Should I use all of my savings on RE property?

Question

Hi, all. So I have about 11k saved right now (I’m 23. No kids, no bills really other than car note/insurance/100 mo for student loans) I have been looking to buy my first property. I live in the DMV (DC, Maryland, Virginia) area where you either spend over 200k on a property, or get a plot of land for MAYBE cheaper. It’s expensive.

I found a townhouse in Temple Hills, Maryland. About a 10 min commute to DC. It is 3 bedrooms, finished basement with an additional FULL shower in basement. It is 215k, but I know I will have to bid higher to win so 225k or 230k realistically .

I am planning to live in the basement and rent out the top 3 rooms for 750/each. HOWEVER, after the down payment and closing costs...I’ll be paying 12k (that’s with down payment assistance)

My question is...is it worth it to spend everything I have to acquire my first property? I will want to get tenants within a month to help pay and start saving again...but it makes me a little nervous going from 12k to 0.

Also...does anyone know about the area? Finding trustworthy tenants specifically? I plan to renovate but want to make sure this is an ok deal. Thanks for help!

Cassidy Burns · Answer

This is a decision you ultimately need to make, but I think it's always a better plan to have a reserve, life happens, ESPECIALLY now.

I'd personally suggest waiting until you have $10,000 in reserves before doing this.  So that means you need to save a total of $22,000.

Good luck.

Dillon Dale · Answer

@Jade Jamison I did and I would do it again if I had to, but I cannot speak to your situation. Just have to ask yourself if you are comfortable with that or not. I suppose having family or friends to support you if everything goes wrong is a nice cushion to have. Basically just play out the worst case scenario and see if you could live with the consequences.

Lynnette E. · Answer

Make sure that the townhouses or condos allow rentals.  And check out what the fees are and if there are any major things the community is expecting such as new roofs or blacktop that they do not have reserves for.  Condos are especially known for hitting you with say $20k for assessment fees with little warning.

If you have no reserves these things can eat you alive.  I was just told that one of my properties with a community sewer system was given notice by the state department of the environment that the sewer system must be upgraded.  Every property will be given an assessment of $3k each for the next 2 years, due December 31, 2020 then March 31, 2021.  Merry Christmas!  If everyone pays they are expecting that to be enough, but based on the default rate, there may be a supplement bill next year to pay for the system.  Unforeseeable bills can come from anywhere when you own property.

Have either some reserve or family that can lend to you.

Also note, that many loans will require about 3 months of savings.

George Lang · Answer

@Jade Jamison I think this is a great step in the right direction, that you're thinking about this early/earlier in life.  You've received some good input from others, I would also strongly recommend building up a healthy sized reserve for the worst case scenario of having to carry all costs by yourself (non performing leases on the house hack), OPEX and CAPEX costs, HOA, etc.  Run your numbers to get a better idea of where you need to realistically be to make it work.

I felt like I was in way over my head when I bought my first property of having to carry that mortgage for 30 years, even though I was in a decent paying job with good career growth prospects, so I started house hacking 2 months after I moved in (and that tenant is still with me 9 years later and the property is a full room by room rental now).

The great thing about house hacking (esp 3 rooms) is that a single room vacancy won't (or at least shouldn't) crush you for the month.  You'll learn a ton through self-managing, have the opportunity to get your hands dirty with the maintenance, and have direct control over the tenants you put in place.  You can source from Craigslist, FB marketplace, Cozy (and it's affiliates), word of mouth, etc.  Screen all your tenants, background and credit checks.  You can also take a security deposit or an extra rent payments depending on the lease terms.  For my rental, I also provide fully furnished rooms which I think I get a premium for, but it also attracts a specific type of tenant which could lead to more turnover.

Best of luck and let me know if you have any questions!

Steven Foster Wilson · Answer

@Jade Jamison RE is a great way to build wealth, honestly I believe its better then a 401k and an IRA. Consider this as a retirement account if that helps you make the decision.

Though be aware, owner real estate requires reserves, if you are spending all of your money, where will money come from to pay for emergencies?

Salvatore Lentini · Answer

@Jade Jamison - I would not cut it that close to the bone.  What if you have a $6000 HVAC replacement or $15,000 roof?  Can you bring in a money partner...like a family member and either give them equity in the property or do an interest only loan with them?  They can have a 2nd lien on the property, with your bank in 1st position?  In the future you can decide, once your principal is paid down and if the property appreciates, to refinance and buy them out/pay them off in full.  Man... what I would do to go back to 23 and start my real estate investing career.  Good for you!

Frank Godfrey · Answer

@Jade Jamison I personally would never suggest ever using all of your savings to invest.  Investing is not as clean cut as they make it look on HGTV.  There are always over runs.  Always something else.  Always!

My suggestion is to look into the programs that will allow you to use less of your money to invest.  There are plenty for 1st time home buyers in MD and especially in Prince George's County.

Know, you could qualify for a construction loan and only need 3.5% if the terms are negotiated well in your favor.  This would include the rehab costs so money spent to close the deal gets you to the end of the finished product ready for market.

DM for details on tapping into available programs.

Note, programs will reduce your buying power.  You will not have the sexiest terms to a seller.  Unless you are buying strictly as-is.  Finding the perfect home will take some effort by you and your agent.

I close one today that is a very similar situation, however, they have 35k to invest in the rehab instead of getting rehab financing from FHA of Fannie Mae.

Use a buying program for your first home.  It is the only first home so use all that is available to you.

Stephen Kehoe · Answer

Does the bank have reserve requirements?

Seth Hochberg · Answer

I'm going through a similar debate in my head. It's important to have some form of back-up if things don't go according to plan. What if you find out you need to do 5k of repairs? What if you get terrible tenants and they damage the property and more importantly, they don't pay rent. How are you going to pay those mortgage payments? Do you have a parent that could loan you 5-10k in a pinch? Are you comfortable with that? Because with nothing in reserve, worst case you don't have it rented out, you've got to figure out how to make mortgage payments or your property will get foreclosed on.

Should I use all of my savings on RE property?

Most Popular Reply