First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

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bogler52
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First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Thu Jul 30, 2020 6:50 am

Hi All,

I am making this post to hear opinions, feedback, and guidance from the community.

Background:

I've long read how real estate can be a great vehicle for passive income and wealth building. BiggerPockets comes to mind. The goal is to purchase a multi-family to generate income, or at minimum is close my current COL and appreciates over time. I would live in one unit. Ideally this would be the beginning of a rental income portfolio.

My Situation:

Right now I live in a condo that my family owns and I pay slightly less than market value and slightly less than their costs. My rent is $2k /month split with my gf and their total costs are around $2,400 with mortgage and condo fees (thank you family!).

I live in a HCOL area where average home prices are $1M. My base is $70k / year and with commission over $100k. Last year my W2 was $123k. I'm playing for $200k this year. I make my budget solely off my base salary.

No debts other than car payment ($7k left on loan, could pay off today). NW $160k+

Based on my income and splitting rent / mortgage payment with my gf our current housing is appropriate for our income ($145k / year combined, not including commission). We don't have kids and are 30 years old. She would not be putting money towards this property other than rent paid.

The Dilemma:

My family would be willing to give a gift of $100k, possibly more, to help out. My down payment fund is ~$25k right now which would probably not even cover closing costs.

It's been my goal to buy a multi-family and interest rates are low. However, it feels like an expensive move because of being in a HCOL area and the good deal that I currently have.

Question:

What does the community think about buying a multi-family given my HCOL area, current financial state, and living situation?

Please let me know if you have any questions.

Best,
bogler52

niceguy7376
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by niceguy7376 » Thu Jul 30, 2020 7:31 am

What is the cost of the multi family?
Even if your family gives 100k, would that be enough for a down payment for you to get a loan on your name?

h82goslw
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by h82goslw » Thu Jul 30, 2020 9:00 am

Wife and I bought a 2 family duplex in a MCOL area right when we got married in late ‘90s. I was just starting my career and was earning peanuts, as was she. Our mortgage payment was $1000 and we collected rent of $850. Sold it 6 years later when we bought a single family home and cleared $40K. Was one of the best financial decisions we made (although I now wish we had kept it). If you don’t mind getting called on Christmas morning that the heat isn’t working (yes this happened) I say go for it.

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Sandtrap
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by Sandtrap » Thu Jul 30, 2020 9:09 am

What is the multi family? (fourplex, sixplex, 12 unit apartment building)?
How much does it cost? (you give other numbers but not enough info)
Would you be able to afford the rental unit if it had a 50% vacancy for 6 months?
You will have to up your liability and personal insurance. Can you afford that?
Will you self manage (rent/check in and out, take applications, repairs, complaints) or hire a management $$$$ company?
Are you a landlord/businessman or a passive hands off landlord expecting the least involvement yet make a profit?
Can you change a faucet washer?
Can you unplug a sink?
Can you reset a water heater electric breaker at 2:00 A.M. and then go back home to work in the morning?
Will the rental unit be reasonably near to wear you live?
Will your parents be on the rental unit title or loan? Cosign?
Do your parents have rental units?
Do you plan on living in that area for a long time?
What will happen to the rental unit if you move to another State?
What if you want to sell the rental unit in 6 years and will take a 20% loss because of a R/E downturn, but you need to sell?
What would happen to any of the above if you had to move out of your parents "subsidized" condo and be on your own?
What would happen if you had to move out of your condo and live in one of your rental units?
Do you have to pay your parents back?
What would happen to your financial situation if your GF leaves and you are on your own finances and income, etc.?
When are you going to get married?

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

Dave55
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by Dave55 » Thu Jul 30, 2020 9:12 am

Sandtrap wrote:
Thu Jul 30, 2020 9:09 am
What is the multi family? (fourplex, sixplex, 12 unit apartment building)?
How much does it cost? (you give other numbers but not enough info)
Would you be able to afford the rental unit if it had a 50% vacancy for 6 months?
You will have to up your liability and personal insurance. Can you afford that?
Will you self manage (rent/check in and out, take applications, repairs, complaints) or hire a management $$$$ company?
Are you a landlord/businessman or a passive hands off landlord expecting the least involvement yet make a profit?
Can you change a faucet washer?
Can you unplug a sink?
Can you reset a water heater electric breaker at 2:00 A.M. and then go back home to work in the morning?
Will the rental unit be reasonably near to wear you live?
Will your parents be on the rental unit title or loan? Cosign?
Do your parents have rental units?
Do you plan on living in that area for a long time?
What will happen to the rental unit if you move to another State?
What if you want to sell the rental unit in 6 years and will take a 20% loss because of a R/E downturn, but you need to sell?
What would happen to any of the above if you had to move out of your parents "subsidized" condo and be on your own?
What would happen if you had to move out of your condo and live in one of your rental units?
Do you have to pay your parents back?
What would happen to your financial situation if your GF leaves and you are on your own finances and income, etc.?
When are you going to get married?

