19YO Trying to Not Screw Up His Life

[Jack Martin]

My apologies for how long this post is, it's almost a full on financial advise session than a single question, just want to get some guidance as the main centerpiece to my situation is a house and renting.

Here's a  quick rundown on current my financial state. I am making about $23,000 a year, and currently have around $5000 in expenses annually. I could up my income considerably as I only work three days a week, so whether its delivering pizzas or DoorDash or some other second part time job, my income could be closer to $30,000+ if I really tried. I have a $130/month car payment, $200/month car insurance, and no other debts. My credit score is just about what most banks would consider Excellent, due to a $500-limit credit card I pay small expenses with and my previous and current car loans. I will be going to Aircraft Mechanic Technician training in August 2020, and the entire 2.5 years will cost $20,000 or less. Once certified, I should start out at about $85,000-100,000/year. I am working at a major airline so the already abundant jobs in this field will come even easier being in the system already. Plus with the abundant overtime, I could really increase that range as well.

Anyway, with that covered, here's the deal. I have been planning for a while to buy a 4 bedroom house in Minnesota come next spring or early summer. By then I will have $10,000 stashed in an emergency fund, and $12,500 to go towards a down payment with the rest going towards furniture and household supplies, and also to cushion the emergency fund. I have 3 reliable and very close friends that all want to move in and rent from me when I get the house. I'm well aware of how careful one must be when renting to friends, or renting at all, and believe me, I have been planning with experienced adults about legal safeguards and the best way to handle the situation so there is zero grey area.

Got a family friend who is a skilled realtor, just helped us get the house we're in now (I'm living with my parents while I'm saving money), and they sold our old house as well. Very good at what they do so I'm planning to probably go with them to help me buy.

For a decent 4 bedroom in the Twin Cities general area (I work at MSP Airport so I can't go too far), you're looking at the $200-275k range. It would be around 1500-1750 a month including PMI and other costs, so split between 3 renters, its around $600/month before utilities, which, at least in Minnesota, I think is more than reasonable.

I'm mostly concerned about these worst case scenarios:

a. I cannot qualify for the loan due to my laughable current income compared to what I want to buy. 

b. The mortgage broker might not accept future rent income as actual income to justify the loan.

c. Might lose job randomly due to some economic turmoil causing mass firings, I am low seniority and fairly expendable currently.

d. A friend might fall out with me unexpectedly and leave me 600+ short a month.

In summary, I can in NO way afford even a $200,000 house, unless it's a 4 bedroom with 3 rented out rooms bringing in money every month. At $1,500 a month, that is $18,000/year, so if I even got the loan, if all hell broke loose and all the renters flaked and I couldn't sell the house, things could very easily go spiraling into financial hell. Seems like an insane risk, but my family, who is extremely wary of getting into debt (wouldn't even let me borrow 10 bucks for a Bionicle set if I didn't have the money) seeded this idea, along with some other very level-headed and experienced family friends. My grandfather, who is a bit of a real estate tycoon, said that the biggest mistake I could make would be doing a 15 year mortgage and putting any more than the minimum down on the house, because in his words, this house is not an investment, it's a place to live. That especially struck me as genius because I never wanted this house to be a long term living situation or to raise kids in it or anything, just as a way to live with my friends and avoid dumping money into renting a place of my own. I'll probably move out of it after like 5 years anyway.

And just to be clear, I am an ALL-cash kind of guy, I plan to start investing in rental properties in a few years once I land the job I'm pursuing. Cash is totally the way to go and all future real estate purchases are going to be mostly or all cash. What's more, by the time I start school I should have about $5000 to put towards school, and since at that point I'd be living in my own house with renters paying the bill, I would have no mortgage payments to worry about, leaving my monthly expenses under $750. 

Immediately after buying the house I'd be going back to putting money away, and can easily pay off the school loan and even my car loan before I finish school in Jan 2023.

