First home. Is this a good investment?

Question

My wife and I are small business owners and are looking buy our first home. We plan to live in it for one year and then rent/airbnb it out. We are using an FHA and putting 3.5% down plus we have an appraisal gap of 10k that we have to cover in cash. As I look at rental prices in our area, it seems like we would break even on our mortgage on long term rental. Air BNB seems like it would cash flow a little bit better. The goal is obviously to cash flow on this property within a year. What are you thoughts about this situation? would you buy? What questions would you ask yourself to make a great financial decision?

Steven Foster Wilson · Answer

Its best just to get started. When I got started investing my sophomore year of college, I had $500 to my name, My grandmother lent me $12k for the down payment on a duplex on OSU campus in Columbus. Over the course of a year, my wife and I fixed it up, rented to friends, ate peanut butter and jelly, and did everything we could. We then refinanced the property and it has given us $140k in cashback and continually produces $1,800/month in cash flow. Ultimately, even if you break even you are going to have an asset paid in full at the end of 30 years!

Chris Davidson · Answer

@Isaiah Bellah without knowing your area I would say do it. Not sure if FHA is the best as it is low money down but not great long term IMO. You are also planning on holding for a year and running your numbers as if rents don't change in a year. They may not but what about your current situation do you expect the rents to stay the same or increase. If it is a good property go for it. Worst case you don't rent out next year and keep on living in it...

Isaiah Bellah · Answer

This is the other side that I’m wrestling with. Equity is a real thing, so even if the deal is not the best, We can still make money at the end of the day. Just trying to stay smart about it all.

Dave Skow · Answer

@Isaiah Bellah thanks for the post - you should consider using a conventional loan instead of a FHA loan as the down payment can be as low as 3% , you would avoid paying the FHA UFMIP of 1.75% and you can avoid the permanent expensive monthly mortgage insurance ....the conventional loan will likely have a higher rate / fee but its likely a better deal to consider using ...this would also allow you to keep the FHA loan idea to use for for next property

Michael Porche · Answer

Time in the market is better than timing the market. as long as you buy right and cashflow you'll be able to live through any down turn

Greg R. · Answer

I disagree that everyone is paying over list and giving full or partial appraisal waivers. Those kinds of buying terms are going away quite quickly. If the terms aren't good for buying where you live, my recommendation is to wait. The idea that buying terms are only going to get worst and that if you don't buy now that you'll never be able to buy is false. This is the same kind of nonsense that some people were saying prior to the 2008 crash. Be patient, be smart, and exercise discipline.

Isaiah Bellah · Answer

Yeah... That's what we were coming to realize. I believe we can get that 10k back through minor updates and appreciation. I do have an in on air BNB management, but still we are not looking at a great deal here. My follow up question is, everyone is paying over asking right now. We have had a hassle from conventional loan guys because we are self employed, even though we have the money. This is part of the reason why our loan terms are not great. Would it be better to form an LLC and get a different type of loan? We do eventually want to own a couple properties, so I'm trying to understand how to do it correctly.

Greg R. · Answer

Off the bat you're going to have no or negative equity, and a high interest rate with mortgage insurance. I would be very cautious about over paying for an average property that requires 10k over value (cash) with unfavorable loan terms. Regarding Airbnb, it's a lot of work. Search the forums, there is a lot of info on STRs. The don't run on auto pilot, they require a very high level of involvement. Or, you are going to have to pay a STR property manager who will take all of your profit. If your goal is to live in the property to save a couple hundred bucks a month on rent and avoid rent increases, great. However, if you're looking for this to be a high cash flowing investment, I recommend you exercise extreme caution.