Buying a two family “investment” home

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Buying a two family “investment” home

Post by RRAAYY3 » Sun Mar 25, 2018 2:33 pm

Is it ever wise to put less than 20% on a property?

A friend recently “bought” a 2 family home with 3% down ... with collecting rent his monthly cost of “living” expense is less than 1,000/month

(This is a HCOL area).

With recent market turmoil / geopolitical nonsense, I’ve been wondering if real estate / income property is the next best place to “invest.”

I guess my question is - Is it ever a good idea to put so little down in order to acquire a property. With the rent from tenants he essentially ends up paying a fraction of what rent costs ... slowly but surely building up equity / ownership someday.

Initially I heard this news and thought he was insane, but from a monthly expense perspective it actually looks like it may have been a wise move. I just never thought putting less than 20% down on any home/property would make sense ... Thoughts?

JBTX
Posts: 4231
Joined: Wed Jul 26, 2017 12:46 pm

Re: Buying a two family “investment” home

Post by JBTX » Sun Mar 25, 2018 2:54 pm

Seems to me having essentially no downpayment is going to materially increase your interest rate on the entire loan. Say you could get 4.5% on 80% or 5.0% on 97%. That is basically similar to 4.5% on the 80% and something like 7% on the additional 17%. Or maybe you have PMI which is basically like additional interest on the amount over 80%.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Sun Mar 25, 2018 2:57 pm

JBTX wrote:
Sun Mar 25, 2018 2:54 pm
Seems to me having essentially no downpayment is going to materially increase your interest rate on the entire loan. Say you could get 4.5% on 80% or 5.0% on 97%. That is basically similar to 4.5% on the 80% and something like 7% on the additional 17%. Or maybe you have PMI which is basically like additional interest on the amount over 80%.
So ... not smart?

Once he told me he was essentially paying less than 1,000 / month (about half of what actual rent is here, at least) when it’s all said and done (mortgage, taxes, etc.) I was somewhat intrigued

123
Posts: 3892
Joined: Fri Oct 12, 2012 3:55 pm

Re: Buying a two family “investment” home

Post by 123 » Sun Mar 25, 2018 3:06 pm

In classic real estate deals people leverage as much as they can, "investing" other people's money. Sure it can work out, but lot's of things can happen. If he's paying a high interest rate he could be out-of-pocket much more when he has a vacancy or if he has to reduce the rent to attract tenants (a lot can happen over the course of a loan). Potential rent revenue is impacted by local economic conditions (which can change), local crime situation (which can change), as well as other things.

As is frequently the case "marital difficulties" is the often the biggest risk over the lifetime of a loan.

A certain percentage of "classic real estate deals" fail for a variety of reasons.
The closest helping hand is at the end of your own arm.

User avatar
Sandtrap
Posts: 5454
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Buying a two family “investment” home

Post by Sandtrap » Sun Mar 25, 2018 3:28 pm

It is common for those venturing into the world of R/E investments to only share good news and sound strategies long before regrets and realities.

Like portfolio allocations, everyone has different risk tolerances, some by choice, some by necessity.

R/E income property and R/E investing is a sound strategy to diversify income streams. And, also can be a lucrative "business" as long as one is committed to being a "businessman" and everything it entails. Those who merely dabble in it or approach it as "easy money", or "quick riches", as the seminars and books tout, seldom do well.

j :D

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Sun Mar 25, 2018 5:54 pm

Definitely not a “get rich quick” kinda guy

Market outleak being bleak for the next decade (still invested and max out tax advantaged space) + my friend’s monthly breakdown with so little down has me reconsidering

User avatar
Sandtrap
Posts: 5454
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Buying a two family “investment” home

Post by Sandtrap » Sun Mar 25, 2018 6:48 pm

RRAAYY3 wrote:
Sun Mar 25, 2018 5:54 pm
Definitely not a “get rich quick” kinda guy

Market outleak being bleak for the next decade (still invested and max out tax advantaged space) + my friend’s monthly breakdown with so little down has me reconsidering
Some folks have more to lose than to gain, others more to gain than to lose, or at least think that way.
There's a term on the forum called "sleep factor". Financial strategies where one can't sleep at night are not healthy.

mahalo,
j

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Sun Mar 25, 2018 6:54 pm

So ...

