patrick.net

I'm in the same position you are, and I see no reason to buy anytime soon. Might as well just keep saving cash. Prices have nowhere to go but down.

i would take the cash flow. plus it'll give you some experience owning a house. It's always nice owning at least one house even if it's a rental. you might think you donnt want to live there now but you never know what may happen in the future that fixed $500/mo payment could end up being a nice fall back.

Thanks for the comments, in the area I'm looking to buy a rental, prices are bottomed, really can't go lower.

Just in the nice area I wish to live, its still too high from where I think it should be

Thats a good point toothfairy, if shit ever hits the fan, its a really cheap place to fall back on.

Will I be able to get a second mortgage when I do want to buy my primary? How long will I have to show rent before the banks are willing to give me a second loan?

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

No, it'll be like you're moving up. Since you won't be selling the rental, you'll need to produce leases, which the bank will take at 2/3 the monthly income. This shouldn't be a problem. Further, someone with your income should have no trouble saving 20%.

UAVMX says

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

Well, realistically speaking, you should get dinged on the first purchase for intending not to occupy the house -- higher interest rate at minimum, if not a higher down payment in addition. The second one, you will owner-occupy.

corntrollio says

UAVMX says

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

Well, realistically speaking, you should get dinged on the first purchase for intending not to occupy the house -- higher interest rate at minimum, if not a higher down payment in addition. The second one, you will owner-occupy.

Realistically, how will they know I don't intend to occupy the house? Once they hand the keys over, what does it matter what I actually end up doing? I can go through the process with the "intention" of moving in....jessica says

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

No, it'll be like you're moving up. Since you won't be selling the rental, you'll need to produce leases, which the bank will take at 2/3 the monthly income. This shouldn't be a problem. Further, someone with your income should have no trouble saving 20%.

Can you elaborate on the "2/3 the monthly income". Do you mean that if my cash flow is $600, they will only take it as $400?

Also, I know I can save 20%, not worried about that. But with money being available for so cheap, I might not want to put the 20% down, and use it elsewhere

This is just my humble opinion. You're 26 which is quite young. At this age you should be doing some heavy investing in your 401k, mutual funds, and so on. Real estate over the long run has not come close to matching what the same amount invested in stocks will do. The key is that the younger you start the more you will have in the end due to the effects of compounding. You're making a very good income for your age and you will want to maximize the best use of that money. Real estate probably isn't the best use.

Let me put it this way, and I know to others on here this will sound like a broken record. For over 100 years stocks have averaged 7-8% annual return over the long run. Real estate- 3-4%, or barely above inflation. Real Estate seems like something you can hold but historically stocks do a lot better.

But in any regard you should consider talking to a financial adviser and get their opinion.

They will take 2/3 of the rent on the leases. So by your $1000-$1400 estimate, this would be $667-$934. If that amount covers the monthly outlays of you "primary" residence, then it won't detract from your ability to get a loan and they won't consider your new house an investment property.

Yes, technically your rental should be an investor's loan. You would be lying on the loan docs by calling it a primary residence and not having any intentions of living there. BUT since you are not a homeowner presetnly, they have no reason to believe that you wouldn't live there. Further, if you put the water/sweage bill in your name, that's pretty reasonable proof should they ask it, which they won't.

I've gathered this by the little research I've done on the subject because I've thought of doing the same thing. However, I haven't done it yet so who know what snafus are out there.

UAVMX says

Realistically, how will they know I don't intend to occupy the house? Once they hand the keys over, what does it matter what I actually end up doing? I can go through the process with the "intention" of moving in....

1) fraud is fraud -- if you intend not to live in the house, you are committing mortgage fraud, proceed at your own risk
2) sometimes banks actually do check
3) if you intend to buy a home in the future, the fact that you committed fraud may come back to haunt you

edvard2 says

Real estate probably isn't the best use.

To underscore what edvard said, you need to figure out your real return here based on realistic numbers -- i.e. realistic vacancies, realistic maintenance, realistic wear and tear, and all-inclusive cost (including taxes, insurance, etc.). Often I see people who are willing to take substandard returns, even though cash flow positive, that aren't reasonable for either the size of investment or the risk being taken. Cash flow positive shouldn't be the only qualification.

