How can I use our savings to buy our first home and invest?

Question

Hello All! I'm a newbie with much to learn (I'm not even sure if this is the correct community I should be posting to, but I'm sure someone will let me know). However, I'm having this dilemma (or if it's even a dilemma at all). My husband and I are in the process of saving for a new home. We want to seek out financing for a single-close or construction to perm loan, so we can buy land and build a home within the next year or two. Before we get pre-approved, we should have close to six figures or more saved up.

Now for the tricky part, I would like to start investing in real estate sooner rather than later, but would investing in real estate interfere with my credit, interfering with us building a home? Would transferring the property to an LLC be an option to avoid inquiries on our credit (I understand the due on sale clause may come into effect, but I heard there might be ways around it; is there?)? How can I make these two things coincide? If I invest + finance before financing our home, I fear that it would alter our credit, making it extremely difficult to secure financing for our new build. Will lenders look at my investments as income, and I shouldn't worry about this being a huge impact on out build?

Please reply if you've had a similar experience or some insight on this topic.

Thanks in advance!!!

Rob Bergeron · Answer

BRRRR then buy home. Or buy a househack airbnb and make some profit.

Albert Bui · Answer

HI Ye'chiya,

Investing in real estate shouldnt interfere with your credit, however usually a borrower's first mortgage, typically your fico scores will dip 10-30 points but its just temporary. I've seen this fico score go back to normal and higher after 6-12 months of on time payments. After this period your fico should be even better than prior. Just plan accordingly because if you need to get another loan within the 6-12 month period you might encounter a bit of turbulence when it comes to fico scores. It doesnt mean its the end of the world though because if you're at 780 fico and you drop down to 750 fico you're still the best you can get from a conventional, fha, VA loan financing wise.

The other aspect to look at is your ability to qualify not from a credit perspective, but from a income perspective. We'd have to review your investments that you're planning on buying to see if they cashflow. If they cash flow either on your tax returns or using 75% of gross income - PITIA (monthly payment) then you will be fine, however if the income calculation results in a negative number then this "investment property," might actually slow you down financially.

Hope that helps but those are the two areas I would mostly be concerned with if you decide to buy investment properties first before your home. The upside with investing first is that it will be easier to get them because some people buy too much "home/primary residence," and what happens is their DTI or debt to income ends up getting maxed out and they end up being stuck.

Bob E. · Answer

Why not build your house and put in a basement with a separate entrance.  Then finish out the basement and rent it for a house hack.

I had a friend back in Kentucky that bought some land and built a house on it.  She dried in the house, roof, windows, siding, etc. but left the inside undone.  Then she slowly finished out one room at a time, paying cash for everything.  She paid off her house in 6-7 years on a customer service salary.

Theresa Harris · Answer

Rather than saving 6 figures to buy land and build a home, why not do 5% (or 20%) down and buy a duplex.  Live in one half, rent the other half.  If done right, the other half will cover over 50% of your expenses.  That should also cut your housing costs allowing you to save to build your dream home.  You can live in the duplex for a few years and then rent out the other half and move into your new dream home.

Kathy Henley · Answer

@Ye'Chiya Harper  It sounds like you are very disciplined couple, striving to save a six figure nest egg. You will go far. I know nothing of an out build or loans for such a project. I do know that investing in real estate can be a boost to family wealth and will off-set the tax obligations of your current W2 income.

Why not invest in a multifamily property before breaking ground on your custom built primary home? Or a measly SFH? It would improve your credit worthiness, for you would own an income producing asset. One advantage of using leverage (loans) for real estate investing is that a 25% down payment gets ownership of the property yet one gets to claim 100% of its current value in our net worth.

Might you consider temporarily living in an investment property and later rent it out when you move to your custom built home? There is a book which explains the fundamentals, 'Investing in Duplexes, Triplexes and Quads'. I don't know where you live, how you live now, or anything about your budget, but the method worked for us. Our investment properties pay for themselves and have increased in value. I cannot say the same about my mutual funds this year.

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Ye'Chiya Harper · Answer

Hi, Theresa! Yes, we're considering that option. I was just curious if was room to do both and not damage our credit. I think we may be leaning more towards house-hacking in future...in preparation for our dream build. I'd like a little more insight on what to expect credit-wise if we house-hack. Would banks really consider it as an investment property or not when we finance our build or would I have to spend years trying to improve our credit? Thanks for the reply!

Ye'Chiya Harper · Answer

Greetings Kathy! Thanks so much for the advice. Yes, we're reconsidering house-hacking into the equation. I had to kind of get my husband on board for the challenge, but we do realize it's a great investment opportunity. I just wasn't certain if it would be looked at as a liability. Thanks again!

How can I use our savings to buy our first home and invest?

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