A friend shared a story with me about a friend of hers.
Not in a gossipy kind of way…
we too grown for that!
She wanted to know if I could work with her friend.
Said friend wanted help with house hacking or flipping or buy a multifamily house.
The backstory is the friend already owns a single family house.
She tried buying and flipping a house last year to generate income.
She was mesmerized by all the shows on HGTV. She saw herself cashing in on hundreds of thousands of dollars.
But unfortunately, the flip project was a flop.
She didn’t lose money…
but she quite didn’t make it rain like she was expecting.
She now wants to pivot.
I told her whether I can work with her depends on…
⇒ What her plan is with the single-family house
⇒ Whether her top priority is buying and flipping a house OR buying a house and holding it
⇒ How buying this next house connects with her financial and life goals.
Here is why her current single-family is the biggest wild card
If you already own a house and plan to keep it when you buy your next house, it is going to affect a few things.
One of those things is your debt-to-income ratio.
Debt to income ratio (DTI) is how much your monthly debt payments are in relation to your income.
If this number to too high, you won’t be able to qualify for a mortgage loan.
Your DTI will also determine how much of a mortgage you qualify for.
So, if you already have a house…
that puts an additional bill on your monthly payments.
For most people, your mortgage or rent is your largest recurring bill.
Your rent doesn’t impact your DTI. But an existing mortgage payment does.
And that “largest payment” could limit your mortgage options if you plan to keep the house.
For example, if you plan to use it as a second house, you won’t be collecting rent.
This means you likely are going to need to be a high-income earner to realistically add another mortgage payment and still have a favorable DTI.
Or you would need low debts – which if you are an average American probably isn’t the case.
You likely will also need higher closing costs for the house because the lender may want to see at least 6 months of mortgage payments in the bank available for the old house.
This would be in addition to all the required closing costs for the new house.
Why Buying a MultiFamily First is Advantageous
I am a regular degular person without tons of cash laying around.
SO, the priority for me is to control an asset but put as little of my money as possible into the purchase.
This is another reason why I like buying a multifamily as a first house…
When you buy a multifamily first, no matter what kind of house you decide to buy next you have a track record of income for that building.
Because there is a track record of income on your taxes, your house now positively impacts your DTI.
Your house now represents INCOME as opposed to a bill.
So instead of your house negatively impacting your DTI, it is now a benefit.
The rental income also means your lender likely won’t require the 6 months of mortgage payments for reserves.
A Mortgage Hack for Married Couples
Married couples who buy their first single family house strategically can skirt around this DTI wild card.
Contrary to what most people believe, married individuals are not required to be on a mortgage loan with their spouse.
So if you are buying your first house and you are married you should only have ONE person on the mortgage.
Having just one person on the mortgage maximizes options to buy future property without a DTI headache.
Picture this – John and Mary get married.
That same year after they get married, Mary gets a mortgage for their first house.
John can turn around and also buy a house as an individual and still be considered a “first-time home buyer”.
When it comes to getting a mortgage, Mary’s house has nothing to do with John because John isn’t on that mortgage loan. The bank doesn’t care that they are married.
John can get his first house with the low 3.5% down payment as if Mary (his wife) doesn’t own a house.
And most importantly, Mary’s mortgage won’t affect John’s DTI when he buys his house.
So, he can breeze through buying a house without any DIT headaches.
This move opens the possibility for Mary and John to WIN as a couple.
All because they didn’t do the “normal” and unnecessary thing of both being on the mortgage loan for their first house.
What action can you take today?
Decide right now.
Are you going to take the normal route and do what “most people do” even though most people are broke.
Or…
Are you going to take control of your decisions and take “risks” that are aligned with the life you want to live and the freedom you want to have?
Whether it be buying your first house, planning a trip, or even deciding on what to eat today…
The principle is the same…
Follow the crowd and you are likely going in the wrong direction!
Instead, decide what YOU want.
Learn about it from multiple sources.
Don’t just take what people say (me included) and run with it…
Analyze how what you learned applies to YOUR end goal.
Take the bits that apply to YOU.
Personalize YOUR plan.
Drown out the haters… Then ACT!
ESPECIALLY if it’s the opposite of the masses.
Comment below and let me know if you are going to play on #TeamNormal or #TeamFreedom!
