Questions about strategy of turning first home into rental

[Nicholas DeGaetani]

Hi, I'm planning to buy my first home and while I'd love for it to be my first rental property, my wife is more interested in finding something we can live in. So I'm trying to develop my strategy for living in the first property for a year, then purchase the first rental property or transition to something else and rent the first one out.

My questions are focused on securing funds for the second property, be it rental or primary residence. Besides taking out a home equity line on the first property, how can I confidently secure money (besides the obvious saving $) for the 2nd property? 

Would the 2nd property, be it rental or primary residence, have to be financed with 20% (plus closing costs, etc.)?

Can anyone offer good v. bad reasons for purchasing your first rental property instead of something for yourself to live in? Based on location, costs of renting/owning vary and this is true in northern Virginia where renting is more expensive.

Thanks in advance for your comments!

-Nick

[Kevin Hunter]

Originally posted by @Nicholas DeGaetani:

My questions are focused on securing funds for the second property, be it rental or primary residence. Besides taking out a home equity line on the first property, how can I confidently secure money (besides the obvious saving $) for the 2nd property? 

Would the 2nd property, be it rental or primary residence, have to be financed with 20% (plus closing costs, etc.)?

Can anyone offer good v. bad reasons for purchasing your first rental property instead of something for yourself to live in? Based on location, costs of renting/owning vary and this is true in northern Virginia where renting is more expensive.

 If you buy a property solely as an investment property, a bank will almost always require 20% down.  This is where you need to be creative.  My suggestion is to buy the first house as your primary residence.  You need to be very selective though, and buy at the right price.  The more value you can immediately achieve in the house the better.  So you don't want to buy a house for 100% of the value.  In order to do this, you need to buy houses that are underpriced for some reason, ie.. foreclosure, short sale, in rough condition, must sell situations.  My theory is buy the worst looking house on a nice looking block.  As soon as you close on your property you need to have equity in it. 

After living in this house and putting yourself in a position to realize the additional value, cosmetic improvements, repairs, principal payments, etc... you can now move to your second property. You will need to move into your second property in order to put the least amount of money down though. FHA loans will require 3.5%, but PMI will hurt. At a minimum a bank will require 10% down and you will need proof of around 6 months of reserve PITI for your first property. That can be in a retirement account, savings, etc.. but cannot be used for the next down payment.

  The good reason to buy and live-in is for the smaller initial investment.  You can then slowly and deliberately fix up if you need to, make rental ready, and learn the small peculiarities of buying a house as a rental vice a house you plan to live in forever.

  A good reason to buy a house as a straight rental is the opportunity to acquire immediate cash flow, but again, you have to buy the house at the right price.  In this situation, you need to take into account the principal, interest, tax, insurance, home owner association dues, property management fee (if you plan to use one), and a 10% vacancy/maintenance fee rate.  Once all those things combined, you can find a mortgage that fits under that number and gives you a cash flow that you are comfortable with.  You can then immediately begin to build your account for your next purchase.

  Hope this helps a little bit and good luck!!