Buy first home or first rental property?

Question

Hello, I'm new to the community (first post, but longtime lurker)...torn between purchasing first home (in MD) or first rental property (in Huntsville, AL). Interested in hearing others' thoughts/opinion/advice.

Spouse and I are both active duty military, one child (toddler), $85k in savings, zero debt. Our current rent is ($2400/mo, housing allowance is ~$4500/mo). Decent SFH here in good school district is at least $400k, multi-family units are way out of our price range (being military, we can be moved at anytime, potentially leaving us stuck with a high mortgage payment if we couldn't find renters) I'm originally from north Alabama and the growth/potential in Huntsville looks promising. We could easily afford a small mortgage their (and rent to a tenant) without it affecting our lifestyle, regardless of where we're stationed. However, if we buy in AL, we'd still be renting here.

Does it make sense to buy a rental property before your owner-occupied property?

Appreciate any and all input. Thanks

Daniel Porter · Answer

The nice thing is if you get your rental now in Huntsville, you still have purchasing power when you PCS by using the VA loan. So even if you had to use some of the $85K right now to get the rental, you could still purchase a house at your next duty station.

James Wise · Answer

In that case it may make sense to get yourself a rental first. However remember if you choose to buy a home that you'll live in now and rent later you'll only need 3.5% down as opposed to 25% down so your money will go much further. Just food for thought.

Asa Ifill · Answer

Avery! Congrats on taking to plunge into real estate investing! You are correct by saying Huntsville, AL looks promising. With all of the new opportunity coming to the city within the next few years we are bound to blow. We have a Facebook data center, Toyota/Mazda manufacturing plant along with 8,000 new FBI employees joining us on the Redstone Arsenal. This is taking place to happen within the next 1-5 years!

Back to your question, I think that getting an FHA loan on a multi-family property could be a good idea just by using the leverage the bank will give you, you will only have to pay 3.5% down along with closing costs and such. You will have to live in this property for a year so if you and your wife travel a lot for work (military) then this might not be a good idea.

Honestly, having that much money saved up, you could potentially find 2 properties here in Huntsville, AL that you could use that money on..if you can find the right properties that cash-flow up to yall's standards.

I love talking about real estate and am passionate about it, shoot me a message if you'd like to talk more on this subject.

Thanks,

Avery Bishop · Answer

@James Wise,

Thing is, we have little desire to really stay in MD long-term and I have no idea how long we'll be here. Our longest assignment has been three years and the shortest assignment was 16 months.

We can see ourselves in Huntsville even after our military careers and it's close to home/family.

James Wise · Answer

Take care of home base first man. Anyone telling you otherwise can Eff off. At the end of the day you need a roof over your head and you've got to pay off a mortgage for said roof. Do you want it to be your mortgage or someone else's mortgage?

Ken Swearengen · Answer

Hi @Avery Bishop assuming price was no issue, where in Maryland would you be willing to house hack? The MLS is dry right now, but if you're willing to wait until the market picks back up in a couple months or try searching non-MLS deals (ex: craigslist or contacting owners directly) you may have some more luck luck.

Avery Bishop · Answer

Thanks for the advice everyone, much appreciated. If y'all wouldn't mind, I have a quick question about financing...

I'm due to get a raise in February (after taxes, this amounts to an extra $750 per month). Should we wait until that kicks in before shopping around/applying? Since we'll have to show income over a certain period of time...

What are your thoughts/recommendations?

Sebastian E. · Answer

Hi Avery,

The best thing to do is to purchase a residence you plan to live in using a VA loan with nearly no money down. It is the only vehicle out there that allows you to secure long term fixed rate debt with little or no money down.

The second thing would be to find a home that has a second unit like a basement unit or in law suite to subsidize the mortgage. Then if you are stationed elsewhere you can rent out the entire house and hopefully you buy right so you are cash flow positive. I know the area pretty well between DC and MD and it's not easy to find deals that make sense but you if you hustle or buy a fixer upper you can make it happen. I would encourage you to check out homepath and hudhomestore.

Once you have that locked down use as many conventional loans as you can to buy cash flowing rentals. Huntsville is a good market for that and so is Baltimore. I generally invest in my area but there are different schools of thought on long distance investing.

Good luck and happy investing.Sebastian

Avery Bishop · Answer

We've been looking for a while and multi-family units are not affordable for us (maybe if we wanted to live in Baltimore but we don't). Our immediate and surrounding areas (let's say 15 mile radius) is mostly townhomes that go for $400-$480k

Aaron K. · Answer

It can but you may have dismissed a multifamily house hack too quickly, without knowing where in MD it is tough to say but there may be SFRs with something like a granny flat that could bring in that extra rent.

Buy first home or first rental property?

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