How to: Buy rental & preserve first time home buyers credit

Question

As a first time home buyer, how can I get started with investment properties and retain my first time home buyer benefits for when I am ready to purchase my first home to live in?

Currently, I live in San Francisco, I am happy with where I live and rent my home, and I cannot afford to purchase a property near to where I live and work. I want to invest in rentals in nearby towns to increase my savings and equity; this could put me in a better position to afford a home in/near San Francisco in a few years. However, when purchasing a home in the Bay Area with a median-ish earned income, I will need access to the first time home buyer benefits of lower down payments required and lower mortgage rates. What strategy would you use to retain access to those benefits?

What other strategies should I consider to be in a better position to purchase a home in an expensive area like SF?

Jeff B. · Answer

Don't be shocked, BUT . . . buying directly in the name of an LLC usually (99.9%) doesn't work and the lender will require mortgage & deed to be in your name.  You can quitclaim to the LLC, but the damage to your intent is already done :sigh:

Tatyana Shevnina · Answer

@Leslie B.  - found this article on BP about LLCs.  Something else to consider is that once you form a LLC in CA, you need to file a tax return and pay $800 minimum tax for it every year until dissolved. This applies even if LLC is just a shell and does not conduct any business or owns any real estate.

Leslie B. · Answer

NA Beard While reading the article, it started to appear that the LLC makes sense after you have a couple of properties. The article went on to argue the same thing.

According to what I have read elsewhere, at a couple properties...that is also about the place that conventional lending starts to become more challenging and portfolio lending and private financing options start to be a better fit. Seems like it all starts to fit together well at that point.

Shaun Weekes · Answer

@Leslie B.

Fannie Mae has taken away the first time home buyer label.  It used to be that you needed to wait 3 years but now you can put down 3% to 5% on a conventional loan.

You can also take advantage of an FHA loan if the numbers make sense.

I would strongly recommend getting in touch with a broker or loan officer so that they can help and guide you through the process.

I hope this helps and have a great day.

Jeff B. · Answer

I would agree.  Once you have a portfolio, THEN the cost and effort to maintain an LLC *may* be worth the effort.

Be advised, it's $800/yr to keep an LLC in Calif AND the list of members must be filed annually.

All the seminars taught the legal entity stuff (usually due to the vested interest in 'helping you') but IMO a good landlord insurance policy + an umbrella policy is sufficient for "well behaved owners".

{btw: I too went down that path and created an S-Corp + LLC, but gave up both when I could not create my own Prop Mgmt Company}

Leslie B. · Answer

Thank you, @Tatyana S.! That article exactly covers what I am weighing, and my personal situation is/will mirror the authors. The impacts of the LLC on the down payment, mortgage/capital gains write offs, and cost of business are significant, plus I can see making mistakes in setting up the LLC as so much of the process is new all at one time. The FHA approach is sounding very good.

I am eager to read through the comments, too. The article generated a lot of discussion.

Once again, a little bit of Bigger Pockets has gone a long way to influence and focus my vision. :) Thank you!

Tatyana Shevnina · Answer

Leslie B.

Hi Leslie and welcome to BP! Common strategies to take advantage of first-time buyer perks are  to invest in a duplex and live in one unit or house hack - buy as primary, fix up and rent out.  I don't know about buying rentals outside SF first while still preserving your first-time buyer privileges for later primary home purchase.

I own and rent out a condo in sf. Bought it as primary home in 2009 when prices were dropping and foreclosures were everywhere. Over the last 2 years it's been a no-hassle rental. I hired a management co and that has worked well. What has allowed me to buy it, was having a stable job and saving money for downpayment. I was ready to buy when market went downhill. Real estate is cyclical so there are bound to be downturns in the future.

Good luck!

Leslie B. · Answer

Thanks to @Tatyana S. and @Ryan Landisfor the encouraging words and ideas.

Was wondering if an LLC could be used for the initial investment purchase of the rental and then I could use my own name for the live-in as first-time homebuyer. Will look into the FHAs more.

Ryan Landis · Answer

@Leslie Bienenfeld reach out to a mortgage broker/lender and ask them directly. I was under the impression that most of the language usually is around primary residences (but I may be wrong) and how many years ago you purchased (if you ever have). Also, FHA/etc. would not mind. Something else you might want to look into are the income limits here (in some counties it is a bit higher than most people think) for qualifying for support/programs.

How to: Buy rental & preserve first time home buyers credit

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