Primary residence downpayment or PMI it and buy a rental property?

[Volatov]

I'm stuck in a bit of a predicament.  I'm currently considering moving to a new location based on a new job opportunity and will be buying a house.  Let's say I buy $200K house and put a $40K downpayment (20%) but will not be able to buy an investment property since my cash will be all tied up.  Or I could put down $10K (5%) and end up paying PMI on the main property but at the same time use that $40K to buy 2 investment properties each worth $100K.  Is this a good idea and what are your thought?

[aj485]

Let's say I buy $200K house and put a $40K downpayment (20%) but will not be able to buy an investment property since my cash will be all tied up.  Or I could put down $10K (5%) and end up paying PMI on the main property but at the same time use that $40K to buy 2 investment properties each worth $100K.  Is this a good idea and what are your thought?

You seem to be double-counting part of the $40k - If you put $10k down on your main home, you'd only have $30k left, not $40k.  Plus, investment property generally requires a 25% down payment, rather than the 20% you can put down on your home.  So, with $30k left, you'd have enough to buy $120k of investment property, not  2 $100k properties.

If you want to do both, I'd suggest you look for a duplex where you'd want to live in one side.  For owner occupied duplexes, you can put just 20% down and still get conventional financing.  Then, if you decide you want to buy a different house later, you can rent out both sides.

[Volatov]

Let's say I buy $200K house and put a $40K downpayment (20%) but will not be able to buy an investment property since my cash will be all tied up.  Or I could put down $10K (5%) and end up paying PMI on the main property but at the same time use that $40K to buy 2 investment properties each worth $100K.  Is this a good idea and what are your thought?

You seem to be double-counting part of the $40k - If you put $10k down on your main home, you'd only have $30k left, not $40k.  Plus, investment property generally requires a 25% down payment, rather than the 20% you can put down on your home.  So, with $30k left, you'd have enough to buy $120k of investment property, not  2 $100k properties.

If you want to do both, I'd suggest you look for a duplex where you'd want to live in one side.  For owner occupied duplexes, you can put just 20% down and still get conventional financing.  Then, if you decide you want to buy a different house later, you can rent out both sides.

Fair point.  Let's say I have $20K saved up for this on top of the $40K tied in equity.  Should I still try to do this or just put down 20% on the main house and continue saving before buying investments?

[MacGyverIt]

I don't think any of us can tell you if this is a good idea or not without the big picture of your finances. But if you have to debate if putting down enough for PMI is worth it to then go into debt for a rental property, then the answer is probably no, you can't afford it at this time.

[Dicey]

I get frustrated with people who complain about PMI, or more correctly these days, MI. It's merely the price you pay for not making a "full" down payment, but only you can judge if you are one of those people who don't consider that before they do the "deed".

I'd suggest looking for a larger multi-family, such as a 4-plex, but I know nothing about your city, job stability or family circumstances. I just know owner occupied can be easier to finance and it can be a good wealth-building tool. But then so can MI ;-)

[Cwadda]

OR you can get the best of both situations. Buy a multi family property and owner occupy it.
You can go with conventional or FHA, and put as low as 3.5% down. You only have to live in it for a year.

[njn63]

Look into if the mortgage insurance is for the life of the loan or goes away at 78%.  That makes a big difference.

[CptJack83]

OR you can get the best of both situations. Buy a multi family property and owner occupy it.
You can go with conventional or FHA, and put as low as 3.5% down. You only have to live in it for a year.

THIS.  Buy a multi family(2-4 unit) with an FHA loan putting 3.5% down.  This is the single best deal in real estate finance.  Live there for a year.  A $300,000 multi family home would require an investor to put down $75k (25%) and it's yours for just over $10k!! You can only use FHA on owner occupied.

Not only is this a good deal but allows you to get acquainted with your new area you are living to figure out where you want to sink a big downpayment into.  Buying a house in an area you are unfamiliar with can not always work out.

Also that year you are living in the multi family you will save major bucks!


I actually just did this.  I bought a duplex with 3.5% down FHA, mortgage payment with everything is $1,600.  I rented the top out for $1,250.  So my net housing payment was just $350 for 18 months.  I then purchased a great single family.  Total payment is $1,750 on that.  Rented my vacated unit for $1350 and increased other to $1350 ($2,700 total) So my net on a kick ass single family is $650 (less than half what my tenants pay!!) and the principal reduction on both is almost $800/

So buy the multi family with FHA :)

[Cwadda]

Look into if the mortgage insurance is for the life of the loan or goes away at 78%.  That makes a big difference.

FHA PMI is for life, but you can refinance. Also, if you're buying it for a lower price and it gets appreciation you can refinance quickly. This is rare for FHA however.

As long as the PMI is built into your numbers you are okay. This is the price you pay for loaning a ton of money from the bank.

[nick663]

Look into if the mortgage insurance is for the life of the loan or goes away at 78%.  That makes a big difference.

FHA PMI is for life, but you can refinance. Also, if you're buying it for a lower price and it gets appreciation you can refinance quickly. This is rare for FHA however.

As long as the PMI is built into your numbers you are okay. This is the price you pay for loaning a ton of money from the bank.

Allegedly interest rates may rise soon so refinance might not make sense if the OP waits too long.

Then again, they've been saying interest rate increases are imminent for about 2 years now so who knows if it will ever happen.

[CptJack83]

Yes the FHA PMI is for life.  However we are evaluating an FHA mortgage on a Primary multi-family vs an investment mortgage on a multi-family.

Right now if you bought a multi-family with FHA 3.5% down as a primary, you could get 3.375% as a base interest rate and the monthly PMI is 85bps.  Assuming $250K purchase price. you'd be looking at roughly $1,085 on the mortgage and $170 on the PMI total of $1,255.  If you do the math backwards, with the PMI that is about a 4.73% interest rate with NO PMI.

The current rate for an investment multi-family loan is about 4.75%.    So your cost of credit is essentially the same and the FHA allows a significantly lower downpayment.

Now YES, you are taking on a significant amount more leverage, so the risk is higher, but your % return on invested capital is also much higher.

The original question was about making a smaller downpayment on your primary  so you could make a bigger DP on the investment.  I personally prefer the opposite.  Make a bigger downpayment on your primary.  If I'm going to have leverage, I'd much rather prefer it on my investment properties as opposed to my primary.