Hey, same problem here... 27yo with 150k base, wanting to borrow as much money as I can at 4% and lock it in long term before inflation really hits. My area means there is nothing I could stomach living in for under 400k, so would need 100k cash to cover DP and closing. This has kept me from buying a rental first so far, as coming up with another 100k downpayment in a year or two would be challenging. What I am doing until I figure things out though, is buying into the stock market on large cap decent div yield stocks. I also enabled my brokerage for margin, so if I need to put together a downpayment, I can always borrow from my 401k first, then from my portfolio at 7.5% if needed (with the dividend yield at 3.9%, 100k invested pays the loan interest on 50k borrowed).

What I think may be really helpful to you is to understand the differences in tax and liability between buying a rental or primary. This is something that has concerned me a little bit. First off, for Liability purposes, you would want a rental to be owned and managed by 2 separate LLCs. This way, if the renter trips and breaks a leg, they can only sue the management company, which folds, and you still own the owning LLC, safely separate. In a lot of states, LLC's have a minimum required tax, quite often somewhere around $800. So covering yourself legally via corporate shells should be an expense accounted for.

Also, from a tax perspective, rental vs primary are fairly different. A primary allows you to tax-deduct the interest on your mortgage and the taxes you pay on the property. A rental property you would tax deduct the depreciation on the asset over (around) a 30 yr period, but every dollar you sink into the house in maintenance and improvements adds to the depreciable base. Once you sell the property though, as a primary you would pay gains on everything you sell it for above the value you purchased it for, or defer gains by buying another one within 6 months. For a rental, you would be liable for all gains above the value you have depreciated it down to. On the up side though, you also have a lot of freedom to tax deduct expenses through your corporation now that you do not have before you get that cash flow. ie., your car is now partly a business expense, as is your computer, right? as are some business lunches, gas, and a trip to the bahamas for a company meeting or investment research...

Also worthy of adding into the model is a 3% per year maintenance cost. Things break, and you need to account for them. I use 3% in my models, but it really depends on the house price. The other thing you might think about, and this is one that applies to me in spades - What is your time worth? If you are grossing 100k/yr, you are making around $50/hr before taxes. How much time are you going to sink into managing a rental and dealing with the BS that comes with it? Is it worth your time? I usually factor in the cost of having a management company worry about that stuff, which can be widely variant, but about 8% of rent should be reasonable. You also need to factor in things like vacancy rates - you may need to carry it for a month or two between renters, and that can eat into returns quick.

When it comes to primary vs. secondary though, I think there are 2 questions you have to answer independently: 1. do a rent vs buy analysis for yourself - is it better for you to rent or buy. This model should include everything you can add into it including maintenance, tax, opportunity cost on the downpayment, and equity being built. 2. What is the ROI on an investment property, and how does that compare to what else I could be doing with that money? ie. could I invest in the stock market and expect a higher return? Once you have built these two models and answered these two questions, you can easily come to a decision. If is better to buy your own place than rent, how much money per month is it better by? if the ROI on a rental is better than you can get elsewhere, how much money per month is that going to make you? Whichever option maximizes the return on investment is the one you should do. it is also completely possible to come to the conclusion that you should not buy either, and instead commit that capital to more productive uses.

Another thought, if you buy a primary first, would you buy something comparable to what you live in now, or would you stretch to buy something larger? For me, I live in a one bedroom, but would only buy a two bedroom or larger, which is not apples to oranges.

anyway, my $.02

but every dollar you sink into the house in maintenance and improvements adds to the depreciable base
Just to be clear, repairs (painting, fixing a leaky faucet, etc) are a deductible expense for the year in which they occur.

Rich4 says

First off, for Liability purposes, you would want a rental to be owned and managed by 2 separate LLCs. This way, if the renter trips and breaks a leg, they can only sue the management company, which folds, and you still own the owning LLC, safely separate. In a lot of states, LLC's have a minimum required tax, quite often somewhere around $800. So covering yourself legally via corporate shells should be an expense accounted for.

If you personally are negligent, you will still be liable personally. People often misunderstand how LLCs work. If you personally engage in negligence, an LLC will not protect you.

Rich4 says

Another thought, if you buy a primary first, would you buy something comparable to what you live in now, or would you stretch to buy something larger? For me, I live in a one bedroom, but would only buy a two bedroom or larger, which is not apples to oranges.