I’m still not sure if I’m getting a “yes, look further into this” or “no, 20% down payment at least” response ...

User avatar
Sandtrap
Posts: 5454
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Buying a two family “investment” home

Post by Sandtrap » Sun Mar 25, 2018 7:06 pm

RRAAYY3 wrote:
Sun Mar 25, 2018 6:54 pm
So ...

I’m still not sure if I’m getting a “yes, look further into this” or “no, 20% down payment at least” response ...
How deep are your resources?
Can you afford a minimum 20% down payment on the following criteria:
1 Purchase a property in an area of high appreciative value such that you could sell it in 1-2 years and make back all of your money plus expenses, R/E commissions, and closing costs?
2 Rent the property for a minimum 6% Net Cap?
3 Afford to have the property vacant (not earning income) for a period of at least 3 months?
4 Be able to self manage the property to cut management costs if you needed to?

Would you be able to purchase a duplex or triplex or fourplex for better economy of scale and to minimize SPF (single point of failure of a SFH "single rental unit")?
Do you have business experience and want to be a "businessman"?
Do you have experience as a "landlord", or R/E agent, or "property manager"?

Will you be dependent on a property management company if you purchase a property far away from you (distance ownership. . not always a good idea)?

As an aside, the "leveraging concept" where one "uses other people's money" as touted by countless seminars and books is a minefield littered with casualties.
j

123
Posts: 3892
Joined: Fri Oct 12, 2012 3:55 pm

Re: Buying a two family “investment” home

Post by 123 » Sun Mar 25, 2018 7:13 pm

It's possible your friend has prior experience with real estate that might not be readily apparent. Perhaps his parents/grandparents/etc had rental property so he may be familiar with the ins and outs of real estate even though it looks like he's just getting started to you.
The closest helping hand is at the end of your own arm.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Sun Mar 25, 2018 7:26 pm

123 wrote:
Sun Mar 25, 2018 7:13 pm
It's possible your friend has prior experience with real estate that might not be readily apparent. Perhaps his parents/grandparents/etc had rental property so he may be familiar with the ins and outs of real estate even though it looks like he's just getting started to you.
His dad knows a thing or 2 ... wouldn’t call him a real estate tycoon by any means

His dad would also pass on whatever sage wisdom he knows to me ...

I’m definitely not rushing into anything, but I saw the monthly breakdown and if my “rent”/living expense could end up below 1,000 month while slowly building equity in a property it just may actually make sense.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Sun Mar 25, 2018 7:31 pm

Sandtrap wrote:
Sun Mar 25, 2018 7:06 pm
RRAAYY3 wrote:
Sun Mar 25, 2018 6:54 pm
So ...

I’m still not sure if I’m getting a “yes, look further into this” or “no, 20% down payment at least” response ...
How deep are your resources?
Can you afford a minimum 20% down payment on the following criteria:
1 Purchase a property in an area of high appreciative value such that you could sell it in 1-2 years and make back all of your money plus expenses, R/E commissions, and closing costs?
2 Rent the property for a minimum 6% Net Cap?
3 Afford to have the property vacant (not earning income) for a period of at least 3 months?
4 Be able to self manage the property to cut management costs if you needed to?

Would you be able to purchase a duplex or triplex or fourplex for better economy of scale and to minimize SPF (single point of failure of a SFH "single rental unit")?
Do you have business experience and want to be a "businessman"?
Do you have experience as a "landlord", or R/E agent, or "property manager"?

Will you be dependent on a property management company if you purchase a property far away from you (distance ownership. . not always a good idea)?

As an aside, the "leveraging concept" where one "uses other people's money" as touted by countless seminars and books is a minefield littered with casualties.
j
If I sold some taxable assets, 20% wouldn’t be an issue.

I live in a part of the US that is HCOL, and will remain that way / appreciate

My friend bought a place for under 300K, collects approx 1,500 in rent and lives in the other.