I know that this post was basically just an info dump but I really don't wanna screw up so early, as at my current trajectory I could retire early and wealthy.

[Michele Wax]

Congrats on getting started early. I think you should go for a FHA loan and buy an apartment building with 2-4 doors, not a house with 4 rooms. A bank will look on this easier. If you could find a building with 3-4 bedrooms and your friends then also moved into the one you are in it would make you a ton of cash.

A four bedroom house that is not made into apartments will never make the kind of money an apartment building would.  
Find something that has zero or one vacancies that has been rented out for more than 6 months. Buy that and move in with a FHA loan. You would make your money back faster and give you some clout to start setting up for retirement.

Living with friends is always a bad deal.  Someone always moves out and you are stuck with the bills. But if you own even a duplex and the other side is making payments to you for say 1500 a month and the mortgage is 2000 you will still be doing great if you have a friend that rents a room from you for 600 then you are going to be able to put aside some money for yourself. 

I don't know your area but this is a way better idea. 

[Scott Jensen]

@Jack Martin

At 19 years of age a goal of "Trying to Not Screw Up His Life" is leaps and bounds ahead of your peers. Kudos to you for being intentional.

When I was younger my views on money were much more black and white than they are now. There was a right way to do it and a wrong way to do it. 15 year mortgages were the best, 30 year mortgages were barely acceptable, and ARM mortgages were for suckers!

In life and money nothing is black and white. 30 year, 15 year, and ARM mortgages are just tools and sometimes one tool works better than another depending on the circumstances.

The important thing at your age is just being intentional, having a plan for your money, and being willing work hard and make it happen. If you're going to be short on cash, work more or get a higher paying job until you finish up school. The scenario you described above certainly sounds reasonable.  Talk to @Tim Swierczek about what you can realistically finance. 

[Jonathan Bombaci]

I completely agree with @Michele Wax, that was exactly what I was thinking. When I was 22 I househacked a 3 family. It was a 2/2/4, I lived in the 4 bedroom with my brother (who ironically is a aircraft technician for UTX), paid me $500 a month. I rented out the two 2 bed 1bath apartments which completely covered my mortgage and carrying expenses. So the $500 from my brother was my maintenance fund. 

A bank will not count a roommates rent when doing a loan, especially on a SF. But the will count 75% of the rent generated by other units and if you buy a small multifamily (4 or less units) it qualifies for a residential loan if you plan to live it for a year. Househacking a 3/4 plea with a bank loan for 3.5% down payment is literally a once in a lifetime opportunity. Plus it sounds like you’d love to own rentals in the future, why it cut your teeth and get some experience by buying a 3/4 plex? Your buddies can still room with you if you get a 3-4 bedroom unit but if it goes south you still have the other rental income to foot the bills.

The beautiful thing is if you find the right property your income doesn’t even matter. With the rents from 2-3 units you can cover the carrying cost of the house in 90% of markets and any income you make is a bonus. I use this strategy all the time with clients that have commission based or tips based jobs. Underwriters can brutal with non-W2 wages but if we find a 4-plex that pays for itself when 75% occupied (owner in 4th unit) they’ll underwrite it all day long. 

Also as a side note thinking about this stuff at 19 is impressive! I wish I had thought about this stuff at a younger age. 

[Tim Swierczek]

@Jack Martin  I applaude your planning and thought you are putting into your investing.  Since you asked for advice my recommendation would be to wait until your in a more stable position.  Once your schooling is done you would be able to withstand the ups and downs of the real estate market.  If you do move ahead then you will want a cosigner.  I can tell your eager to get going and but you should learn the difference between Loan Guidelines & Lender OVerlay's  See this article I wrote https://www.biggerpockets.com/forums/701/topics/667832-loan-guidelines-vs-overlay-s-the-differences-between-lenders

The reason this is imporant is that when your asking these questions you might be fooled into thinking that lenders will differe on the guidelines related to your questions, and they willl not that article explains why.  As for your questions the first two answers are guideline based (no opinion).  The second 2 are my opinions.  Please reach out if you'd like to meet up some time and talk investing.