This is a very astute comment. Sometimes people are willing to compromise for a non-ideal property when renting, so they pay less. Then, when they want an ideal property, they typically do have to pay more money for that. Maybe you're willing to rent a 2BR house, but you'd buy a 4BR house. Maybe you're willing to live without a garage or a certain type of backyard, but you wouldn't buy without those features.

What was different during the boom is that people were paying excess money for the non-ideal properties that they would have tolerated as renters, but that most reasonable home buyers would not tolerate (e.g. too few rooms for future family expansion, missing features such as a garage or other rooms, up 40 steps to the front door, etc.). This was all in the hope of unsustainable appreciation in prices, which all had to end at some point. You could see this when people were buying studio and 1BR condos that they knew ahead of time they might not be living in within the next 5-7 years.

edvard2 says

Let me put it this way, and I know to others on here this will sound like a broken record. For over 100 years stocks have averaged 7-8% annual return over the long run. Real estate- 3-4%, or barely above inflation. Real Estate seems like something you can hold but historically stocks do a lot better.

Very good advise. More over you can shift in/out of industries. Tax benfits, even with loses, are more favorable for equities.

Forget the 7% return on stocks over 100 years, when the US grew from overabudance of natural resources and a home grown manufacturing employment. The last 10 years, 2001 to 2011 shows a stock market total return or 10%, $100,000 in stock in 2001 grows to $110,000 in 10 years.

Investing in a break even rental house will save you tax wise on a $100,000 income at least 15%, around $15,000 write off on your $100,000 gross income. And if you can pay the mortgage off in 30 years or less, you will have a solid annuity for the rest of your life.

Ok, color me curious, where do you live and what type of work do you do? Is it steady, any chance of layoff coming up? Seems an income like that compared to average housing price is high.

Can you find something you want in the 200k range? Simple calculation at a low 4% 30 year loan would be about $800 for mortgage and taxes/insurance $200-400 a month depending on rate/coverage. So about the same for your current shared rent. Could even rent a room and make it cheaper since you seem to be Ok sharing.

Hell, with that income it's not a stretch to pick up both a house and a rental unit.

Rentals may not be as dependable as one would think. There are a lot of variables. One of the being finding tenents and also the tenents themselves. That can be highly undependable. Being stuck with a mortgage is something you should consider when renting.

Its not as easy as you think. In addtion as a noob and I mean noob. Its going to take some hard lessons and faluires before you become successful if indeed you can make it that far.

Sound like discouragment from me. Its not. I'm really not trying to do that at all. I am just preparing you for the reality of renting. Which can be a very tough run especially when your new at it.

wow so many comments, thank you so much, I'm not even sure where to start or what to say...so I will start here

edvard2 says

Let me put it this way, and I know to others on here this will sound like a broken record. For over 100 years stocks have averaged 7-8% annual return over the long run. Real estate- 3-4%, or barely above inflation. Real Estate seems like something you can hold but historically stocks do a lot better.

But in any regard you should consider talking to a financial adviser and get their opinion.

Okay, I understand that, and it makes sense. But does that also include if you factor in NEVER SELLING IT? Does that include owning the property outright, collecting the positive cash flow and having the 100% equity that you can use, or sell the house, etc? The thing that entices me about real estate is that it would be not only a cash flow, but a long term savings account that someone else is paying. So if that house is worth lets say $150k in 30 years, and I want to buy a new toy in retirement, I just sell that house and use the cash.

The stock market historically making 8% lets say is great, and your money compounds, but there are also stretches of 10-20 years of being flat isn't there?

The other concern with the stock market is right now I see it as being high, higher then where it should be. Also the fear is I KNOW NOTHING about the stock market, what to invest in, how to invest in, etc.....I think there is a lot more risk and I think it's rigged in so many ways. Real estate, if I end up with 5-10 rental units that are eventually paid off, that I have control of that really, nothing can cause me to lose everything (such as the stock market is) out of my control....

