Primary Residence Vs. Investment Property
I sat down with a mortgage guy the other day, and we started working through my game plan for buying my first couple of rental properties.
Currently, I'm living in an apartment. His opinion was that I should buy a house for myself first and then begin building my portfolio of rentals. His thought was for me to buy something with 20% down, and get a HELOC to pull the funds out as needed. Personally, I would prefer to just go ahead and start buying the rentals. Which way should I go with this?
Thanks!
Dave
I agree with the Mortgage broker. Take advantage of the tax benefits and use the equity for your ventures, Just remember, you have to pay it back, so that should keep you in check
Why not start off with a Multi Family property? This way, you can get alot of experience right off the bat and figure out if the Landlord thing is for you.
I would say it depends upon where you are in your life, your career, and how far along you are in reaching your investment goals.
Your mortgage broker may be just giving you old-fashioned conventional thinking, from when our parents and grandparents emphasized homeownership as a primary goal -- the American Dream.
Asking your question in this forum, you are likely to just get personal opinions based upon our own biases. Because none of us know your age, your marital status, your job requirements, your financial strength, your investment and life goals, you can't take our responses too seriously.
My personal plan is to work on investment properties first and I'll tell you why. I'm paying $650/mo for rent right now and that equivilant when I consider property tax and insurance is roughly a $70,000 property which is a lot worse of a house than what I'm in right now.
I personally can't justify the added cost when I can be using that money to increase my wealth. I don't want to live beyond my means but rather work to expand my means.
Not knowing your tax bracket, I'll guess that your $650 in rent is costing you $900-1,000 (that you have to earn in order to have the $650). You are not writing off the majority of your housing expense and you are not enjoying the appreciation and loan paydown that your landlord is.
I almost asked this question earlier, thank you for bringing it up.
I read somewhere that your home is a liability and not an asset, and I assume you read the same thing. I would like to get input on how one can advise buying your own home first, with that in mind.
Also, can you not take out a HELOC on a rental just as easy as you could a rental? I’m a newb, so just asking.
I think the advice on buying a multi-unit REI is good advice, but then I have a question; if you were to live in it would it not be considered Owner Occupied? How would that affect the loan and loan application, as well as tax implications if you were to move or sell the place?
I would certainly get out of renting myself first, whether you buy a duplex and live in one half or whatever. Think about it, if you are renting for X number of dollars and you get X amount of cashflow, you are still throwing away any rent money you pay when it could be going against an appreciating asset.
Also, it is pretty easy to get 100% on owner occupied. I wouldn't put 20% down on anything.
[addsig]
DMR, what you're doing is called fraud. It’s both illegal and unethical.
Dave,
Why not buy a multi-family property and move into one of the units. You get a partial deduction for the unit that's your property, and your other tenants can pay your mortgage for you. When you rent, you're helping someone else build equity on his or her property. Seems like it's better to build your own equity and possibly generate cashflow than to simply help someone else become successful in REI.
Yes, I would definately advise against DMR's method. I believe the majority of us are here to increase ouw wealth legally and ethicly, while his method is neither. When you take out a mortgage for an owner-occuppied property, the owner is actually required to occupy the property for a period of time. Now, after this time has expired, you should be able to get *another* owner-occuppied loan for a new home (that you must then move into), and rent out the old property. I can't remember the time period (6 months pops into my head for some reason), so check to be sure. I have a friend who just "trades up" to another home every so often, then rents out his old home. Granted, this isn't the quickest method for building wealth, it has worked quite well for him over the years.
Reed Wilkins
I agree with those that suggest buying at least a 2 family, and living in one of the units...kind of like killing 2 birds...
DMR states to move in for a short time and that takes care of the ower-occ issue. You actually don't even have to move in, you just need to be buying with the intent to move in. If you DO move in for a week or so, you have met ALL owner occupied requirements.
I never commit fraud or engage in unethical conduct. I do, however use EVERY legal loophole I can get my hands on. Should we just pay taxes off our gross income, or do we owe it to ourselves and families to use every legal trick in the book to write off as much as we can and pay the very least?
If you feel something is 'iffy', go ask an attorney. They will help you understand what is legal and what is illegal. And how you can do some things that were 'thought' to be illegal, but if done the right way are not.
i asked a loan officer at countrywide what was the definition of owner-occupied. he said that you needed to live in it for 12 months.
incidentally he owns 20 homes. he's been moving into a different homes every 12 months for the past 20 years!!!!!
Hi Dave,
Good luck!
