Turn Your First Home Purchase into an Investment Property
─First Steps to Build Wealth through Real Estate Investment
When buying a starter home, think long-term. Instead of selling when you have outgrown or are ready to upgrade, turn your first home into an investment property. The benefit of converting your primary residence into a rental property is the mortgage terms for a primary residence are far better than a loan for an investment property. You will secure a lower interest rate and need less money down. Living in the home also allows you to build equity and save for your next purchase. Subsequently, you can leverage this home’s value/rental income to finance your next primary residence, whether it be a “forever” home or another investment property.
1) Financing Advantage ~ Better Rates & Less Money Down
Most mortgage lenders require borrowers to have a 20% down payment for investment properties. Typically, first-time home buyers are putting down as little as 3% to 5% or 0% on a VA loan. This normally includes an additional monthly cost of mortgage insurance, based on the price of the home. Mortgage interest rates will always be higher on investment properties than on your primary residence. This is because investors are viewed as riskier borrowers compared with those who are buying a home to live in. A general rule of thumb is .5% to .75% higher than the rate on your primary mortgage for a single-family home and .625% to 1% for multi-units.
2) FHA Loans
The U.S. Federal Housing Administration (FHA) offers a home loan that makes it easier to qualify for first time buyers. This loan is unique because it protects private lenders, like banks and credit unions, from losing money on “higher risk” borrowers. In short, if you do not repay your loan, the FHA will pay the lender instead. The benefits of FHA financing are a smaller down payment (3.5%) and a lower credit score requirement. Extra funding is also available for repairs and renovations with FHA 203k programs. Keep in mind there is a mortgage insurance premium required (1.75%) and you must live in the property for a minimum of one year.
3) Multi-Family or Roommates
A way to save more money and offset a mortgage is to purchase a multi-unit property or consider getting a roommate(s) to rent out individual rooms. Also note buying a multi-unit property and living in one while renting out the other unit(s) is acceptable for owner occupied/FHA financing.
4) Bank Owned/First Look
Foreclosures are often bargains and popular with real estate investors on the hunt for rental properties or house flips. Competing with these investors, many of whom have access to significant credit lines and cash, can be challenging for first-time homebuyers. Today, the First Look Program, through the Department of Housing and Urban Development (HUD), offers a 30-day period during which owner occupants, public entities, and nonprofits have the exclusive ability to buy Fannie Mae and Freddie Mac real estate owned (REO) properties before they are available for investor purchase. This gives a first-time homebuyer the opportunity to acquire a distressed property which after a few repairs can likely sell or rent at a greater profit.
5) Tips When Considering What to Buy
Mortgage Principal + Interest + Taxes + Insurance (PITI) is close to current rental rates. Ideally, estimated rent + 20% ≥ PITI. This may mean not maximizing your approved loan amount. Remember, this is not your “forever” home so be reasonable with must-have features. Make sure you can still save money for a down payment on your next home plus reserves for repairs/maintenance on the rental property.
If you would like more detailed information on your local market or would like to determine the value of your home, please give the Paradise Team a call at 732-899-3338.