1st time buy single or multi in Phoenix live in to turn rental?

Question

Hello! So I am looking to buy my first property. Im looking around the Phoenix AZ market. Yes the market here is at a high and really hot. I have about 8k to 12k cash and I am debating using the down payment assistance program we have here In Arizona to increase my purchase price. One problem with the down payment assistance is I have to live there for 3 years. Im going to use a fha 3.5% down or a conventional 3% down.  I have a full time job income is $3600 after taxes. I have 0 expenses now. I also plan to rent out the extra bedrooms I have in my unit or air bnb them. My goal is to buy a place (single or multi) live in it for about a year turn it into a rental and buy another and continue that trend. So I have a few options I am debating on doing.

#1 Don't buy and save more money. (But I will be paying around $1200 in rent per month that I will never see a return on)

#2 Buy something I can afford with no down payment assistance. Like a condo or a small  single family with hopes of a low hoa. It will be a lot cheaper of a place and may be harder to rent. But I Save the higher interest rate and I can rent it in 1 year vs 3. Price range $100k to $130k

#3 Use the down payment assistance. single family. Price $225k to $275k easy to find an ok place.

#4 use the down payment assistance multi family. Price $225k to $275k is gonna be tough to find a decent deal.

Let me know what you think. Thanks!!

Scott Michaels · Answer

Have realistic goals. Know what you'd be comfortable with.

Sounds like you have done a good bit of research and I recommend FHA or 3% conventional on a single family. There aren't any good, inexpensive multi units. Condos tend to have a high monthly HOA payment that won't be worth it if you plan to rent in the future. Another limiting factor is whether or not a condo is FHA approved.

I've helped several of my clients buy single family homes and rent out the extra 2 bedrooms for $400-500 a month plus utilities. Which should cover most of your mortgage allowing you to either pay it down quicker or save for your next investment.

Bob Okenwa · Answer

@Chad Mcquality

I'm fully familiar with what you're talking about and there are a few different programs in AZ outside of the Home In 5 program you've referenced. There's the Home Plus program as well as the Pathway to Purchase Down Payment Assistance. For just trying to get your foot in the door, these programs can help with what is the largest hurdle for most folks, which is the down payment. I'd also speak with a lender if you haven't done so already as they may be knowledgeable about other down payment programs as well.

A lot can change in the 3 years and the refinance may not be worth it if you can't get a better rate, but on the other hand, you'll have a property with the possibility of none of you own money in it, which could make your ROI essentially infinite.

Chad Mcquality · Answer

@Ryan Swan so the down payment assistance is a program where you get a grant pretty much for 1% to 5% of the selling price covered. The down side is there is a 2nd lien on the property. its forgiven over a 3 year period.  you must live there for 3 years you cant refinance for 3 years. Its also a higher interest. so you are paying more each month so its like free money that you pay back over 3 years then after that you are paying more then you should. Thats a rough break down. Its called home in five i think for AZ. So my dilemma is do i use that and pay more over the term of loan and cut my future potential cash flow down when i rent the property out. Or do i get a cheaper place with out that program. But then im losing out on having a nicer place that will rent easier in the future. I figure in the long term of things my rent on the other future properties that cash flow will wash this one out. I just need to get in and make my first deal.

Ryan Swan · Answer

@Chad Mcquality it sounds like you've done a good job analyzing the market as well as your individual situation!

Wanted to clear up some points:

1) What do you mean by down payment assistance?

2) FHA is not down payment assistance - it is a government insured low-down loan program for both first time and repeat buyers. You can put as little as 3.5% down on SFH, condos, or even up to 4 unit dwellings. $8,000 down payment will get you up to around $228k purchase point (you'll need to factor in another $4,000+ in closing costs and upfront mortgage insurance premium). That's a pretty healthy budget for a variety of property types across Phoenix Metro. You only have to live in the property for 1 year after purchase. Keep in mind that you can't get another FHA loan on a different property in the same geographic area.

3) If you have the income and credit, there are also low down payment conventional (non-fha) loan programs. These are usually preferable to FHA when you can qualify for them.

Given your budget and finances, the best option is to get something and house hack it with 1-2 roommates.