My answers to your questions:

a. I cannot qualify for the loan due to my laughable current income compared to what I want to buy. – This is true your housing debt to income ratio exceeds all loan guidelines, you would need a cosigner to qualify. At $1500/month payment your housing ratio would be 78.26% and at $1700/month your housing ratio would be at 88.69%. It should be around 31% and I would not expect you to qualify above 39% based on the information provided.

b. The mortgage broker might not accept future rent income as actual income to justify the loan. -The mortgage broker CAN NOT accept boarder income. Fannie Mae guidelines do not allow the lender to use income from the unit you are living in unless you meet very specific boarder income rules that you do not meet based on your post.

https://www.fanniemae.com/content/guide/selling/b3/3.1/08.html

Ineligible Properties

Generally, rental income from the borrower’s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the borrower. However, Fannie Mae does allow certain exceptions to this policy for boarder income and properties with accessory units. See B3-3.1-09, Other Sources of Income, for boarder income requirements, and B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements, for accessory unit income requirements.

https://www.fanniemae.com/content/guide/selling/b3/3.1/09.html#Boarder.20Income

Boarder Income

Income from boarders in the borrower’s principal residence or second home is not considered acceptable stable income with the exception of the following:

When a borrower with disabilities receives rental income from a live-in personal assistant, whether or not that individual is a relative of the borrower, the rental payments can be considered as acceptable stable income in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage loan. Personal assistants typically are paid by Medicaid Waiver funds and include room and board, from which rental payments are made to the borrower.

The HomeReady mortgage eligibility requirements include an additional exception. See Chapter B5-6, HomeReady Mortgage.

The following table provides verification requirements for income from boarders.

✓	Verification of Income from Boarders
Obtain documentation of the boarder’s history of shared residency (such as a copy of a driver’s license, bills, bank statements, or W-2 forms) that shows the boarder’s address as being the same as the borrower’s address.
Obtain documentation of the boarder’s rental payments for the most recent 12 months.

c. Might lose job randomly due to some economic turmoil causing mass firings, I am low seniority and fairly expendable currently. – this is a valid concern when you are on the edge and cannot afford the payment without rent.

d. A friend might fall out with me unexpectedly and leave me 600+ short a month. – Another valid concern.

[Jack Martin]

Thanks to all for the advise! A couple clarifications:

My original plan was to get a du/tri/quadplex and do exactly what you are suggesting. However, I live in Minnesota and currently I haven't been able to find any listings, much less any listings I could afford.

With this small multi-unit strategy, does the income from 2-3 boarders, plus the possibility of renting to friends in your own unit allow for the price range of the home to increase?

Basically, the main reason I wanted to do the 4 bed house idea was to just enjoy myself in my own place while living relatively for free. I'm getting extremely tired of living at home and opting out of college, while I don't regret it in the slightest, has made me that much more stir crazy. As George Bailey put it, "I just feel like if I don't get outta here I'll BUST."

What's more, househacking seemed to me like a great way to break even and still live on my own. I am going to go head on into real estate investments in a few years but I just saw this as a stepping stone, and a better choice then putting down 800 a month + utilities to live in a crappy apartment in the cities. The amount I would spend on the house out of pocket would be returned through rent checks within a year, and any more time I spent there would be a bonus. Additionally, while I do understand the concern of renting to friends, I hear examples of awful scenarios and an equal number of great ones. I've found that a lot of people make really bad choices in friends as well, whereas I have been tight with the same few people for the majority of my life. These aren't fairweather friends by any stretch and we all share the same philosophical and economic beliefs. I get that things can go wrong, but to me, based on the people I want to move in with, I'm more likely to get caught in a bad market or have the basement get flooded or a tree fall on the roof, than I am to fallout with one of them. Additionally, the legal safeguards will keep everyone on the same page. I mean, none of us even drink or do drugs so that's half of the issues with young men getting into trouble right there.