I am currently renting my primary and have purchased three outstanding rental properties in the meantime. Of course, the rent expense doesn't go towards an appreciating asset, but don't let anyone tell you renting a place is throwing money away. Your rent payment is affording you other advantages that you wouldn't have if you owned your primary. You are buying the right to not have to pay for any repairs should anything go wrong, to not take on a large debt for a liability (yes, your primary is liability as well as an asset. Ask yourself if it would be taking money out of or putting money into your pocket) and easy relocation, should the need arise. You can always move into a primary after you have the cashflow from rentals coming in to pay for it too. (Probably a nicer one than if you bought it before you started investing.)Its just a matter of where you are in life, really. If you are young and mobile like me, renting while buying rentals just might be the way to go... in the begining at least.
niravmd
What your buddy told you is incorrect. There is no 12 month requirement for owner occupied properties.
There is no 12 month requirement in the Fannie Mae Selling Guide to make a home "owner-occupied" or to meet 'intent' to occupy.
But clearly purchasing with the intent to move in, move out and rent is not what the underwriting was based on. The way one gets caught not occupying the property is one of three ways:
1. defaults on mortgage
2. change of address for coupons or payment book
3. change of address on homeowners insurance endorsement.
Since most landlords will get a different insurance policy upon renting out their "owner-occupied" home, the servicing department will catch on to what happened. This is most common if it happens a short time after closing.
The downside is that if they call the loan, you'd have to refinance to get it paid off.
Why not just get a 100% investor loan and not worry about it?
In some closing documents they will specify that you must live in the home for 12 months of the loan, meaning if you keep the loan 13 months only one month can be N.O.O but this is not all loans. But you are frauding because you have no intentions of moving into the property you do have to sign that too in the closing.
Do not do it. Its far more reaching then just the homeowner as well the broker that did the loan can also lose their license if in a licensed state.
it depends on your goals. the "get out and start now" position sounds good and is a good way to start. i would go that way if "i" were given a chance. on the other hand i purchased a home first because i had a family at the time. i now look back and see that it was one of my best rei 7 years later i have over 250k equity. just sit down define your goals make your plan and do what is best for you. it seems to me the "big" thing is just do something........km
Kenmax,
"it seems to me the "big" thing is just do something........km"
Exactly. Do whatever you think is best, but do something.
mitnc
"Do not do it. Its far more reaching then just the homeowner as well the broker that did the loan can also lose their license if in a licensed state"
Mortgage brokers have no control over what the borrower will do in the future with their property and have no liabilty.
Sorry, now I'm done. I'm just a little confused over the whole issue of someone that owns NO properties being told not to get an owner occ loan.
Hey Dave,
I believe "Quickclay" is on the right track to answer your question. Either way has pro's and con's. It just depends on your business plan and situation. Renting keeps more capital at hand and allows for easier geographical relocation. Buying allows for more deductions, equity building, etc.
I currently own a condominium style duplex in a homeowners association. I live in one side and rent the other out. I was able to purchase the entire structure ($120,000) with a no money down loan and enjoy the home ownership benefits on my half and the rental income from the other half covers a little over half of the entire mortgage. Not as geographically fluid if I choose to move but in a college town can more than likely keep it full utilizing a management company until I could sell it.
My advice is run the numbers and see how it fits your current situation.
Wishing you prosperous investing!!!!
I'm confused why anyone would say that I was committing Fraud. It is not fraud to move into a home, live in it for 6 months, and then rent it out. I am not even sure that I need to be in the house for 6 months!
I'm not saying you lie..and never live in the house. I'm saying...buy the home as a primary, make it a primary for the minimum duration..and then move out. I did this on my last home...the house appreciated 40K in 6 months.
Just need to know what, when and where to buy.
I did modify my listing because I mistated my point. I did say move in for 6 months. This is not fraud, its the law. Bankers ask questions after a while but there's no need to lie if you truly intend to move in for 6 months.
Quote:
On 2004-12-20 08:14, wilkinscr wrote:
Yes, I would definately advise against DMR's method. I believe the majority of us are here to increase ouw wealth legally and ethicly, while his method is neither. When you take out a mortgage for an owner-occuppied property, the owner is actually required to occupy the property for a period of time. Now, after this time has expired, you should be able to get *another* owner-occuppied loan for a new home (that you must then move into), and rent out the old property. I can't remember the time period (6 months pops into my head for some reason), so check to be sure. I have a friend who just "trades up" to another home every so often, then rents out his old home. Granted, this isn't the quickest method for building wealth, it has worked quite well for him over the years.
Reed Wilkins