able to have some additional liquid cash that you may have saved up for your rental properties. For short sales and foreclosures deals, cash is king!

    My wife and I own rental properties and was able to purchase a beautiful 17 year old, 4 bedroom, all brick house in a very good location via a short sale. We worked with the listing agent directly that was selling the house and with the cash offer,deal was able to get the house at a deep discount. With a little luck on your side and working with the right agent, you can make this happen.

    1Reply
  • Carol Martin
    Gabriola, BC · Member since 2015 · 29 posts · 7 votes
    11y

    Hey Laurie,

    First of all buying your home is the best feeling.If you want to invest and make more money in no time.Take little-little steps to fast grow.In my knowledge search today market ,The your time before investing do research as much as you can.Do small investment first earn good from them and then take huge step.through research about marketing will leads you on  great scale.don't hesitate to take steps take suggestion as much as you can before investing.

    Thanks a lot!!!

    1Reply
  • Carol Martin
    Gabriola, BC · Member since 2015 · 29 posts · 7 votes
    11y
    Originally posted by @Carol Martin:

    Hey Laurie,

    First of all buying your home is the best feeling.If you want to invest and make more money in no time.Take little-little steps to fast grow.In my knowledge search today market ,Take your time before investing do research as much as you can.Do small investment first earn good from them and then take huge step.through research about marketing will leads you on  great scale.don't hesitate to take steps take suggestion as much as you can before investing.

    Thanks a lot!!!

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    11y

    I'm with @George P. I drive my junker from my $240k house to service/get rent from one of my $720k apt blds all the time. On a scale of 1-10, what is the degree of 'like to move up in house' vs degree of 'not like to work like crazy for years to come'? I can appreciate wanting quality of life for you and your family. Unless the area where your house is currently is scary or declining, I would not move. I do not like putting a bunch of money into my own house. There is no ROI. Without ROI where your money is working for you, there is only you working for it. My friends that have beautiful hilltop or waterfront homes are rarely home to enjoy them or available to play. They are always working. Same thing with 'normal' families in the $400k houses. Have you seen the same @Laurie Williamson ?  

    3Reply
  • Rob Ohs
    Qualicum Beach, BC · Member since 2015 · 18 posts · 4 votes
    11y

    Great tips from @carol martin !! good to read your advice and will surely implement these tips .Now about the topic buying your own home while building your rental  is not easy .We can manage it accordingly Every one knows real estate  is the best to invest and for the best out come and have to little patience and lucky by the time .Success and money is easy but make a strategies is real tough task to work make it work according to you.

    1Reply
  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    If investment is your primary goal, you may consider renting your primary residence next.  Especially if you plan on getting into a multi-family.  Once you have it established you might look at purchasing and using your husband's income for the loan on your primary.

    1Reply
  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    @George P., I understand and respect your point of view, and I was kind of expecting to hear that! You are absolutely right that if I make more money, I will be able to afford what I want -- and yes, that is why I started looking into real estate in the first place. Because I wanted to make more money. 

    I am a freelance writer, and about 8 years ago, I figured out how to increase my personal income and savings by becoming self-employed. However, I've just about maxed out the amount of money that I can make in my career, without hiring someone else (which I don't want to do right now.) 

    I like to motivate myself by setting goals, and because I live in Texas and my hubby does not want to move, my dream is to buy a lake house, and get a boat. I started looking into what that costs, and the house I would love to have, lakeside, was about $1.5 million. When I calculated how long it would take me to afford that, at my current salary, my first reaction was to laugh. Then I started googling "how to double your income" and stumbled upon real estate. ANYWAY, I'm obviously a long way away from the $1.5 million mansion on the lake, but I am beginning to see how it is possible.

    The house I'm thinking of moving to in the next couple of years would NOT be the million-and-a-half dollar house. It would, however, be the nicest house we could comfortably afford, while still investing and saving for the future.

    You are also correct that we could get there much faster if we stayed in the house in which we live right now. However, it is not just about the end goal for me. It is also about being happy right now, without being ridiculous and overspending. In general, I am pretty fiscally conservative. I drive a paid-off, boring Honda Accord, and my house is paid off, and we pay off our credit cards completely every month. The only debt I currently have is the rental I just bought. So I don't want to spend beyond my means; I just want to enjoy life as much as I can while I am alive. 

