When is the best time to buy your first investment property?

Buying your First Investment Property

When is the best time to purchase your first investment property? If you’re looking at getting involved with buy-and-hold real estate, you’ll hear all sorts of advice about when you should get involved with rental properties like this. Dave Ramsey, Robert Kiyosaki, and a host of other experts on the bigger pockets podcast and blog will give you some good advice.  There are other articles that talk about how to buy your first investment property like investopedia, Rocket HQ, and Forbes, but we think we can help you out right here at the Duplex Doctors.

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Most of the experts are going to say that investing in real estate is a good idea after you’ve paid off all of your debt, built up a bit of savings and an emergency fund, and already funded retirement plans up to the match with your current employer. We think this is a good approach, but this approach to starting an investment property he’s looking at it in the traditional sense from somebody who has already advanced a bit through their career in life.

Duplexes & Small Multi Family are the easiest as a first investment property.

Most of the financial advice that you’re going to hear from people like Dave Ramsey and Robert Kiyosaki are forgetting that small multi family properties are a unique opportunity to get started with an income producing property.

Why are duplexes and small multi family the best first investment property?

Small multi family homes are unique because you can use traditional financing that you would use for your primary residence in order to purchase a home that has a unit for rent. This is all about being an owner occupant, were you live in one of the units of your multi family housing structure, and rent the other units out. Here in Minneapolis and St. Paul, we have a great deal of duplexes, triplexes and even mini four Plexes that create a ton of opportunity for somebody to honor occupy.

So in our opinion, duplexes and triplexes are the easiest types of property to get started in, but they aren’t located everywhere. Most duplexes are found in areas that had construction going on during the early and mid-20th-century. Often times immigrant families and multi generational households appreciated the duplex and triplexes, so you’ll see quite a few in neighborhoods like Minneapolis, St. Paul, Milwaukee, and other towns that were established around industrial commerce during the early and mid-20th-century.

Rental Income Powers Your Home Loan

One of the most important concepts to understand when getting involved with an owner occupied duplex or triplex, is that when you go to purchase your home, a duplex and triplex lender will consider the future income from your tenant when they give you an estimated loan amount or when they approve you for your final mortgage.

In other words, you get to borrow against somebody else’s rent payment.

So let’s say in a regular situation, your current income and financial situation had you approved for a $200,000 single family home. If you started to look at properties that were similar but had an opportunity to drive $1200 a month in rental income, your approval amount would be significantly more than that $200,000 and you’d be able to purchase more house.

When we talk about house hacking in a little bit here, we will show you why this is important as you start to build out your portfolio of additional homes.

So your own income and the rental income from your tenants will be considered when borrowing, enabling you to purchase more of a house if it’s a duplex.

Use your first home buying experience to purchase an investment property

Duplexes are great because you can use traditional financing to purchase them as long as you intend to owner-occupy them.

There are a couple of rules, but the court tenant is that you will purchase a duplex or triplex as your primary residence and you will live in it yourself for at least one year. If you are down for that, living in your investment property for at least a year, then you’ll be able to purchase a townhome with less down payment than a traditional investment property.

Investment properties usually require 20% or even 25% down payment, and The lender or bank is going to be much more conservative then if they were using the secondary markets or traditional mortgage products.

How much down payment will you need for your first investment property? If you’re planning on using the home as an owner occupant and living in one side and renting the other out, then you can use any of the traditional mortgage programs out there that would require 10% down payment or much less.

Often, you’ll be able to purchase an owner occupant duplex for as little as 5%, 3% or even 0% down depending on which program you are using.

Remember, not having to come up with lots of cash might sound good, but you’ll also have to consider PMI and other negative consequences of taking on a low down payment mortgage.

House hacking is the best way to get started

So we’ve already established that we think small multi family homes such as duplexes, triplexes and quad Plex is, are the best properties to purchase as your first investment property, but now let’s talk about when is that the most viable in terms of life stage.

One strategy we think is very valuable is the house hack, were you do everything possible to get your first property and fill the highest income units with tenants while you live in the least viable unit in order to get the most income generating.

The legal requirement for most of your owner occupant mortgages is that she will live in the property for at least one year. In order to house hack, you try as hard as you can to fill as many units as possible with higher paying tenants, and you simply get by to meet the legal obligation for a one-year resident.

After you’ve lived in it for a year, you could actually fill the unit you were inhabiting with another tenant, and you could move on to purchasing another property with the same type of program.

Rental Income Again fuels your loan

Earlier in this article we talked about how your income and financial situation is augmented by the projected rental income from your tenant when you get approved for your loan to purchase a small multi family owner occupied property.

If you fulfill the one-year requirement of living in that property, and then backfill the unit you were inhabiting with another tenant, now that mortgage is being covered by rental income.

Because that mortgage is covered with rental income from the tenants, you will now be able to borrow again against your own personal income.

Generally speaking, you will only get to use 75% of the rental income to cover that first mortgage, so it won’t be a one for one exchange as you go on to purchase your second, third, and fourth owner occupied property with your traditional mortgage financing.

Essentially, each time you replace your income with rental income to cover the mortgage, they have to account for vacancies.

This whole idea of living in the smallest or most minimal unit inside of a owner occupied primary resident multifamily, is much easier when it’s only you and your lifestyle is less extravagant.

What stage of life can you actually house hack?

This brings us to the final question, when is the best time to buy your first investment property?

We think it’s a really good idea for young people, before they have children or have a more complex social situation, should look at what it takes to build up the necessary credit, establish the proper gainful employment, and save up for their down payment in order to start their house hacking.

This means the best time to buy your first investment property is probably when you’re flexible enough to sleep in a super small closet or bedroom inside a duplex, triplex or quad. The more you sacrifice early in your life in order to build financial momentum, the more you’ll be able to rest and relax in the future as your income streams increase.

Buying an Investment Property Tip: Be Able to Make the Best Offer

But what if you’re looking to purchase an investment property and you are already a homeowner, or you’ve got some kids or a different living situation? That doesn’t mean you’re not able to save up and get ready to purchase a duplex, it does mean that you’ll probably need to make some sacrifices in order to be in position to actually purchase a duplex or small multi family home.

Because so many first time buyers are in the market for a duplex or triplex, you’ll see that people selling a duplex or multi family rental property are less likely to except offers that are contingent upon home sales.

If given the opportunity, most sellers want to take the deal that has the fewest headaches, the least amount of risk, as well as the highest asking price.

During a low supply, high demand market like we are seeing from 2016 to 2021, it becomes incredibly difficult for contingent buyers to actually get their offer excepted. Because of the advantages of multi family housing, the market is already much more efficient and the deals go through even faster.

If you think that single-family deals go quickly in these types of markets, you’ll be stunned at how fast the small multi family deals go through.

The reason why were bringing this up is because if you want to be in position to actually close on a duplex an owner occupied, you’ll probably want to sell your house first. We understand that that can be incredibly difficult and require you to rent for a period of time, but you’ll be more likely to win the deal if you have the cash on hand, and your offer is not contingent upon the sale.