I would never buy a property that isn’t within driving distance from me (I’d probably live in it/rent other half)

I could stay where I am and rent out both places ... 3K month in rent at least ... Hmmmmm

lotusflower
Posts: 188
Joined: Thu Oct 24, 2013 12:32 am

Re: Buying a two family “investment” home

Post by lotusflower » Mon Mar 26, 2018 12:28 am

RRAAYY3 wrote:
Sun Mar 25, 2018 2:33 pm
Is it ever wise to put less than 20% on a property?
Not sure I understand. Why wouldn't you put in as little as possible if you could do that. The 20% is demanded by the banks to protect them in case you stop paying the loan early on. They can use the 20% value to defray the costs of unloading the property and still get their principal back. If you can find someone foolish enough to loan you more than 80%, then take it, unless there are other terms of the deal that are bad.

Archimedes
Posts: 132
Joined: Wed Feb 15, 2017 11:27 am

Re: Buying a two family “investment” home

Post by Archimedes » Mon Mar 26, 2018 3:03 am

Those who favor this technique of buying a duplex or triplex with a plan to live in one unit and rent out the other units call it “house hacking”. You get to exchange managing the property for a below market rent for yourself. In the right market, in a triplex or quad you could live “rent free”.

It works out well if the rents cover the majority of the monthly expenses, you have good tenants who are stable and don’t create problems, the economy is stable or growing in your area making demand for rentals high, you have sufficient cash to cover the inevitable maintenance issues with roofs and HVAC or appliances that come up, and there are no hidden disasters with the property you buy.

Those are a lot of “ifs”, but if they all work out and the property appreciates, this can turn out to be good diversification away from stocks. A good deal like this can give 20% annual returns, and a bad one you can lose your shirt. Do a cash flow analysis, a business plan of sorts. Don’t forget to account for vacancies, maintenance costs, debt service, property taxes, and insurance. The lower the down payment, the higher the potential risk and the higher the potential return. But like all investments in real estate, it could make sense but it depends on too many variables that we aren’t privy to, and therefore we cannot analyze this investment for you.

The bigger pockets website has information about all things related to real estate investment. Search for “house hacking” on their forum for lots of information on the pros and cons.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Mon Mar 26, 2018 8:08 am

lotusflower wrote:
Mon Mar 26, 2018 12:28 am
RRAAYY3 wrote:
Sun Mar 25, 2018 2:33 pm
Is it ever wise to put less than 20% on a property?
Not sure I understand. Why wouldn't you put in as little as possible if you could do that. The 20% is demanded by the banks to protect them in case you stop paying the loan early on. They can use the 20% value to defray the costs of unloading the property and still get their principal back. If you can find someone foolish enough to loan you more than 80%, then take it, unless there are other terms of the deal that are bad.
it's my understanding that there would be PMI insurance on top of the mortgage ... also, more of a mortgage / loan = more interest being paid

i'm generally debt averse - but if it's for an income property could make sense.

123
Posts: 3892
Joined: Fri Oct 12, 2012 3:55 pm

Re: Buying a two family “investment” home

Post by 123 » Mon Mar 26, 2018 8:51 am

Something to think about. Does he have a fixed interest loan or is it adjustible ARM? An ARM can cause interesting things to happen as rates change. Is the loan 100 percent bank financing or is some prior owner financing involved? If owner-financing involved people often overpay to get the financing. He put down 3 percent, did his dad or other relative also contribute to the down payment? People sometimes don't tell complete details.
The closest helping hand is at the end of your own arm.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Buying a two family “investment” home

Post by dbr » Mon Mar 26, 2018 8:58 am

RRAAYY3 wrote:
Sun Mar 25, 2018 2:33 pm

With recent market turmoil / geopolitical nonsense, I’ve been wondering if real estate / income property is the next best place to “invest.”
I don't like the thought process here. There is always market turmoil and geopolitical nonsense and real estate is always a viable investment in general for those that do it right. There is no such thing as "the next best place to invest." That is the part I don't like.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Mon Mar 26, 2018 9:19 am

dbr wrote:
Mon Mar 26, 2018 8:58 am
RRAAYY3 wrote:
Sun Mar 25, 2018 2:33 pm

With recent market turmoil / geopolitical nonsense, I’ve been wondering if real estate / income property is the next best place to “invest.”
I don't like the thought process here. There is always market turmoil and geopolitical nonsense and real estate is always a viable investment in general for those that do it right. There is no such thing as "the next best place to invest." That is the part I don't like.
I am still maxing out retirement accounts, sorry if it came off as a market timing statement