    Yes, I could spend the next 20 years building wealth while living in our current house, and be plenty happy with what I have. But I could kick the bucket tomorrow, and never get to enjoy the fruits of my labor. What is the point of working and earning money if I don't get to enjoy it? That is why I would rather take some incremental steps now, and live in a nicer house, even if it means I won't be a millionaire as quickly. The nicer house is the whole reason I became interested in real estate in the first place. Plus, if I wait 20 years to buy my lake house and my boat, I'm not going to look very good in a bikini any more. (I'm already pushing it with two kids...)

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  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    @DavidStefanovic, Thank you so much for that brilliant idea. Again, this is something I would not have thought of on my own. Now that you mention it, I am reminded of a house I looked at recently, in a very desirable Dallas neighborhood. Its retail value was listed by Zillow at over a million, but the sale history indicated it had gone into foreclosure and sold for around $300,000. I am not sure how accurate their estimates are (probably not very accurate), but it definitely piqued my interest. Something more for me to research. Thank you!!

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  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    @CarolMartin, yes – doing research and taking small steps is key. I will read and try to learn as much as I can before I decide which strategy to pursue. Thanks for your feedback.

    0Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    I don't like option A mainly because interest rates are so low. It's better to leverage. I like option C the best of the three. If you buy now, you can lock in super low rates for 30 years. If any of the houses hinder your ability to buy your dream house, you can sell as many as needed. But buy them now instead of letting your money earn 0.5% in a savings account. Your rentals should do way better than that. Good luck!

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  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    @SteveVaughan, Thanks for your thoughtful reply and questions! I guess the degree to which I want to move up vs. not worth like crazy is a 5? I want to have my cake, and eat a little bit of it, too. The good news is I don't give a crap about what people think about the car I drive, so I will keep rolling in this boring Honda, and I don't overspend in other areas of life. I do understand your point about having an amazing home and not being able to enjoy it, and that is definitely something I want to avoid. I work from home, so I'm home all day — which is part of the reason that a newer, nicer home appeals to me so much! I like my job, and it pays well enough that I will keep doing it as long as I need to in order to afford my dream home and build a decent real estate portfolio. And while I'm not super-young, I'm young enough that I have some time to build that portfolio. (I'm 35.) But I do look forward to the day that I can quit working and retire, with income-producing properties! 

    As to whether I have seen the same, with friends who live in nice houses and work all the time, I do believe you that it is true, but I haven't seen it much, simply because I don't know a lot of people who have waterfront homes or lovely hillside homes. I would like to meet those people. They are not living in my neighborhood! Among my friends and peer group, I seem to be kind of an anomaly. I have a lot of mom friends right now since my kids are so little. The stay-at-home moms are mostly in comfortable suburban neighborhoods, but nothing fancy. For those that live in nicer homes, it is the husbands that are at work all the time, so I guess you are right about that. The moms are working their butts off raising small children, but that job does not pay as well as it should. 

    Most of the working moms I know are in a house comparable to mine, but they are maxed out with no savings, and living month to month. It is probably just the stage of life we are all in. Having kids is expensive!

    1Reply
  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    @AndresMirza, thank you for the feedback! That is a very good point. Interest rates are much better for buying than selling right now. 

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  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    Whoops, I meant to say they are better for buying houses than for putting money in a savings account. 

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  • Shawn Dandridge
    Investor · Houston, TX · Member since 2011 · 209 posts · 56 votes
    11y

    I am currently in this situation right now. We are doing new construction in Fort Worth, Own two rentals, and live in a primary (for now) in MD. Everything was straight forward as far as the loan process but I have to have 3 months PITI per rental, including the one I live in now which we plan to convert to a rental once the new build is finished. But we are also W-2 government employees and not self employed so I guess that makes a difference as well.

    1Reply
  • Jerry PadillaBusiness Member
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    11y

    @Laurie Williamson

    Have you thought about doing a cash out refinance on your current home and then a HELOC so a majority of the mortgage is at a fixed rate? Then you could rent it out and purchase a new primary residence in the near future and use the funds from this cash out to put down on more investment properties and the purchase of your new house?

    [email protected]585-204-6923
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    1Reply
  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    @jerrypadilla, I never considered a refinance or HELOC until I started this thread, but I am looking into it now. I need to educate myself about those products and how they work. Interesting idea.

    0Reply
  • Laurie Williamson
    OP
    Rental Property Investor · Plano, TX · Member since 2014 · 54 posts · 19 votes
    11y

    @ShawnDandridge, glad to hear that it is working out for you. Hope you like Fort Worth. It's a fun place; I am a fan. 

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