This rental unit I see paying off quickly, and moving on to another one. Or pull some equity for the next one, etc.Rich4 says

Also worthy of adding into the model is a 3% per year maintenance cost. Things break, and you need to account for them. I use 3% in my models, but it really depends on the house price. The other thing you might think about, and this is one that applies to me in spades - What is your time worth? If you are grossing 100k/yr, you are making around $50/hr before taxes. How much time are you going to sink into managing a rental and dealing with the BS that comes with it? Is it worth your time? I usually factor in the cost of having a management company worry about that stuff, which can be widely variant, but about 8% of rent should be reasonable. You also need to factor in things like vacancy rates - you may need to carry it for a month or two between renters, and that can eat into returns quick.

thank you for your long insight. Those are absolutely some things I have to include in a model. I was considering one month a year not being rented and 1% maintenance costs. I mean, even worst case scenario, if the mortgage and all other factors (management cost is another good one to consider) let's say its $800 a month costs or $900. If it can be rented for a minimum of $1000 (depending on the house could be up to $1300-1400) there's still buffer in there. And I'm considering building a stock pile of rental homes, not selling them. Look for the long term outlook (having it paid off in less then 15 years) and using it as retirement income.

SingleSpaced says

Ok, color me curious, where do you live and what type of work do you do? Is it steady, any chance of layoff coming up? Seems an income like that compared to average housing price is high.

Can you find something you want in the 200k range? Simple calculation at a low 4% 30 year loan would be about $800 for mortgage and taxes/insurance $200-400 a month depending on rate/coverage. So about the same for your current shared rent. Could even rent a room and make it cheaper since you seem to be Ok sharing.

Hell, with that income it's not a stretch to pick up both a house and a rental unit.

Rather not say. But the work I do and the pay I get is NOT THE NORM for the area I live. Pretty much my company and what I do is the only one around. Its a low income area (the area I want to buy the rental) but where I want to live is nicer and a little more expensive, but not separated by more then a 30 min drive. It's very steady, no concerns about layoffs. It is probably sustainable for another 5-10 years minimum. If I want to change jobs, or move, does that change this whole equation?ArtimusMaxtor says

Rentals may not be as dependable as one would think. There are a lot of variables. One of the being finding tenents and also the tenents themselves. That can be highly undependable. Being stuck with a mortgage is something you should consider when renting.

Its not as easy as you think. In addtion as a noob and I mean noob. Its going to take some hard lessons and faluires before you become successful if indeed you can make it that far.

Sound like discouragment from me. Its not. I'm really not trying to do that at all. I am just preparing you for the reality of renting. Which can be a very tough run especially when your new at it.

with the bare minimum that would be required to keep the house, insured, etc....would be what, $300-500 a month on a $80k mortage? I would be able to maintain that while renting.corntrollio says

This is a very astute comment. Sometimes people are willing to compromise for a non-ideal property when renting, so they pay less. Then, when they want an ideal property, they typically do have to pay more money for that. Maybe you're willing to rent a 2BR house, but you'd buy a 4BR house. Maybe you're willing to live without a garage or a certain type of backyard, but you wouldn't buy without those features.

The place I rent is of similar size and quality of what I would buy FWIW.

ArtimusMaxtor says

Its not as easy as you think. In addtion as a noob and I mean noob. Its going to take some hard lessons and faluires before you become successful if indeed you can make it that far.

That's what makes me not want to do the rental....buy the primary and learn on that, have security on that...then expand out. But then what do I do with my money in the mean time until prices come down to where it needs? I would need something more liquid, and my 1% ING account is doing me no good...

What's the matter with this group of commenters?

Why doesn't ANY of you tell this person to pay off his student loan and his car before he assumes more debt?

when I see a graph like this....how can you tell me in 30 years that I will have made money? There is an exponential climb in the market.

Does it have no ceiling? The high that was 14k, theoritically, it will need to be 8% higher then that to have really made a good investment.

Or with the market at 11k now, and I buy now, when I retire, it will need to be higher then 11k. When looking at a graph, how can it not be seen as a bubble?

Look at the market from its inception, until the 40's. Then from the 60's to the late 80's. How much of an increase is that? Who's to say we won't at LEAST stay completely flat for 30 years?

This is what makes me inclined to just procure many rentals

I recently spoke with a mortgage broker friend of mine.
Using rental income to go against your debt to income rental is a thing of the past, according to him. You used to be able to deduct 75% of your rental income from your debt to income ratio, but not anymore, according to my friend the mortgage broker. They won't even consider renal income as a means to reduce your debt to income ratio. If anyone has experienced differently in recent months, please do share.