Profile picture for jayap

if i buy a house & live in for one year, then rent it, and buy another, repeat every year or so ..

I can eventually have several rentals.  I know I have to have sufficient I/D ratioes, and if I keep a good reserve of cash, and a decent cash flow on the rentals, it seems like it will work.  Anyone who would like to let me know where my reasoning is flawed?  I'm sure it has to be or everyone would be doing this, lol.  It's my method of acquiring rentals thru a 5% downpayment strategy.  I already have tow rentals this way, going for the third.  
  • August 05 2009 - Stockton
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Answers (25)

To qualify as Owner Occupied you will have to be Upgrading or moving closer to work. So if you started in a Condo and ended up in a Mansion it would work well as far as pricing is concerned on your interest rates.
  • August 05 2009
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Profile picture for jayap
why do i have to upgrade?  I kind of wanted to stay in a certain range and size to keep my rentals more moderately priced.  Thanks for your info!
  • August 06 2009
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Dean took the question towards the owner occupied concept because that's the only way a lender will lend on a property with just 5 percent down.

If they know you are acquiring the property for rental purposes they will want a minimum of 25 percent down. If you tell them you are going to live in the property then rent it out, it may be considered fraud.

Your best bet to purchase a property with 5 percent down would be to find a home where the owner was willing to finance the property.
  • August 06 2009
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Profile picture for jayap
 I wasn't trying to fool the bank, I planned to live in the house for the required 1 year, then start looking for a new one, in the same price range, in the best school districts.  I would then rent out house A, and I know with the buy and bail rules the income won't count for 1 year.  I would still be able to afford house B, live in it for 1 year, and so on.  Is this against the rules?  I am retired military and my wive can't stay in one place for 5 minutes, lol.  I would like to know the likelyhood of this succeeding (mortgagewise), before I embark on a long term plan.  thanks to everyone for their input!
  • August 06 2009
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Profile picture for jayap
I just reread the posts, are you saying you think the bank will say "I see you are just trying to buy rental properties at homeowner downpayments, and we won't let you do that?"  Once a pattern is established?  Thanks!
  • August 06 2009
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Profile picture for BMFPitt
The question is whether rents will be sufficient to cover the mortage and other carrying costs.  There are probably very few areas where this is true unless you are handy enough to buy places that need a lot of work and fix them up, and take care of maintenance yourself.

For example, in my area, I could rent a house comparable to mine for about the same as PITI, but that leaves $0 for profit and assumes 100% occupancy, and no advertising or maintenance costs.
  • August 06 2009
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First, there is nothing typically in the loan paperwork saying that you must live in the home even a day. Plus, typically you have work to do on it, etc, and take a few wks just doing that before renting it out. I should clarify... first time home buyer programs do have stipulations on how long you must live there, so read the paperwork carefully.

Second, my dad tried to buy a house a year. The most he ever got to was 6 homes... took 20 years. lol So I wish you the best.

Third, rents count as 75%. So if you get 1000/mo in rent, the banks will use 750/mo as income.

I hope you are getting low-interest fixed loans with instant break even, including taxes and insurance and maintainence. We've only had one instant break even home ever. Can you handle all your rentals vacant or losing money for 3-6 mos? If you can, then you're good to go, if not, prepare for it before picking up more property. We have had several times rents go down... including now. One just went down 400/mo, the other 250/mo.
  • August 06 2009
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Profile picture for lyee92
I think lenders only consider rentals that have over 2 yr history as rental income.  So when you purchase a 2nd house, your mortgage on your 1st house would be consider as debt, which adds up to your debt to income ratio which makes it harder to get a loan, unless you have a significant amount of income.
  • August 06 2009
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Jay, I have never heard of needing to upgrade, moving closer, etc., nor have I heard anything about 2 years history in another post. The lenders for a duplex I was looking at were perfectly willing to accept a lease agreement, upon condition of sale, and add that income to ours at 75%. That is where I got that number.

In 98 we bought two homes, 20% required down at the time to get rid of pmi, both owner occupied. 6 mos apart. My mom threw a fit to buy two in a year, but the market was on the rise and it worked out. THERE IS NOTHING UNETHICAL ABOUT ALL OF THIS! Are the banks charging more for Trump because he's buying? I have never heard such misinformation here before.

Jayap, work it the way you want. Watch your debt ratio carefully so that you can buy the next house and make sure you can afford some 6 mos worth of very bad times. My great grandfather had 3 rentals in Youngstown, OH, rents went down due to the closing of steel mills. He was able to hold them. When he passed, my grandparents inherited them. They were HAPPY to have paying tenants that did the repairs in their old age. The rents were negligable, but they were considered good for the hard hit area. 6 mos is absolutely necessary.

