Buying a rental before a OO

I have a question about buying a rental before buying a house that I would live it. I know this seems, and probably is backwards. However, the neighborhoods that I have looked into to buy a house for myself, prices have been dropping and I have been holding off on buying a house in my ideal neighborhood until winter time, and for the time being my rent is cheaper than what the property taxes on any live in home I would buy is so I feel like I am in a pretty good situation holding off.

I have been wondering how bad an idea it would be to buy an investment /rental property with 100% financing first, and then when I find a house for myself using my current 45-50k money saved for a downpayment buy a home with a conventional 80/20 loan. I also plan to rent extra rooms in that house out to friends and coworkers once I buy.

I just wanted to know of potential pitfalls and snags with taxes and financing if this were done.

Thanks for input!

I will give you my 2 cents… your thoughts and thinking might be good initially; however, keep in mind what would happen when FOMC decide to pause or stop raising the interest rates for a duration. What do you think would happen to your “prices are dropping” market?

Investor need to be very nimble in their stategy or get burned. Too many late night real estate programs offering the moon and people are getting into it without having a solid understand as to where the market is. Look at the house index and you will see where the market is going or not going.

The real estate markets have changed in considerably in the last 6 months and the changing market will wipe out many investors and Realtors. The end for some and a new beginning for others.

Nothing wrong with what you’re doing. Check this out though. Why not buy the investment property to live in with your buddies. You would be building equity and creating cash flow instead of paying rent. Then when you find your sweet deal dream home, you’re on better financial footing and your buddies can keep renting from you.
Personally, I’m not crazy about renting to friends and co-worker. Some people find it difficult to seperate friendship and business. How do you evict a friend who isn’t paying his/her rent? There are a number of tax advantages to owning verses renting. Talk to a CPA, but you’ll like the mortgage interest and depreciation deductions from taxable income. By the way, a conventional 80/20 is a common approach which combines a first and second mortgage. You mentioned putting money down so are you sure this is what you meant. Are you talking to a banker yet? Might not be a bad idea.
Go for it.


By 80/20 i meant 20% down conventional loan.

I know its a weird situation, but it was something I have been looking into.

The reason I did not wnat to live there and rent to my buddies is because the house is not in the best area, and the house is not in the best shape. But it is in a up and coming area where lots and lots of rennovations are going on.

I work in one of the city agencies in Baltimore that processes permits and this is one of the neighborhoods that the bulk of rehab permits are coming through.

Just say an 80% loan then. 80/20 is shorthand for 100% financing, you get a regular 80% first mortgage then another 20% second mortgage. In your case, there’s no 20% second so you can just say you’re getting a conventional mortgage which is usually an 80% first mortgage.

Anyway, you might be right about holding off, usually the worst time for sellers is in the winter between Thanksgiving and Christmas. Only those who really need to sell will keep their properties on the market. Less choice, but there may be more bargains out there. Also if you close in January, you’ll have a whole year’s worth of tax deductions instead of just a month or two. I believe claiming the interest deduction requires you to itemize so it may not be worth that much to you.

Renting for less than property taxes is a pretty good rate. Around here, taxes are 2-3k a year so paying $200-$300 a month for rent is a pretty good deal.

Some of the houses I was looking at for myself have property taxes of around 5k. The property tax rate here is crazy…

Anyway I was just asking because I have come across a few houses lately that appear like they would cash flow well.

the main one is a rowhouse about 80k, 2bed 1ba. on a 12x130ft lot with a 2 car garage in the rear. Most of the comparable houses in the neighborhood go for 90k-110k. It is in a neighborhood that is transitioning to a nicer neighborhood with lots of rehabs. A 100% financed mortgage would be about 550 mo, plus insurance. Area rentals go for about 800-900.

One of the main reasons I like this property is the long lot. the back of the lot borders a street, not an alley, and you could potentially subdivide the lot and sell the back half.

Just some thoughts that have been running through my head.

Don’t know about your area, but around here, you have to check with the zoning board before you can build anything. Usually there’s requirement like street frontage, setbacks and minimum lot size before you can build.

Before you go ahead with the deal, make sure you check with the local building department and make sure you can build on the lot. Each city has different requirements. Lots that used to be buildable in one city where the minimum lot size use to be 4000 square feet now require 7500 square feet. Then you have minimum setbacks from the front of the street, from the back of the lot from the side of the lot ect. Lots of those old houses you see that were built were grandfathered and you could never build those today.

I actually work with the city agency that does subdivisions and development reveiws. I am not involved first hand but I do work with the people that are involved. I have just not had time the last few days to sit down and talk with the people I need to.

Thanks for the info!