Owning an investment property... and we still rent?

[catccc]

My family currently rents our residence.  We have the credit scores, the cash, and the desire to own a home, but we just haven't found the right "forever" property yet. 

I am thinking about purchasing a 2 unit home in our neighborhood.  It's listed at 275K, and it is currently pulling in rents of $2,100/month, and I think one unit really should be renting for about $300 more.  I think maybe we could get it for 255K.

We are a one income family, and I currently earn about $90K/year.  Well, that's my salary.  My taxable income is slightly lower because I contribute the max to my 401K.  My spouse does not work (home with kids).

We have a good bit of cash- maybe $170K and I'm willing to part with $60K or so for the investment property (holding the rest back to put down when we find our "forever" home).

My concern is that with the investment property loan, we will have a harder time getting a loan for our forever home, should it become available in the near future.

We have no debts right now since we rent, own our cars, and either paid/negotiated our way thru school (me), or paid off student loans (spouse).

Is there an easy rule of thumb that I can use to figure out how much a bank is willing to loan me between two mortgages, one of them being an investment property?

Any thoughts?

[AlmostIndependent]

As long as you can document that the investment property makes money then you shouldn't have a problem. If you try to buy again in very short order it could be difficult, but not impossible. If you have rental income on your taxes and the property is making you money it will actually help you when it comes time to buy your own home.

[Another Reader]

My thought is that this property isn't going to cash flow well, if at all.  IF you can get it for $255k and IF you can raise the rent to $2,400, you still are not grossing 1 percent per month.  Have you run any numbers on this property?  What will you use for vacancy and collection loss?  How much are taxes and insurance?  What about repairs, maintenance and capital improvements?  What about mortgage terms - have you looked into what kind of mortgage you can get?  In your shoes, I probably would not buy this property because of the cash flow issue.

Lenders are very conservative right now.  Without an operating history on the rental, they may not give you full credit for the income in underwriting your home.  I would talk to a couple of loan brokers and banks to get an idea how recently acquired rental property is treated in underwriting an owner-occupied purchase.

[Daleth]

Why do you need a "forever" home? You're not going to live in it forever. Why not look for a home that meets your current needs, financially and otherwise, and go from there? Would you be interested in living in the second unit of this 2-unit you're talking about? That might make getting the mortgage easier, as well.

[mpbaker22]

I second another reader.  You might not be aware, but the general rule for investment properties is monthly rent should be AT LEAST 1% of the purchase price.  Arebelspy, who I guess will be posting shortly, uses that as an absolute minimum and frequently re-iterates that he has never bought something that low.

2100/275,000 = .0076 < .01

Unless there's something else that makes this property attractive, it seems like a bad investment ... I am by no means an expert real estate investor though.

Edit - corrected 0 typo pointed out by number cruncher

[NumberCruncher]

I second another reader.  You might not be aware, but the general rule for investment properties is monthly rent should be AT LEAST 1% of the purchase price.  Arebelspy, who I guess will be posting shortly, uses that as an absolute minimum and frequently re-iterates that he has never bought something that low.

2100/275,000 = .076 < .01

Unless there's something else that makes this property attractive, it seems like a bad investment ... I am by no means an expert real estate investor though.

2100/275,000 = .0076 < .01

missed a zero -> otherwise spot on.

[infogoon]

How difficult would it be to convert the property into a single-family home? There are several houses on my streets that were built as upper-lower duplexes, and have been converted into singles as the owners' families grew. Could you live in one unit and collect rent from the other for a few years, then take over the whole building as a "forever home"?

[catccc]

Thanks for the replies, everyone.  A couple of things- one the, rent on one unit is low.  they are essentially equal, but one rents for $1300 and the other rents for $800.   So we would find a new tenant that would pay the $1300.  The place just hit the market and I thought it was over priced by about 20K, bringing purchase price down to $255K.  So $2600 in rent v. $255K cost > 1%.

Two more thoughts- that is 2 "ifs," if both units rent for $1300 and if the price is $255K.

We did think about living in one side, qualifying for owner-occupied financing, essentially living free of housing cost.

And a last thought.  Saw the place.  No way.  Not just the place, but this is the 3rd place we've seen that is currently rented.  And I remembered how poorly some tenants treat rental properties.  I am always surprised because we take very good care of the places we rent.  And these places are kept in shitty shape.  I guess maybe landlording is not for me.

Maybe "forever" home was the wrong term.  It's really town-home v. farmish-home.  We currently rent in a cutesy little PA town in Philly burbs.  You know, main street with a barber shop, hoity-toity boutiques, and nice restaurants.  Small lots.  My partner worked in agriculture prior to becoming a SAHP.  Plans to return to farming, and we'll need land.  Kids will both be in school in about 3 years, so that puts the longevity of a town-living situation on a pretty short time-frame.  Is it worth it to buy for 3 years?   What if the farm property comes up in 1 or 2?

Anyway, the new plan is to look into town- homes, and start moving cash to an index fund, because honestly renting is so freakin' easy, I suspect we will keep doing it for a while, it's really been a mistake to keep so much cash on hand all these years...

[escolegrove]

Honestly, if you don't plan on buy for another 1-2 years. Than you won't have any issue. Your primary house will be your second mortgage. It can take 1-2 years for the rental income to count depending on who you use. Honestly your numbers look great from the type of buy hold that I do.

[mpbaker22]

Again I'm going to comment on not being an expert here (I don't own any property), but I know the investors on these forums look at 1% as a minimum, and you are stretching to get to the minimum.

[zinethstache]

If your property taxes, water/sewer are low enough and you get a good interest rate, sub 1% will work. We have 2 rentals that are sub 1% and we net just fine because of the great interest on our mortgage. Both or our units had immediate rent increases from our projections netting us $650 more than expected. so it can work...