This was more of a “I’m never buying a house” to “oh, maybe it could make sense financially” rather than continuing to invest in my taxable account

“Diversification” if you will

User avatar
Sandtrap
Posts: 5454
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Buying a two family “investment” home

Post by Sandtrap » Mon Mar 26, 2018 9:23 am

Archimedes wrote:
Mon Mar 26, 2018 3:03 am
Those who favor this technique of buying a duplex or triplex with a plan to live in one unit and rent out the other units call it “house hacking”. You get to exchange managing the property for a below market rent for yourself. In the right market, in a triplex or quad you could live “rent free”.

It works out well if the rents cover the majority of the monthly expenses, you have good tenants who are stable and don’t create problems, the economy is stable or growing in your area making demand for rentals high, you have sufficient cash to cover the inevitable maintenance issues with roofs and HVAC or appliances that come up, and there are no hidden disasters with the property you buy.

Those are a lot of “ifs”, but if they all work out and the property appreciates, this can turn out to be good diversification away from stocks. A good deal like this can give 20% annual returns, and a bad one you can lose your shirt. Do a cash flow analysis, a business plan of sorts. Don’t forget to account for vacancies, maintenance costs, debt service, property taxes, and insurance. The lower the down payment, the higher the potential risk and the higher the potential return. But like all investments in real estate, it could make sense but it depends on too many variables that we aren’t privy to, and therefore we cannot analyze this investment for you.

The bigger pockets website has information about all things related to real estate investment. Search for “house hacking” on their forum for lots of information on the pros and cons.
Excellent points!
j :D

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Buying a two family “investment” home

Post by dbr » Mon Mar 26, 2018 9:26 am

RRAAYY3 wrote:
Mon Mar 26, 2018 9:19 am
dbr wrote:
Mon Mar 26, 2018 8:58 am
RRAAYY3 wrote:
Sun Mar 25, 2018 2:33 pm

With recent market turmoil / geopolitical nonsense, I’ve been wondering if real estate / income property is the next best place to “invest.”
I don't like the thought process here. There is always market turmoil and geopolitical nonsense and real estate is always a viable investment in general for those that do it right. There is no such thing as "the next best place to invest." That is the part I don't like.
I am still maxing out retirement accounts, sorry if it came off as a market timing statement

This was more of a “I’m never buying a house” to “oh, maybe it could make sense financially” rather than continuing to invest in my taxable account

“Diversification” if you will
Then, sure, as a general proposition it is fine. I don't think it is particularly necessary. I think those who do own real estate will confirm that doing so is more in the nature of running a specialized business than in the nature of just another asset class in the portfolio. For that reason I would recommend a lot of thought and learning going into it. As far as diversification, the individual owner of a house or two is actually highly concentrated in risky holdings and while as a theory that diversifies the overall financial position, you may in fact be hugely increasing your risk. One thing might be to shift other risky assets such as stocks to fixed income to maintain a reserve of stable assets against risky real estate, not to mention the possibility of cash flow losses.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Mon Mar 26, 2018 9:40 am

123 wrote:
Mon Mar 26, 2018 8:51 am
Something to think about. Does he have a fixed interest loan or is it adjustible ARM? An ARM can cause interesting things to happen as rates change. Is the loan 100 percent bank financing or is some prior owner financing involved? If owner-financing involved people often overpay to get the financing. He put down 3 percent, did his dad or other relative also contribute to the down payment? People sometimes don't tell complete details.
No just the 3%

Which at first I thought was lunacy - but after seeing the monthly nreakdown it peaked my interest

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Buying a two family “investment” home

