Buying Property #2 - My Primary (property #1 was a rental)

[Julie Marquez]

Property purchase #1 was a rental and I describe the entire buying process in my blog post here.

Property purchase #2 was my primary home and we just closed earlier this week. Lots of people ask the question about whether to purchase a rental or a primary first. Both ways have merit, but I wanted to describe what I faced when I went to the bank to buy property #2, so that people weighing the options might know what to expect.

For the investment property, be prepared to put down 20-25% with an interest rate that is slightly higher than an owner occupied rate. I went with Chase for this loan, and they had no problems loaning to me (I also have superb credit). I got a 15 year loan. See blog post for more details.

When I went to buy my primary home one year later, I came up with some issues, but nothing deal breaking. I spoke with two different banks in my area - a state wide credit union that is huge in our state (BECU) and a local state bank that does portfolio loans only (WaFed). I ended up going with WaFed because they offered the construction loan that I needed. Here are some things that the banks specifically looked it:

1. Length of time rental house is rented. Today, my rental has been rented for over one year, but when inquiring earlier in the summer, BECU did not like that it wasn't "seasoned" for a year. Though it was rented for 100% of the time I owned it, they wanted to see over a year.

2. BECU also didn't like the fact that I had a month-to-month rental agreement instead of a one-year lease. The tenant has now been there over a year, but to the bank, they want to see stability.

3. Cash flow. Neither bank liked that I didn't cash flow positive. With my rental's 15 year loan, I "barely" cashflow. In tax terms, and BP terms, I don't cash flow. Regardless of my personal investment strategy, the banks just wants to see that it cash flows positively. This was probably the biggest issues for the bank. Knowing what I know now, and having the goal to buy more property, I would have selected the 30 year loan over the 15 year. Here is a conversation I started regarding my goals and  30 vs 15.

4. Cash. Now that you have a rental, when you go for your primary you have to have enough cash reserves for PITI on the rental, and cash reserves for PITI for your primary. That just more cash to have saved up. I'm sure all the experts know this, but as a newbie, that's a lot of your own cash to have on hand.

Otherwise, it was a similar process getting a loan and banks work with investors all the time, or find a different bank. But those are some suggestions to position yourself to be better prepared to buy your primary as property #2.

Though I would suggest looking into this strategy: Buy your primary first, with the primary lower interest rates. Live there a year, then rent it out. Buy another primary, with the primary lower interest rates. Live there a year, then rent it out. Buy another primary, with the primary lower interest rates. Live there a year, then rent it out. You get is gist of it! Just buy every primary with the "rental" numbers in mind and it will work out. Though I assume the banks will still ask the same questions above when acquiring any additional property.

I'd love to hear what other people have to say about buying a rental first and what they have faced when trying to buy a primary later. Anyone doing the primary to rental strategy, and how is that working?