j :happy
+1

Dave

wilked
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by wilked » Thu Jul 30, 2020 12:24 pm

You are paying under-market rent, and living with your girlfriend. Does this $25K you have for downpayment include your e-fund? What is the other $140K of net worth invested in?

The offer of a gift is generous, but I wouldn't take it. Keep living cheaply and keep saving. Check back in when you have $100K+ saved up

Gibby45
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by Gibby45 » Thu Jul 30, 2020 4:09 pm

To get your first MF property, you could consider looking into low downpayment no PMI loans from a local small bank or credit union. They are often portfolio loans. You could also look into an FHA loan which would allow you to put down as little as 3.5%. The mortgage rates are really low, but you would have to pay the mortgage insurance for the life of the FHA loan (until you refinanced). If you are in a HCOL area where real estate and rents are appreciating, it may be worth a shot. If you go the MF route, make sure you have sufficient cash reserves. Anything up to 4 units is considered a residential property.

Many HCOL area homes have total monthly costs that drastically exceed expected rent. Run the numbers to make sure you would be better off when taking savings into account (depreciation, rent from the other unit(s), average area appreciation v. total expenses of owning compared to your current situation (make sure to account for vacancy, repairs, increased insurance, property taxes and the stress of being a landlord). Compare that to the simplicity of just investing in the stock market. If after taking all of that into consideration it still looks like it could work, go for it!

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bogler52
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Fri Jul 31, 2020 6:49 pm

niceguy7376 wrote:
Thu Jul 30, 2020 7:31 am
What is the cost of the multi family?
Even if your family gives 100k, would that be enough for a down payment for you to get a loan on your name?
Hi niceguy7376,

The home prices vary for this area anywhere from $700k on the low-end (fixer-upper) to $1m+ for something in great shape.

$100k may be enough for a downpayment, but only for 10% down. That would mean there would be PMI which I'd like to avoid.

Topic Author
bogler52
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Fri Jul 31, 2020 7:04 pm

Sandtrap wrote:
Thu Jul 30, 2020 9:09 am
What is the multi family? (fourplex, sixplex, 12 unit apartment building)?
How much does it cost? (you give other numbers but not enough info)
Would you be able to afford the rental unit if it had a 50% vacancy for 6 months?
You will have to up your liability and personal insurance. Can you afford that?
Will you self manage (rent/check in and out, take applications, repairs, complaints) or hire a management $$$$ company?
Are you a landlord/businessman or a passive hands off landlord expecting the least involvement yet make a profit?
Can you change a faucet washer?
Can you unplug a sink?
Can you reset a water heater electric breaker at 2:00 A.M. and then go back home to work in the morning?
Will the rental unit be reasonably near to wear you live?
Will your parents be on the rental unit title or loan? Cosign?
Do your parents have rental units?
Do you plan on living in that area for a long time?
What will happen to the rental unit if you move to another State?
What if you want to sell the rental unit in 6 years and will take a 20% loss because of a R/E downturn, but you need to sell?
What would happen to any of the above if you had to move out of your parents "subsidized" condo and be on your own?
What would happen if you had to move out of your condo and live in one of your rental units?
Do you have to pay your parents back?
What would happen to your financial situation if your GF leaves and you are on your own finances and income, etc.?
When are you going to get married?

j :happy
Hi Sandtrap,

Thank you for this list of questions to consider. Your last question was my favorite :wink:

Below are my responses:

What is the multi family? (fourplex, sixplex, 12 unit apartment building)? Likely 2 family, possibly 3 family
How much does it cost? (you give other numbers but not enough info) I'm getting MLS listings via my realtor, so anywhere from $700k to $1.3m
Would you be able to afford the rental unit if it had a 50% vacancy for 6 months? Probably not. I have an emergency fund for ~3 months expenses for my current expenses
You will have to up your liability and personal insurance. Can you afford that? Not sure - great question.
Will you self manage (rent/check in and out, take applications, repairs, complaints) or hire a management $$$$ company? I would live in one of the units so I would manage this myself, yes.
Are you a landlord/businessman or a passive hands off landlord expecting the least involvement yet make a profit? In this scenario I would be the landlord
Can you change a faucet washer?
I have to do this on my sink now, so we'll find out!
Can you unplug a sink? Yes
Can you reset a water heater electric breaker at 2:00 A.M. and then go back home to work in the morning? Is this any different thank flipping a breaker switch? If it's the same, then yes, I can and would do this.
Will the rental unit be reasonably near to wear you live?
In this scenario I would also live in the building.
Will your parents be on the rental unit title or loan? Cosign? Possibly, we haven't discussed this yet.
Do your parents have rental units? Not really. The condo I live in I'm the renter, but that's their only experience. I wouldn't count it.
Do you plan on living in that area for a long time? Yes, but can you define "long time"?
What will happen to the rental unit if you move to another State? I would either rent it out or sell it. Ideally I would keep it and rent it out.
What if you want to sell the rental unit in 6 years and will take a 20% loss because of a R/E downturn, but you need to sell? Ideally I'm setting myself up for success to avoid being in this situation. However, if I need to sell it then I would need to sell it. I only see that as the answer to this question./b]
What would happen to any of the above if you had to move out of your parents "subsidized" condo and be on your own? I'm not sure I understand this question. I can afford to live elsewhere, I chose to live in the condo my family owns because it is in a location I enjoy, is a nice place, and rent is affordable. Please explain.
What would happen if you had to move out of your condo and live in one of your rental units?
My plan is to live in one of the rental units in the house I buy. Would you advise one scenario over another?
Do you have to pay your parents back? No, this would be a gift and the expectation is not to be paid back. I would like to, but this is not the expectation.
What would happen to your financial situation if your GF leaves and you are on your own finances and income, etc.? Great question. In my current situation I can make it work (I have been before she moved in) however, I don't think I can swing a $5k - $6k / month mortgage on a multi-family without her contribution and no renters.
When are you going to get married? Love it! She's amazing. No timeline, but I think I'm cooked. Probably in the next 2-3 years.

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bogler52
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Fri Jul 31, 2020 7:10 pm

wilked wrote:
Thu Jul 30, 2020 12:24 pm
You are paying under-market rent, and living with your girlfriend. Does this $25K you have for downpayment include your e-fund? What is the other $140K of net worth invested in?

The offer of a gift is generous, but I wouldn't take it. Keep living cheaply and keep saving. Check back in when you have $100K+ saved up
Hi wilked,

The $25k doesn't include my emergency fund. I have nearly $38k in a high-interest savings account and in my head $10k of that is an emergency fund. $10k is roughly 3 months of expenses for my current lifestyle.

I hear you about not taking the gift and waiting. That though is part of why I made this post.

I've read articles about how it's advantageous to not buy and keep renting, so that's in my head, too. I live in a HCOL area and prices keep going up, or maintain. Of course nothing is certain, and this area saw virtually no change during the last economic downturn. Part of me thinks I'm interested to do this and the escalator is going up so might as well step on. It is kind of scary.

Also, I don't need any more space than I have currently. No kids yet, and I love where I live.

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Sandtrap
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by Sandtrap » Fri Jul 31, 2020 7:23 pm

If you are going to live in one of the units in a TriPlex (3 is better) and you can make all the payments and turn a profit without you girlfriend and with one renter missing then great! Be sure at least a 6-8% Minimum “Net“ monthly CAP Rate.
IMHO owning on your own and making it happen without your girlfriend is critical.
Otherwise: great idea!!!!

j🌺
Wiki Bogleheads Wiki: Everything You Need to Know

Katietsu
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by Katietsu » Fri Jul 31, 2020 7:38 pm

Much good advice already. I usually do not bother to comment on rental questions after Sandtrap has already answered. :happy

Given that your living expenses are so cheap right now, why do you not have more savings? Are you sure you have a handle on your living expenses?

If you own a triplex, remember that you have 3 times the number of A/C units and refrigerators that may and will go bad.

Real Estate can be like the stock market...when there is a lot of FOMO buying going on, it can be a high point in price.

westie
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by westie » Sat Aug 01, 2020 7:32 am

My daughter and her husband are in the in the early stages of house hunting. Seems as though many houses are being sold "as is" these days. What that means apparently is the you can still back out based on a home inspection but it tells the buyer the seller is not going to fix anything you find.