Post by Pajamas » Mon Mar 26, 2018 9:45 am

RRAAYY3 wrote:
Mon Mar 26, 2018 9:40 am

No just the 3%

Which at first I thought was lunacy - but after seeing the monthly nreakdown it peaked my interest
Since the financial details of your friend's real estate investment is what piqued your interest in real estate investing, have you asked him more about the details? If he is willing to share the details with you and explain how & why he did what he did, it would give you more information with which to make a decision and implement it. As others have said in several different ways, if a deal seems to good to be true, it usually is, and you may be missing some information.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Mon Mar 26, 2018 9:59 am

I will definitely not be rushing into any of this

I will definitely sit down and get a more in depth breakdown of “the numbers” - we’re close so it won’t be weird or too personal

I was just caught off guard by how little you can put down and still net a reduced monthly living expense (while building towards ownership)

I’m not cashing out my other investments or anything - just something that caught my attention after I initially thought he was insane

alex_686
Posts: 4024
Joined: Mon Feb 09, 2015 2:39 pm

Re: Buying a two family “investment” home

Post by alex_686 » Mon Mar 26, 2018 10:02 am

He did buy it - no reason to use quotes around “bought”.

I have bought a house with little down and it worked out well for me. I bought another house with a decent down payment and was underwater during the 2008 housing crisis.

Is putting 3% down risky in the current situation? Well, what is your friend's risk budget? What is his capacity to take risk? Never look at a individual asset, always look at the portfolio. These situations can work.

Let us call the 20% down-payment number a historical optimal number that balances out the benefits of leverage and the tax shield with adequate downside protection. Higher leverage works but needs to be thought about. I would be mildly in favor.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Mon Mar 26, 2018 11:04 am

alex_686 wrote:
Mon Mar 26, 2018 10:02 am
He did buy it - no reason to use quotes around “bought”.

I have bought a house with little down and it worked out well for me. I bought another house with a decent down payment and was underwater during the 2008 housing crisis.

Is putting 3% down risky in the current situation? Well, what is your friend's risk budget? What is his capacity to take risk? Never look at a individual asset, always look at the portfolio. These situations can work.

Let us call the 20% down-payment number a historical optimal number that balances out the benefits of leverage and the tax shield with adequate downside protection. Higher leverage works but needs to be thought about. I would be mildly in favor.
I use quotes since buying a home is, in my opinion, paying for the right to continue paying a bank to live there - generally for 15-30 years.

Now, if it can actually reduce my monthly expense while adding up to something I “own” one day - cool

Sagefemme
Posts: 73
Joined: Mon Mar 12, 2018 9:31 pm

Re: Buying a two family “investment” home

Post by Sagefemme » Mon Mar 26, 2018 11:14 am

I have ruminated quite a bit on the same idea as RRAAYY3, i.e., why not make real estate investments in addition to being invested in the stock market?? It makes so much sense in some ways. However, after spending a fair amount of time on the website/forum that Archimedes mentions, Bigger Pockets, I am clear that direct ownership of real estate, being the property manager myself, etc. is not for me. The other consideration for me is I live in a "hot" real estate market where prices make most properties unable to "cash flow." Depending on appreciation only is too risky in my opinion. Hot markets cool; anyone can find themselves under water. If you can find something that puts you in the black monthly, I think it's worth considering. If you're hoping for appreciation only, maybe not as good an idea.

Take a look at Bigger Pockets; I found it informative and eye-opening. Depending on where you live you might be able to be part of a real estate syndicate that might be a safer place to start RE investing.

jminv
Posts: 641
Joined: Tue Jan 02, 2018 10:58 pm

Re: Buying a two family “investment” home

Post by jminv » Mon Mar 26, 2018 11:40 am

RRAAYY3 wrote:
Sun Mar 25, 2018 5:54 pm
Definitely not a “get rich quick” kinda guy

Market outleak being bleak for the next decade (still invested and max out tax advantaged space) + my friend’s monthly breakdown with so little down has me reconsidering
You have no idea what the next decade's stock market returns will actually be. Anyone/anything telling you otherwise is similar to astrology. It's a guess. Similarly, you can't know what real estate market returns will be. It seems you're accepting something like the Shiller PE as the 'truth' and using what you think it's telling you to explore 'alternative' investments where the future is also uncertain. It doesn't really follow that since certain people/indicators suggest low market returns that you should then invest in real estate.

