Buying first house for future rental

[Andrew D.]

My wife and I are 27 and looking for our first home. My goal is to buy my first house for around $180 or less, live there for a year or so, buy a second house to live in, then rent out the first house.

The issue is my wife and I currently gross about $65k. I haven't done any pre-qualifying yet because I want to do it through multiple places within a week of each so it only affects my credit once. I only have 1 car loan with about $5k left on it. No debt other than that.

I am hoping I can get a loan with a low down payment on the first home since I am very sure I will need 20% down for the second home. I think Navy Federal has an option with no downpayment and no PMI, but I still need to inquire with them about it.

I'm worried my plan will be crushed when it comes to getting a loan for the second house. How easy is it to get a loan for the second house?

I've searched around and am having a hard time finding someone in the same situation around my age.

[Dawn Anastasi]

Where did you come up with the $180 number?

[Andrew D.]

Based on the research I've done so far, I know I can find the kind of house I would like to live in around $160-190k. I could probably go even cheaper with a foreclosure.

[John A.]

Andrew Dooly, You're probably going to hear this from many more responses. If you plan on renting this house out in a couple of years as an investment, what you like to live in should not be your first consideration. You should look at income potential as a rental. What do rental market conditions in the area look like? What will the PITI be compared to rents?

In reply to your original question, getting a loan for a second or third house is easy if a) you have the down payment b) your credit score is good and c) your debt to income is reasonable. The banks generally won't consider the rental income on your first property until you can show two years of rental income. But I wouldn't worry about house #2 until you find a good INVESTMENT opportunity in house #1.

Good Luck,

[Brook W.]

Andrew Dooly have you considered starting with a 2-family? That way you can start building up proof of income from your property right away.

[Suzie B.]

Like John mentioned, if your plan is to rent out the home in about two years, you should be looking first for a good investment/rental potential ahead of your "wants"... They are two different properties.

The rentals we own are much, much less in value than the home we chose to live in. Why? Because we can draw good rent on them and pay them back faster if we choose to. Higher priced rentals, in my opinion, aren't worth the added risk, cost more to maintain, and I would rather have 4 50,000 loans than 1 100,000 loan. I don't know about your area, but around here I would get more cash flow with the multiple properties.

Also, as Brook mentioned, duplexes are a good way to start if you know you want to get into rentals.

Spend some time reading the forums and get a feel for what others are doing. There is a lot of insight to be gained here. Let us know what you decide to do.

[Andrew D.]

I would love to go cheaper, but a house under $100k will put me in the part of town where I wouldn't feel safe. If I could find a $50k house that I felt safe having a kid in, then I would consider it, but that isn't the case. I also don't want to rent to the lower class because that is generally the group that can have a hard time paying rent.

I've thought about making my first house MINE and then renting out house #2. The only issue with that is the interest on house #2 would be a lot more since it would be classified as an investment.

[Suzie B.]

You would also have to put more money down if it was purchased as an investment property.

Getting into the real estate and rental business is great... good money if you do it well.

If you do go with a $180k home, I would think you would be stretching yourselves pretty thin w/ your income... Out of my comfort zone anyway. I would be sure to have a pretty sizable savings set aside to pay any repairs and vacancy fees before I bought the second home.

I think I would look at homes in the neighborhoods you feel safe in and see if I could find a smaller home, or one in need of repairs that came in at a lower price. There can be a lot of value in sweat equity as well if you are will to live in some dust. That way you will have less money tied to your future rental, making it easier to pay down when/if you want to.

[Lynn McGeein]

I agree with Suzie B., looking for a fixer-upper in the neighborhoods you want sounds like a good choice for you. Starting out years ago, we built up quite a bit of equity in our first 2 homes -- moving in, fixing up, selling (especially once the 2-year home credit kicks in and you pay no taxes on the gains), repeating the process. Our first home took us almost 2 years to fix up, anyway, as we didn't have the money for all the work up front. Our friends thought we were crazy, living in something while we were knocking out walls (3rd home, we had to live in the basement for first few months while we fixed up the upstairs baths and bedrooms.)

You can look for special first-time home buyer programs where they actually can get you in for 0 down. My son looked at Navy Federal, but the city program came in at lower costs to him overall (NFCU was much higher interest rate, which may not be so bad comparatively now that FHA fees are higher and MIP never goes away). Income limits were much higher than he thought, and he only had to come to closing with $11 (after paying inspection, appraisal & credit report outside closing).

We recently had to move for work, and decided to buy a future rental, a 3/2.5 townhouse style condo that we know will rent or sell easily once we're done with it versus a nicer home in a better neighborhood. It's funny as now our tenants live in bigger homes in better neighborhoods than we do, but it's only for a few years and worth the investment as we're not looking for something permanent here, and nicer homes won't cash flow as well in this area. Definitely do not feel as safe here, but nice neighborhoods get broken into as well. We just take more precautions here (and I've always had a dog).

[Andrew D.]

Thanks for all the help everyone. You are helping me with my decision. I am going to look for something under $180k now that I am realizing I want more cash flow and if the house is vacant for 2 months out of the year, then I wouldn't have much profit at all for the year.

Since I qualify for first time homebuyer loans and can get 100% financing with no PMI through various places (real estate agent recommended CHIP's through BB&T), would it be smarter to do that so I have more money available for a down payment on a second home? I have around 10% available, but I think it would be better to save it since it will be needed for my next home.