All Forum Posts by: Josh Young

Hi Alden,

I live in Gilbert and have a few long term rentals, I like your idea of keeping as a long term rental. Repairs/Maintenance/Property Management/Cap Ex/Vacancy etc...  these vary a lot, so reserves are important, these might be 2-8% each, so you might be right with $200-500 per month. You also have a low interest loan so your principle payments on your amortization schedule are pretty strong, that is an important factor when calculating return on equity, return on equity is one of my favorite measures, obviously you need cash flow to keep the whole thing alive, but building your balance sheet is the ultimate goal in Buy and Hold RE Investing.  Rather than moving into a rental why don't you buy another property as your primary residence using a conventional 5% down loan.  You should be able to put a long term lease on your current property to help you qualify and there are a bunch of properties in Mesa for sale under $300k, so your payment will be about the same $2200, it probably won't be as nice as the property you are in now, but you will own two properties, rent will increase more over time, expenses will too, but not as much as rent, in a few years your cash flow will improve and your balance sheet will be growing.

The lender will only let you take out 75% of the value in the cash out refi, so yes you will be able to get the $15k but it will cost you $3k in closing costs to do the refi and it will cost you $300 a month for the life of the loan, so the effective rate on that $15k would be like 20%. You'd be better off getting a HELOC or even taking out a mortgage in second position, but if you can't save the 5% down payment I'd be concerned of getting over leveraged, you should be able to negotiate the seller paying your closing cost, that will help, if you can't in your original offer, I've had success negotiating it during the inspection period, even if you have to increase your offer to get it as long as it will appraise. Once you get over 50% equity in that 1st house it might be worth doing the cash out refi and that will buy you the next house or even two houses.

Rich Dad Poor Dad is the foundation that BP was built on. After you finish read his next book the Cashflow Quadrant. These are both about mindset and don’t really give specific direction, so after you finish those I really like The Millionaire Real Estate Investor by Gary Keller, he gives specific advise on what to do and how to do it. Like to buy a primary residence every couple years, this gives you the best loans with lowest down payments and he talks about return on equity which will allow you to eventually refinance properties to buy more. Full disclosure, I prefer audible.

Buy a primary residence using a conventional 5% down loan. You may need to put a lease on your current home to qualify with DTI ask your lender, but that's it, your 1st house becomes your rental. It sounds like you don't have enough equity in the 1st house to use any of it to finance the deal, so you will have to save, but 5% down should be manageable to save.

The rate on a conventional 5% down loan is usually better than FHA so I'd look into that for your primary residence. You can buy a primary residence every year as long as you move into it. Then just keep the property and rent it out, this is the easiest strategy to acquire properties with loan money down and the best interest rates you can get. If the rental income isn't on your taxes yet, your lender should be able to use 75% of the rental income if you show them your lease and a couple bank statements with rental payment deposits. If you are super close on your DTI then have your CPA put the rental into service on the date you started collecting rent and not before that if you bought and then took time to rehab or market the property, the fewer days in service and less expenses you claim on your taxes will cost you a few hundred dollars on your taxes but could make the difference on your DTI.

It can vary by market, so check out rental and sale comps of both in your market, just look on Zillow or the MLS to see what's active and what has closed recently. In my market here in Arizona I look for properties that have an office that I can market as an extra bedroom because the extra bedroom brings in more rent and sells for more. A lot of people will tell you being a bedroom means it has to have a closet, but the more important thing is that it has to have a fire egress.

Fallon, if you haven’t purchased a property yet I would highly recommend buying a primary residence using a conventional 5% down loan. Pick a property that will work as a long term rental because after you live in it for 12 months you can buy another primary residence using a conventional 5% down loan and rent out the 1st one.  If you want to hold these properties long term you can keep buying every 12 months, if they aren’t going to cash flow in your market because it’s so expensive then you might consider living in the property for 2 years then renting it out for 3 years and selling just before the 3 years is up and it will be tax free.  You can still buy investment properties in Orlando, but you have to live somewhere and these conventional 5% down loans for a primary residence are the best loans you can get and the easiest way to get started.

Congratulations on buying a primary residence, that is the best way to buy your properties. Keep saving and learning, you don't have enough equity to make the refinance worth the increase in interest rate. Save until you can buy another primary residence with a conventional 5% down. If you need to put a lease on the 1st house to qualify you should be able to count 75% of the rent on 1st house against your DTI.

If you don’t need the cash and don’t have a different investment to put it in I’d definitely keep it as a long term rental as long as it will cash flow and I’m sure it will with that equity and interest rate.  Run a quick calculation of return on equity, this will let know the real return for the decision you are making, it’s (cash flow + principal portion of mortgage payment) divided by equity, plus you can anticipate some appreciation over the long run. If the return on equity is less than 10% you may consider selling or refinancing, or you might want to take out a 2nd loan on the property while it’s still your primary, but again it depends on what you are going to do with that money.  I like managing rental properties, but if you don’t you can find a property manager for 8% of rent (some will have a smaller advertised fee but will charge you extra fees to get to that 8%).  I’ve done this and kept as a long term rental a couple times and has worked out very well. I hope this helps, good luck!

I saved money, learned some basic rules of lending like DTI, and bought a house in 2016 using a conventional 5% down loan. I kept saving and learning, paid off my car and student loans (helped my DTI) so I could buy another house in 2020 using another conventional 5% down loan (this time I prepaid the PMI because it was half the price of making the payments). I had to move and had to show I could afford both mortgages, so I didn't max out my DTI on the 1st one and I couldn't buy my dream house either, but I became a landlord and that was my dream.

I rented out the 1st house and kept saving. In 2021 I bought a 3rd house using another conventional 5% down loan, yes I had to move again, but now I learned a little trick on how to keep my DTI down since they only used 75% of the rental income on the 1st house because I didn't have a full year of collecting rent on my tax returns yet. The trick was I put a lease on house #2 and was able to use 75% of that rental income to offset the mortgage, this gave my enough room on my DTI to qualify for house #3.

At this point house #1 had basically doubled in value since 2016 and my return on equity was too small, so I did a cash out refi and pulled $130k out. This put me right at my max of my DTI and I wanted to use the money to buy another house, but I couldn't move again right away, because you have to intend on living in your house for 12 months when you do a conventional 5% down, so I bought a condo in down town using a conventional 25% down loan (lender required this because less than half the complex was owner occupied) the 25% down also helped keep my payments down to qualify with DTI since I had to wipe out the entire PITI using 75% of the appraisal projected rent.

A few important things to consider here are: my wife and I have had consistent W-2 income, we were able to find properties that would cash flow on day 1, and we always saved to have more reserves than we needed.

We plan to continue with this strategy of buying a house every few years using a conventional 5% down loan until we get to the max allowed 10 conventional loans.