Using leverage in real estate is one of the major things that makes it attractive from an investment point of view. Unlike margin loans, with a mortgage you won't have to put up more collateral or have it called if the value of the underlying property decreases. Problems would occur if you needed to sell the property during the downturn which would lead to a loss or if you lost your job and your tenants (or renters can demand lower rent leading to inability to cover mortgage) and could no longer make the mortgage payments. Hopefully your friend also is also considering his time spent managing this property. You should also realize that leverage increases the riskiness of any investment. It will make your returns more volatile.

Also, investment property tends to be in the same region where you are employed and where you also likely own the house you live in. This results in concentrated geographical risk (job + residence + investment property) whereas a diversified portfolio would likely be preferable. Your local market could sour (such as tech for example) and you could lose your job, be unable to make house payments or need to move to another region for a job while faced with a local real estate market decline and sell the house at a loss, while losing tenants or have to accept lower rent from your investment property which has also devalued.

nofacetimber
Posts: 22
Joined: Mon Oct 31, 2016 3:05 pm

Re: Buying a two family “investment” home

Post by nofacetimber » Mon Mar 26, 2018 12:15 pm

RRAAYY3 wrote:
Sun Mar 25, 2018 2:33 pm
Is it ever wise to put less than 20% on a property?
I would say yes, but obviously this is situational and the decision should be made only after some careful consideration.

Back in early 2016 I did a similar thing, I put down 10% on a property where I could rent out a portion of the basement.

I put 10% down because that was all I could afford at the time without taking money out of my ROTH IRA and still keeping 3 months of cash on hand. I did some research, weighed the pros and cons and came to the conclusion that even with PMI, as long as I was renting out the house 90% of the time, I would come out about even cost wise vs renting.

A payment that should beat inflation over time, $600 a month in equity from the get go, and twice the living space was the determining factors for me. (long term play)

Lucky for me I was able to refinance within 8 months and lower my interest rate even further while dropping PMI. (thank you market conditions) But you can't always bank on that.

I wrote a couple articles on my blog detailing my experience if you want some more food for thought.

https://trevordowdle.github.io/2017-04-20-second-home/

https://trevordowdle.github.io/2017-03- ... ing-solar/

alex_686
Posts: 4024
Joined: Mon Feb 09, 2015 2:39 pm

Re: Buying a two family “investment” home

Post by alex_686 » Mon Mar 26, 2018 12:16 pm

RRAAYY3 wrote:
Mon Mar 26, 2018 11:04 am
I use quotes since buying a home is, in my opinion, paying for the right to continue paying a bank to live there - generally for 15-30 years.

Now, if it can actually reduce my monthly expense while adding up to something I “own” one day - cool
Lets see, you control the property and get all of the profits. Yes, you have to pay the mortgage. But that is leverage and imputed rent. If you live in a no-recourse state you can always give the house back if you lose too much money. A "heads I win, tails you loose" situation.

No saying that you do this. Investing in a home is emotionally complex. No reason to make it more complex by thinking it is something which it is not.

freckles01
Posts: 95
Joined: Sun Aug 10, 2008 4:43 pm

Re: Buying a two family “investment” home

Post by freckles01 » Mon Mar 26, 2018 1:32 pm

RRAAYY3 wrote:
Sun Mar 25, 2018 2:33 pm
Is it ever wise to put less than 20% on a property?

A friend recently “bought” a 2 family home with 3% down ... with collecting rent his monthly cost of “living” expense is less than 1,000/month

(This is a HCOL area).

With recent market turmoil / geopolitical nonsense, I’ve been wondering if real estate / income property is the next best place to “invest.”

I guess my question is - Is it ever a good idea to put so little down in order to acquire a property. With the rent from tenants he essentially ends up paying a fraction of what rent costs ... slowly but surely building up equity / ownership someday.

