Financing my first house: The plan

After a lot of hemming and hawing, I think I’m finally settling on the strategy I’d like to try to use to acquire my first house.

Part one, I need to get a job. Loans work better that way. Interest rates are lower. Banks trust you more. And rightfully so: you have more ability to pay the mortgage. For the following reason (and others), I’m looking to work at a university in the Old Louisville area. I’ll get into more of why I’m looking for that kind of job in a moment.

Part two, I need to qualify for an FHA loan that will cover a certain price for a house. I have a number in mind already, but, again, I’ll get into that later. For now, it’s just important to know that I’m hoping to be able to by my first house with only about 5-10% down. That way, I’ll have cash to pay for repairs the place might need, vacancies (which I’ll get into in a moment), and reserve for future property purchases.

Part three, I need to find a house with three or, preferably, four units in it, each metered separately as much as possible (for heat, water, electricity, gas, etc.). I need it to be within a specific price range and, hopefully, also in the Old Louisville area. There will be a bunch of number crunching that goes into this, but I’ll leave those details out, for now.

Part four, I’ll need to move into one of the units in the house. I’ll probably move into the smallest and therefore cheapest to maintain unit first. But we’ll see. The advantage of living in the house is that I’ll be able to get a lower interest rate on the mortgage, and I don’t think I’m allowed to get an FHA loans for investment properties only.

Part five, I’ll need to find tenants to rent the remaining units. Ideally, the property might already have some tenants when I purchase it. Either way, with the majority of the house eventually being occupied by renters, the house should throw off a decent cash flow. The more renters too, the less risk I’ll be taking on any one renter to cover expenses. This is why a four-unit property would be better than a three-unit property, all other things equal.

Putting all these parts together, here’s how I’m hoping this will all work out.

  • My job will pay for the entire mortgage for the house. During the purchase process, I’ll treat it as my own private property. If I can’t pay for the mortgage each month for (hopefully well) under one-third of my after-tax salary, I won’t buy the house. That’s one of the limiting factors on the price I’ll pay for a house.
  • I’ll analyze the house deal based on the rent I should be able to get from renting out the units. If it doesn’t look like a smart deal regardless of whether I live in it or not, I won’t buy the house.
  • Rent from tenants will cover upkeep and repair costs with a decent margin leftover. I’ll save all the extra money for future purchases.
  • Working at a university, as opposed to other types of employment, will give me a couple benefits directly related to this kind of investment:
    • I’ll be able to live near where I work. Old Louisville has both the houses I’m looking into and the jobs I’m looking into. Over the past three years or so, I’ve lived without a car. I’m hoping that when I get back, I’ll be able to limit my driving as much as possible, even with the general lack of decent public transportation in the city.
    • I’ll have access to university students and recent graduates, which, at least in the beginning, will probably make up the lion’s share of my tenants. Not only will I be in contact with more students this way, I’ll also just have a better feel for what they’re looking for and what they need if I’m working with them each day.
  • After living in the house for a year, I’ll move out and repeat the process with a different house, using the money I saved over the course of the year from the tenants. One property a year for, I don’t know, three to five years is what I’m shooting for at this point.

That’s the plan anyway. What do you think? Crazy? Brilliant? Too risky? Too conservative? What am I overlooking?

I’ll follow this up with a post on some of the downsides and risks I see with this strategy. If you have any thoughts on the plan, though, whether you’re familiar with real estate investing or not, I’d be interested in hearing them. I’m new to it all, so even though I’ve read a lot on it, I still have a lot to learn.

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