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bogler52
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Sat Aug 01, 2020 7:59 am

Sandtrap wrote:
Fri Jul 31, 2020 7:23 pm
If you are going to live in one of the units in a TriPlex (3 is better) and you can make all the payments and turn a profit without you girlfriend and with one renter missing then great! Be sure at least a 6-8% Minimum “Net“ monthly CAP Rate.
IMHO owning on your own and making it happen without your girlfriend is critical.
Otherwise: great idea!!!!

j🌺
Hi Sandtrap,

That makes sense. I want to make sure that the expenses work for me, and when it officially becomes we it should make owning the property an even better proposition. The type of advise you've provided (thought provoking, detailed, critical) is exactly why I made this post.

So THANK YOU and thanks to everyone else that has commented thus far. Any additional thoughts / feedback is welcomed.

Best,
bogler52

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bogler52
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Sat Aug 01, 2020 8:03 am

Katietsu wrote:
Fri Jul 31, 2020 7:38 pm
Much good advice already. I usually do not bother to comment on rental questions after Sandtrap has already answered. :happy

Given that your living expenses are so cheap right now, why do you not have more savings? Are you sure you have a handle on your living expenses?

If you own a triplex, remember that you have 3 times the number of A/C units and refrigerators that may and will go bad.

Real Estate can be like the stock market...when there is a lot of FOMO buying going on, it can be a high point in price.
Hi Katiesu,

My level of income is a relatively new. Prior to this year my salary was $50k ($20k less than I make now) and my costs were actually slightly higher. So I've been saving as much as I can and have recently gotten very aggressive for this downpayment fund. Also, The $25k I mentioned does not take into account my emergency fund or any other funds like 401k, investments, checking account to pay my bills (though I wouldn't touch those other accounts).

I can and do handle my expenses. Thank you for the concern.

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Sandtrap
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by Sandtrap » Sat Aug 01, 2020 10:04 am

bogler52 wrote:
Sat Aug 01, 2020 7:59 am
Sandtrap wrote:
Fri Jul 31, 2020 7:23 pm
If you are going to live in one of the units in a TriPlex (3 is better) and you can make all the payments and turn a profit without you girlfriend and with one renter missing then great! Be sure at least a 6-8% Minimum “Net“ monthly CAP Rate.
IMHO owning on your own and making it happen without your girlfriend is critical.
Otherwise: great idea!!!!

j🌺
Hi Sandtrap,

That makes sense. I want to make sure that the expenses work for me, and when it officially becomes we it should make owning the property an even better proposition. The type of advise you've provided (thought provoking, detailed, critical) is exactly why I made this post.

So THANK YOU and thanks to everyone else that has commented thus far. Any additional thoughts / feedback is welcomed.

Best,
bogler52
Great followup.
Thanks!

Reason why I suggested a Triplex or 4plex or more, is reducing SPF (single point of failure).
IE: A SFH (single family home) rental, if vacant is 100% vacant with nothing covering expenses, a Duplex with 1 prolonged vacancy is 50% vacant with income cut in half and is difficult to cover expenses, mortgage, etc. A 3Plex with one sustained vacancy still has 2 units to sustain costs. Something like this. Of course it depends on outside income (normally peter to pay paul is not a good idea as even if a multiple SFH rentals, one should be owning one to sustain another). Of course anything can work well but this is just another way of rental unit progression. Multiple unit owners go by "cost per door" (unit).

You have a good goal.
j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

megabad
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by megabad » Sat Aug 01, 2020 10:16 am

Sandtrap wrote:
Fri Jul 31, 2020 7:23 pm
If you are going to live in one of the units in a TriPlex (3 is better) and you can make all the payments and turn a profit without you girlfriend and with one renter missing then great! Be sure at least a 6-8% Minimum “Net“ monthly CAP Rate.
IMHO owning on your own and making it happen without your girlfriend is critical.
Otherwise: great idea!!!!

j🌺
+1 just wanted to emphasize that girlfriend should not be a part of this transaction at all. Also wanted to add that finding a reasonable profit on rental property in HCOL areas can be challenging if not impossible so consider carefully all expenses. I don’t use CAP rate, all I care about is cash yearly profit. Be careful with cap rate, make sure you choose a number that is right for that specific situation.