Initially I heard this news and thought he was insane, but from a monthly expense perspective it actually looks like it may have been a wise move. I just never thought putting less than 20% down on any home/property would make sense ... Thoughts?
i did just that when i bought my first home in a hcol area. 3% down when they were giving out 103% loans, yes 103% so i looked totally reasonable at the time "only" borrowing 93%.

it was two loans that got quickly rolled into one with a refi and appreciation working for me.

my thought was, i have to pay to live somewhere so why not buy an income property to help pay for the cost of ownership. they help pay for the inevitable costs to maintain and repair a home that comes with home ownership.

that said, i do kick in extra payments to the principal and also think about selling it all to retire or become FIRE and buy a small condo in a cheaper area.

RRAAYY3
Posts: 926
Joined: Thu Jan 17, 2013 12:32 pm

Re: Buying a two family “investment” home

Post by RRAAYY3 » Mon Mar 26, 2018 1:45 pm

Thank you all

Seems like it’s an option I should continue exploring. This likely wouldn’t even occur until the fall (after researching all summer)

I don’t make spontaneous purchases, ever - I’ll reseaech a beer in the store before I buy a 6 pack if I have to

The reality of putting so little down, actually reducing my monthly rent/“living expense”, AND ultimately owning something is interesting - I’ve just been so hardwired to never put less than 20% down

My area always will have people seeking residence - my friend rented his place not even a week after the renovations were done.

If I can find a property below 300K - I may just go “take a look”

I’ve got some family in the industry (titles/mortgages, etc.) so that’d help.

MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: Buying a two family “investment” home

Post by MrPotatoHead » Mon Mar 26, 2018 7:53 pm

One advantage of multi tenant properties you live in, is it gives you a great way to turn expensive toys and hobbies into business expenses. For example, I love to garden...extensively. My 8 flat has a rather elaborate garden for some reason and a very nice rec room in the basement with a built in theater as well as a nice mini gym with an Endless Pool (for swimming). The row of garages in back seem to be stuffed with 60s muscle cars. Just sayin'.

denovo
Posts: 4384
Joined: Sun Oct 13, 2013 1:04 pm

Re: Buying a two family “investment” home

Post by denovo » Mon Mar 26, 2018 9:00 pm

RRAAYY3 wrote:
Sun Mar 25, 2018 2:57 pm
JBTX wrote:
Sun Mar 25, 2018 2:54 pm
Seems to me having essentially no downpayment is going to materially increase your interest rate on the entire loan. Say you could get 4.5% on 80% or 5.0% on 97%. That is basically similar to 4.5% on the 80% and something like 7% on the additional 17%. Or maybe you have PMI which is basically like additional interest on the amount over 80%.
So ... not smart?

Once he told me he was essentially paying less than 1,000 / month (about half of what actual rent is here, at least) when it’s all said and done (mortgage, taxes, etc.) I was somewhat intrigued
It works until it doesn't.
"Don't trust everything you read on the Internet"- Abraham Lincoln

User avatar
Sandtrap
Posts: 5454
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Buying a two family “investment” home

Post by Sandtrap » Mon Mar 26, 2018 9:35 pm

RRAAYY3 wrote:
Mon Mar 26, 2018 1:45 pm
Thank you all

Seems like it’s an option I should continue exploring. This likely wouldn’t even occur until the fall (after researching all summer)

I don’t make spontaneous purchases, ever - I’ll reseaech a beer in the store before I buy a 6 pack if I have to

The reality of putting so little down, actually reducing my monthly rent/“living expense”, AND ultimately owning something is interesting - I’ve just been so hardwired to never put less than 20% down

My area always will have people seeking residence - my friend rented his place not even a week after the renovations were done.

If I can find a property below 300K - I may just go “take a look”

I’ve got some family in the industry (titles/mortgages, etc.) so that’d help.
Sounds great.
You have to start somewhere. If this works out you will have the initial "seed" to move to greater things. And, you are cultivating a mind and instinct for "business" which is admirable. Hang on to that ambition.

Whether the initial R/E investments are gotten through savings from a high income salary, "house hacking" (new term for me), or other means, set your sights high and vision long. One day there will be apartment buildings and 100's of tenants to take care of of and you might long for "simpler days" and retire to "Bogeheadville".

Good luck.
mahalo,
j :D

Post Reply