YOUR IDEA IS GOOD, good luck!
  • August 06 2009
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Even if you are required to save more downpayment, that is not all bad; If it takes another year, so be it...
  • August 06 2009
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Your plan is actually silly. If you are only putting 5% down you won't have any equity after 1 year and you are required to have 30% equity to count rental income in your DTI for Fannie and 25% equity for FHA (which would not work anyway on a rental). There is no 1 year limit on buy and bail, it's all based on equity and you will have none. So, unless you can qualify for the PITI on all of these properties, with 20-25% down payment to purchase them, your plan won't work. It's a completely unrealistic and ridiculous pipe dream.

Just keeping it real.
  • August 06 2009
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Profile picture for lyee92
Upgrade meaning you are purchasing a home that's better than your initial one to lead the bank believe you are gonna live there to qualify for the interest rate for primary residence, otherwise the bank will treat this as an investment property.
  • August 07 2009
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"Upgrade meaning you are purchasing a home that's better than your initial one to lead the bank believe you are gonna live there to qualify for the interest rate for primary residence, otherwise the bank will treat this as an investment property."

You guys really don't understand do you? If you already have a primary residence and are "upgrading", you have to have EQUITY in the property you are leaving or you have to qualify for BOTH PITI payments with your income. Now that may work once, but that's about it. What you are suggesting is called MORTGAGE FRAUD and underwriters are not that stupid anyway to fall for it.  Buying the second home with the intention of renting it is fraud and you won't get a 3rd one to live in anyway because again ... you have no EQUITY and would have to then be able to afford the PITI on 3 properties to qualify. If you have no equity in your rental properties, you can count ZERO rental income. Not 75% ... 0%. 

I have not even gotten into the requirements for property management yet ... which is another story.
  • August 07 2009
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Profile picture for lyee92
Gregorio Denny, you are talking about a different issue here.  I'm not suggesting a fraud here.  Just saying that if he's getting a 2nd house that have the same or lower value than the 1st house's not gonna be able to persuade the bank to believe he's gonna move there, even he's really planning to move there.  Why would it be a MORTGAGE FRAUD if he really is going to move there?  And I never say upgrading will automatically make him qualify for a loan.  All I'm saying is what will not work, have not get into what will work.  Btw, we don't have any information about Jay's personal finance, he might have enough income to cover all PITI payments. 
  • August 07 2009
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IT IS NOT FRAUD TO LIVE IN A HOME FOR A YEAR, BUY ANOTHER, MOVE INTO IT, AND RENT OUT THE FIRST.

OMG, if it is, then many people I know would NEVER have any rentals!
  • August 07 2009
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Denny... if you have a signed lease agreement to present to the bank, it will count as 75% more to your income. Ex: if the lease says $1000/mo, then it will count as 750/mo income. That will help you qualify for the second home as OWNER OCCUPIED. He uses his income, plus the 750 rental income. That is how you deal with trying to qualify for the second home. Pls, don't tell me it can't be done. My dad did it, and about 5 other people I know.
  • August 07 2009
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Jayap... do your plan. Find a mortgage broker that knows how to get what you want underwritten properly. PAY ATTN to your savings, and your cash flow. Since you lose 25% of your rental income as 'risk' in the banks eyes, make sure your income covers each house you buy.

Don't listen to people that say you can't, because I KNOW you can. A mortgage broker that knows the ins and outs will guide you properly. Don't feel like you NEED to pay the 'investment' interest rate because you only plan on living there a year. The banks are just being greedy and want a piece of YOUR pie. Plus, it's harder to get a good renter at a higher price, which is the end result of the banks' greed. If you are taking the risk and doing the work, you should reap the rewards.

Your plan is a good one, although 1 per year was never achieved when my dad had the same plan! lol One every other year, or every five years, does just fine.

The advice I wrote here was done by Rick, our carpet cleaner who now owns 4 homes, Rich, retired engineer, who owns 3 homes, Fred, retired corp. salesman, who owns 5 homes. None of these homes are upside down, as they started their 'business' years ago. They were in the red for about 5 years for each rental in the beginning.

Need I name more?? Good luck!!
  • August 07 2009
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get yourself the book, "the millionare nextdoor"...

learn how to fix more things at home, learn how to repair everything... live simple, save money, and be flexible...(i'm a bigger believer in 20 or 25% down, it saves pmi or mi, makes for much stronger cashflow, stronger offers that get accepted more readily at lowball prices...)
  • August 07 2009
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To correct a few pieces of misinformation ...

You most certainly *DO* agree that you intend to live in the property being purchased as a primary residence.  You agree by signing your loan application and you verify it by signing your closing documents. 

For the past couple of years, most lenders conduct periodic occupancy checks for the first two years to verify that the person(s) who borrowed the money still live(s) in the property.  If not, they can call the loan due.  End of story.