WS1
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by WS1 » Sat Aug 01, 2020 11:04 am

I’ve toyed/am toying with this in the NYC metro. Doing this in a HCOL area is not the “live for free” thing you read about on Bigger Pockets. It’s really a lower cost way to own in a neighborhood you’d want to call home or its the ONLY way to own in a neighborhood because there are no single family homes. Unless you are doing an FHA or the bank is making a portfolio loan, max LTV is 85% (this was pre-COVID)

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bogler52
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Sat Aug 01, 2020 12:40 pm

Sandtrap wrote:
Sat Aug 01, 2020 10:04 am
bogler52 wrote:
Sat Aug 01, 2020 7:59 am
Sandtrap wrote:
Fri Jul 31, 2020 7:23 pm
If you are going to live in one of the units in a TriPlex (3 is better) and you can make all the payments and turn a profit without you girlfriend and with one renter missing then great! Be sure at least a 6-8% Minimum “Net“ monthly CAP Rate.
IMHO owning on your own and making it happen without your girlfriend is critical.
Otherwise: great idea!!!!

j🌺
Hi Sandtrap,

That makes sense. I want to make sure that the expenses work for me, and when it officially becomes we it should make owning the property an even better proposition. The type of advise you've provided (thought provoking, detailed, critical) is exactly why I made this post.

So THANK YOU and thanks to everyone else that has commented thus far. Any additional thoughts / feedback is welcomed.

Best,
bogler52
Great followup.
Thanks!

Reason why I suggested a Triplex or 4plex or more, is reducing SPF (single point of failure).
IE: A SFH (single family home) rental, if vacant is 100% vacant with nothing covering expenses, a Duplex with 1 prolonged vacancy is 50% vacant with income cut in half and is difficult to cover expenses, mortgage, etc. A 3Plex with one sustained vacancy still has 2 units to sustain costs. Something like this. Of course it depends on outside income (normally peter to pay paul is not a good idea as even if a multiple SFH rentals, one should be owning one to sustain another). Of course anything can work well but this is just another way of rental unit progression. Multiple unit owners go by "cost per door" (unit).

You have a good goal.
j :happy

Thank you!

squirm
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by squirm » Sat Aug 01, 2020 12:47 pm

Here's my simple advice I have always followed: If you can't easily put down 20%, you're not ready. Always worked out well for me.

flaccidsteele
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by flaccidsteele » Sat Aug 01, 2020 1:47 pm

99% of the work in MF is finding a deal

If you can do that, then go for it
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat

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bogler52
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Re: First Time Home Buyer / Multi-Family - To Buy Or Not To Buy?

Post by bogler52 » Tue Aug 04, 2020 6:56 am

Hi All,

An update for you.

Yesterday I was approved for an $850k loan ($1m purchase price with 15% down for a 2 family. 3 family was slightly higher at $1.067m and 20% down). This was in line with my expectations and has caused me anxiety. Of course $1m isn't my budget. It's given me pause to understand what my number is, how I feel about owning, and being a landlord.

Interest rates are low (I was quoted 2.875% 30 year fix mortgage) because the economy is slowing down. Many people are losing jobs which means counting on rental income to cover part of the costs (always a risk) is even riskier. I want to be able to cover the entire monthly costs (mortgage, taxes, insurance, maintenance) by myself, within budget. Right now that would mean around $400k (assuming no rental income).

Since I live in a HCOL area and am not married yet I'm working off of one salary (I don't budget off my commission, nor factor in my girlfriend's income). I've spoken to some friends who are interested to buy rental income property together, which I'm hesitant to do.

Part of the downpayment would come from the sale of the condo I live in which my parents own. I've always thought of it as "rent to own". However, my folks don't want to be landlords (I'm their only "tenant") and would need to sell this place in order to give me a gift. I love where I live and I think it will appreciate significantly over the next few years. Ideally, I would hold on to it as place to rent out.

Getting pre-approved happened so fast and I've been wanting to purchase a multi-family for years. It's scary how quickly this is moving. Again, I love where I live (it feels like home) and my lifestyle is appropriate for my current income. My goal is FI which I've always thought of rental income as a piece of.

I'm contemplating not buying now, continue to save, and get into a house that I want to live in. Prices will likely go up, as will interest rates. This feels safe, and I don't want to pass on a great opportunity. Over the next few years my income should continue to increase and I may be married or at least engaged. The space we have is perfect for us now, and in a few years a larger home would be nice and possibly necessary with a growing family.

I'm also contemplating rental property in less expensive areas and not being owner-occupied. This would allow me to own property and meet the aforementioned goals.

I'm struggling with all the pieces in front of me, I just don't want to get over my skis.

bogler52

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