Buying primary home after retirement and owning rental property

[John Larson]

I plan on retiring early and moving to a cheaper state in ~3 years.  Our plan is to move into a rental home in the new state, sell previous home, and eventually buy a new home in the new state.

Between now and then I plan on buying some multifamily RE and am concerned with getting a good rate with the mortgage on the next primary home in the new state because 1.  I’ll have debt in the multifamily rentals and 2. we’ll have much lower income (wife will work and we’ll some hove retirement income).  If I kept my current salary when buying the next primary home, this wouldn’t be a problem but my employer won’t allow the remote work and I would prefer to stop working for money at that time.

Questions:

1.  Say I invest now in only commercial properties using loans.  Do commercial loans affect my income to debt ratio?

2. Would owning CRE or non-commercial RE using a trust or LLC be beneficial to my situation knowing I want to get a good rate as much as I can for the primary home mortgage?

3.  How can I estimate my income once I am retired in much the same way a mortgage lender would?  Currently all of my investments are in the stock market but I plan on buying some RE in the next 6 months or so.

If anyone has advice to do these events in a different order to achieve my goal, I’m happy to read what you have to say.

[Nick Belsky]

Hey @John Larson!

Ok so a few things here to unpack:

1) A commercial loan is normally closed under an LLC or other entity that you own or are part of. These loans are NOT normally reported on your personal credit but are reported under the entity's EIN. This is one way to help build your entity's credit history and worthiness. Much like personal credit, when you first start the entity, there is no credit history. Checking accounts, savings, accounts, credit cards, lines of credit, in general, will allow trade lines to get started and show the worthiness of your business. So to answer the question, no. Commercial loans do NOT impact your DTI when buying as an individual. As with anything, there may be exceptions out there.

2) I am not sure how being in or out of a trust as an individual or under an LLC would effect your rate... Conventional and FHA will likely always be the lowest rates you can get. Other non-agency loans are not far behind and are extremely appealing to investors. DSCR loans, in particular, only fall about 0.5-1.0% above conventional on investment properties. These loans can be closed under an individual or under an entity as well. If you have high liquidity in your assets, you could also consider an Asset based loan for your primary or investment. Both of these loans will normally require 20% down.

If you are concerned about your primary rates, you could use an FHA loan to purchase with minimal down, live in the new property for 12 months, then refinance it or rent it out. FHA is great for getting in cheap, but IMO, FHA loans are very expensive over time and not really a great choice for long term financing. If you put less than 10% down, you will pay Mortgage Insurance for the entire life of the loan, if you put more than 10% down, you will pay for 11 years; even if you put over 20% down...

Alternatively, you could use your current income and buy your primary in the new state now... there is no rule that says you can't own two primary residences...  Worse case, buy it as a second home, provided it is at least 100 miles away from your primary.  There are legit ways to do this... Second home rates are right there with primary rates... But, in case you haven't seen, rates have been trending upwards the past two weeks or so... 

3) Your retirement income can be estimated or calculated a number of ways depending on the lender, the program, and what the assets are. Asset Depletion loans may be a viable option for you as well, but they will not provide low, comparable rates to conventional. Expect 4.0%+ as of today. If you have $1,000,000 in assets, you qualifying amount would be 110% (some lenders do 105%, 115%, 75%, etc...), so $1,100,000. Divide this by 84 (some lenders do 120, 60, 96, etc...) = $13,095 in Qualifying Monthly income to be used in your DTI calculation. The rest is done much like a conventional loan, but with higher rates.

Obviously, if you are getting a retirement payout or have regular annuity payments setup, those would be used as well.  There are many forms of income and the answer is specific to you...

Hope this sheds some light for you...

Cheers!