I know that there's some disagreement about how ready I am to get a house or plex, but for those who have recommended the plex, is that a solution to my current income problem, something which would allow me to get the loan while only making 30,000/year at the time of applying? How big a loan are we talking? Most of these plexes I have looked at, of the limited number that are even listed, are just south of half a million. I skipped college because I wanted to avoid extreme debt with less than great chances of return, and I just feel like I don't know the first thing about finding or keeping renters when they're complete strangers. The stakes seem to be so much hire it kind of scares me into just getting that crappy apartment and waiting another 3 years until I've saved more money. However, considering how much I'd be flushing down the toilet on rent, could take longer than 3 years.

One last note, the current job I'm working is good and I do well and have a good reputation there, plus it's important that I keep that job because it will not only greatly increase my pay at a AMT job when I get certified due to seniority, but it will also increase the likelihood of getting an ideal job at that airline since I'm already in their system, which is a months-long process. Point being, I will not be quitting any time soon. I will be ramping up the part time work though, and I am starting a little drone real estate photography business on the side (already licensed), so I hopefully can increase my income a bit through that, although it's not going to be a drastic change from the 30,000 range.

Thanks again for the advice, hope I'm not being silly this is just very new stuff to me.

[Tim Swierczek]

@Jack Martin You can use the income from units you do not live in to qualify.  The lender will give you credit for 75% of the gross rents on each unit you do not live in (duplex 1 unit, Triplex 2 units, Fourplex 3 units).  In order to use the income of the units that you live in you would need to meet the requirements I referrenced above.  This includes but is not limted to living with the roommates for the past 12 months and proving reciept of rent form them for that time period. 

As for your other question my answers are in bold to make them easier to read:

I know that there's some disagreement about how ready I am to get a house or plex, but for those who have recommended the plex, is that a solution to my current income problem, something which would allow me to get the loan while only making 30,000/year at the time of applying? Maybe, but you would still have issues to deal with.  With just the rental income alone you would still have a debt-to-income issue.  You really need a cosigner but if you get a cosigner on a multi unit property your minium down payment increases dramatically (FHA 25% down/Conventional 15% down).

How big a loan are we talking? its hard to say exact without a full application, but a rule of thumb would be to take your 

Gross monthly income (23.000/12= 1,916.67)

Add it to 75% of the rental income from the unit you are not going to live in. (est 1,200x.75=900)  

So your income would be 1,916.67+900=2,816.67   

Multiply your gross income by .39 (2816.67x.39= 1,098.50)

1.098.50 would be your likely max payment (this is not exact but it's close

Now subtract your montly taxes and insurance, I would use $125 (insurance) and $250 (taxes)

1,098.50-375 (125+250)= 723.50 This is your max principle & interest payment including mortgage insurance

The rule of thumb is that for every $1,000 you finance your payment is $5/month.  

Divide your max P&I payment by $5 (723.50/5=$144.70)

multiply by 1,000 (144.70x1000= $144,700)

$144,700 is close to your maxium purchase price with the varibles being, the actual rent you recieve I used $1200, the taxse on the home you buy.  I used 3,000.  The insurance on the home you buy I used $1500, and the interest rate you qualify for ($5/1000 with mortagage insurance is in the ball park with good credit, with bad or no credit it coudl be closer to 5.5/1000 which would reduce your max price to about $131,545,

Most of these plexes I have looked at, of the limited number that are even listed, are just south of half a million. I skipped college because I wanted to avoid extreme debt with less than great chances of return, and I just feel like I don't know the first thing about finding or keeping renters when they're complete strangers. The stakes seem to be so much hire it kind of scares me into just getting that crappy apartment and waiting another 3 years until I've saved more money. However, considering how much I'd be flushing down the toilet on rent, could take longer than 3 years.,  I don't think you need to wait 3 years, but I highly recommend you wait until you finish your training program and your making the $85,000+ wage