~~Wife and I live in lower cost area in SoCal that's nearly a 1 hour commute to my job. We are currently renting month to month and originally anticipating on catching a good deal this winter in our desired area. We are starting to consider staying in this area 1-2 more years so that we can pile up more cash from cheaper housing and very low cost child care from a nearby relative. So now I'm thinking what if we: 1)purchase a home in our current area now on 5% down conventional loan 2)live in it for a year 3)rent it out (will have next to 0 cash flow) 4)purchase a second home in desired area using 75% of the rent income to help balance out the first mortgage 5)keep home as a 0 cash flow rental property where I put only 5% down and allow the rent to eventually pay down the principle
few other things: Homes that I would potentially buy are no more than 13 years old with pretty strong rent demand. I expect there will be homes listed for sell that are 35% below the pre-recession peak this winter. However I don't see a much potential on huge appreciation here as this area has plenty of land to build up more inventory. Also we have landlord experience, own an out of state condo.I haven't thought everything completely through but wanted to know if this is a bad idea or not before digging into this further. thanks
Your going to buy a home you plan on living in for year, not make any money on renting it and don't think the area has much chance of very high appreciation? I wouldn't even consider it. There is no upside for you.
Make sure you can meet the income qualifications for your 2nd home carrying the 1st home as debt. Most banks wont consider rental income unless its been rented 2 years or more, and even then at a percentage of what you actually get.
I don't think it's a percentage any more, I think they simply look at the net bottom line from tax returns. I've had to "help" make sure depreciation doesn't count and the rental mortgage isn't counted twice a couple of times. So "0 cash flow" is not going to contribute to a better DTI ratio.
cajundavid said: Your going to buy a home you plan on living in for year, not make any money on renting it and don't think the area has much chance of very high appreciation? I wouldn't even consider it. There is no upside for you. Well, you do eventually end up with a paid off house at no cost to you. As long as rent covers all expenses and a portion of the mortgage principle payment, it is a net positive. Whether it's worth doing on a one-off basis may be another question.
jaytrader said: I thought that free equity meant something still? Even a $0 cash flow rental generates tax savings, plus your equity is being paid for, for free.
Yeah, its not nothing. Kind of depends on what he's spending with that 5%, what the expected appreciation really is and what the alternatives are.
But you do have to work for it. Landlording isn't free.
And there is risk involved if the property values decline or the property has major repair bills or tenants don't pay rent, trash the place, start a section 8 methlab etc. I don't know how much risk there is, but there is risk to consider.
Accumulating value in this 0-down no cash flow home is not a bad thing. Over time, the principal payments will increase... someone is paying most or at least all of your interest. But you are ignoring better opportunities. Why not do what you originally though, except with buying this home? Run the numbers on buying the house and staying in it for 2-3 years, then renting it out? Do those numbers do any better? If not, hard pass.
Not only what everybody has said... 1) You want to live in the house, and purchase 2nd house without having first one rented yet (I'd assume) 2) Qualify on second house, bank will want a copy of lease for zero cash flow property. Bank will only take 60-75% of rent to factor into payment, so that's a problem if you don't have the cash. 3) The ZCF property results in say $2000 rent, of which 1000 (just throwing numbers out) is interest, and 1000 is paid towards principal and property tax (I assume you included this in the zero cash flow).
But let's say that's all fine.
Going back to that $1000 towards principal/property tax, if say $600 is principal, you have $600 of income. End of the year, even zero cash flow property owners DO have to pay tax on anything that isn't an expense. This goes for multi million dollar zero cash flow properties as well as residential. Yes principal payments will increase over time, but so will property tax payments and likely insurance payments.
Is it worth it? IF the property is in an area coming up for development or rapidly growing, yes. If it's an area that won't appreciate much? As everybody else has says... don't bother. Strong rental demand is good, but having SOME equity in the house is good as well, and also being able to have a float for expenses as they come up.
I hopped to rent house out before applying for second house (go month to month in a rental for a few months). I was told that there are lenders that will accept 75% of rent on current agreement as income even if there was less than 1/2 year history. However I'm no longer considering this plan.
nwill002 said: I hopped to rent house out before applying for second house (go month to month in a rental for a few months). I was told that there are lenders that will accept 75% of rent on current agreement as income even if there was less than 1/2 year history. However I'm no longer considering this plan. So what plan are you considering? It's like you just stopped typing in the middle of your post and hit submit.
nwill002 said: I hopped to rent house out before applying for second house (go month to month in a rental for a few months). I was told that there are lenders that will accept 75% of rent on current agreement as income even if there was less than 1/2 year history. However I'm no longer considering this plan. You're correct about this. Use to be that you need 2 year property management experience or to own the property two years. That has changed, and you can use the 75% of agreement OR you can get an appraisal based on rental value, which the bank will base your rent on. That may be a better route as you'll find it a bit easier than just saying "We want a second home and plan to use both as our residence".
Saying "this is an appraisal of the current house and appraisal of rental values, we intend to rent it out after moving" would allow you to show more cashflow, otherwise you're showing current debt/mortgage, PLUS all expenses for new house, and if you're tight right now then approval will be even harder later.
Having zero cash flow though would actually hurt from a lender's perspective. Think about it like this. Your rental income is $1,000, and expenses are $1,000. You consider it a zero cash flow. However, the lender is going to say "Okay, so we're taking 75% of that property, so your rental income is $750, and expense is $1,000". Tack that extra $250 onto your other monthly expenses, in addition to the new property. If you use a DTI of 43%, that extra $250 means you now need to show $581 in additional income.
I would suggest check going rental rates in the area, and if they're about 30-35% more than your expenses for the property, go for the second property. Or, if your income will allow you to qualify for the additional property.
mwarrior said: You're correct about this. Use to be that you need 2 year property management experience or to own the property two years. That has changed, and you can use the 75% of agreement OR you can get an appraisal based on rental value, which the bank will base your rent on. So banks will now include(without a prospective renter/lease) estimated rent into the income figures needed to get a new mortgage ?
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