If you decide to purchase a "second home" and retain your "primary residence", you may encounter additional problems if the lender becomes suspicious of your intentions.  Most lenders will require that your "second home" be a minimum of 50-75 miles from your primary residence.  Such purchases may also be subject to other criteria, requiring detailed statements of your intentions.

There are perfectly valid reasons why investment properties are perceived as greater risks.  That is becuase they are not owner-occupied, thereby subject to a greater liklihood of falling into disrepair or abandonment!  Trying to circumvent the lender's non-owner-occupied interest rate and LTV underwriting guidelines constitutes mortgage fraud.  You might have been able to pull off this trick a few years ago, but not now.

Don't run the risk of being charged with commiting mortgage fraud.  Your intentions appear clear that you are willing to risk it.  Please don't.
  • August 09 2009
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Profile picture for lyee92
In today's market, if the lender calls back a loan because a home is no longer the primary residence, the lender's just adding another invetory to their huge number unsold homes.
  • August 10 2009
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Scott, I looked at my loan paperwork and there was no limit stated on how long I had to live there. In fact, there is no prepayment penalty, or anything else that holds me to keeping their loan, their way.

Also, I've been here 1 1/2 yrs, and nobody has arrived at my door. My families rentals DO get mail there, which the tenant collects and gives to them periodically. I've never not lived in a rental sfr, where this has not occurred.

The risk is already counted in with the 75% rent, instead of taking it at 100%. Typically, rentals are 90% occupied.

How many 'call the loan due' have you heard of that were not in a first time homebuyer program. I know of none in the last 30 years I've been in the market.
  • August 10 2009
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Loan applications and closing documents may not openly state a specific time period (closing docs do in some States), but may be codified by State laws.  Your loan application also requires that you agree not to commit perjury.

Pre-payment Penalties (PPPs) are absent from ALL conventional mortgages, as well as FHA and DVA -- whether Owner Occupied (O/O) or Non-owner Occupied (N/O/O).  PPPs are used on non-conforming mortages for investment properties, commercial properties, and other high-risk loans (e.g, sub-prime).

Occupancy checks by mortgage lenders are seldom conducted through door-knocking campaigns.  Rather, they rely on other more stealthful methods (e.g., postal records, vehicle records, voter registration, etc.).

The "due on sale" clause in your mortgage documents is also there for a reason -- to avoid unrecorded encumberances, such as Contracts For Deed.  This is another reason for a mortgage lender to call a loan due.
 
Risk is assessed in a variety of ways: fraud scoring mortgage applications, factoring reserves (2-3 months on O/O properties, but as much as 12 months on N/O/O properties), and increased interest rates chief among them.

Calling in a loan is a relatively recent phenomenon.  It became prevalent about the same time that sundry mortgage fraud schemes began to skyrocket.  In the first four months of this year, the FBI was investigating more than 40,000 Suspicious Activity Reports (SARs).  There were something like 60,000 SARs in 2008.
  • August 11 2009
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Profile picture for rjon.101
the advice of d.scott and Gregorio should be listened to it is up to date and will keep the OP out of jail.  The mortgage laws and requirements have changed in this last year to avoid the abuses that helped cause the houseing buble and meltdown. Stuff from 5 or 10 years ago is just invalid information.  

And the economics do not work as others have stated very well. Just work out the numbers as pointed out in some of the postings.  It is a great fantasy and if its to good to be true its not true.  If it were so easy to aquire a house a year on an " average salary "every one would do it. But then who would the renters be.

Lyee 92    the "banks" will have no problem calling a loan and they don't care about 1 more foreclosure since they will have another 8 million in the next 4 years.  the "banks" have much tighter rules they must follow now and compliance is the new bussword. again information and what was done 10 years ago is of no value today as the 'rules' have changed even for the banks . And its not personal to them it just business(to quote the Godfathers famous line) to follow the fed guidlines.. .
  • August 11 2009
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"Denny... if you have a signed lease agreement to present to the bank, it will count as 75% more to your income."


Debt, you are confused. You seem to think that because you purchased a home recently that you know all there is to know ... you do not. What good is a lease agreement if the rental income won't count due to guidelines that dictate how much equity is needed. Staying in a home 1 year and renting it will not build equity. If your next line will be that they will put large down payments on them, then A) that's stupid and kills the plan .. and B) current depreciation will eat it away. And the Fraud comes in by saying that your intent is to buy it as a primary so you can rent it. The intent makes it fraud ... got it?

As I stated, it will not work! He will not get financing! 

Period!
  • August 11 2009
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Well, if you want to solve the property management issue I suggest that you rent to a Section-8 tenant. 

I own 12 houses in Sacramento and I will never rent to someone not on the program.

Assuming, you do get your houses it is an easy way to document your rental income since you will have contracts, copies of checks, and a 1099 at the end of the year. 

And if you have issues with financing contact Community Commerce Bank.  They had a 90% N/O/O program.  Full Doc of course. 
  • August 17 2009
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