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Should your first Home Purchase be a Rental/Investment or Commercial Property??

It's time to dump conventional wisdom, conservative thinking and the status quo when it comes to real estate investing. In this day and age there are multiple methods to buying and investing in real estate. But what is not discussed often or even taught at all is the concept of continuing to pay rent to someone else while actually buying and owning rental property for yourself.

In other words, instead of buying your first home or a primary home for yourself, instead you buy rental/investment or commercial property where others pay you rent to live or to conduct business in your property while you remain a renter to someone else for years or for the rest of your life.

Typical Frightened Conventional Thinking/Status Quo Response:

Why in the hell would you do that?!! That doesn't make any sense!! Why would you continue to pay rent and not take advantage of home ownership in your own home first and then invest! This isn't prudent! This isn't responsible! This is utter nonsense!! This is total madness!! You can't do that!! You shouldn't do that!! DON'T do that that!!

My Expert Mortgage Advice:

YES, you can do that!! And yes you should do that. And here's why.

If you're young OR you're investing by buying in much cheaper parts of the country than where you currently reside then this may be the power play you've been looking for.

In fact, I highly encourage existing renters to buy rental property while remaining a renter themselves! It may fly in the face of American wisdom and conventionalism, but it makes good business sense especially to younger buyers who are still nimble and do not want to be tied to a house or a city but still have a need and a desire to invest their money. Whether it’s buying a rental single-family home, a 1-4 unit building or a commercial property, renters should seriously look into this unique option.

Young people should be thinking about investing as soon as they can, not just into appreciating assets, but into cash flowing assets as well. Oddly enough, rental property is both. It's an appreciating asset that can also pay for itself while ideally providing you with a profit.

The process of buying a rental or commercial property is no different from buying a primary home that you would live in yourself. The only difference is that you have to do some simple math to figure out if the collected rent (gross revenue) after all operational expenses (i.e. repairs, management fees, maintenance, vacancies etc.) have been deducted will cover the mortgage; have a monthly profit or break even.

These properties also require a higher down payment that can range between 10-20% + closing costs. You will likely have to show some operational cash reserves on hand after closing. But if you're buying in a cheaper part of the country it can actually be quite doable. It may sound daunting at first, but it can be done if one has the fortitude. As in every scenario there are both Pros and Cons so here are both.


-You can qualify to purchase a rental property using Conventional, FHA and Portfolio/Non-QM Lenders. With FHA loans you have to live in one of the units, but with Conventional loans (.e. Fannie Mae, Freddie Mac) you do not have to live in any of the units. With both programs you can purchase either a single family or an entire apartment building from 2-4 units.

-With Portfolio/Non-QM Lenders you cannot live in the home as this considered to be a real estate business loan and not a personal mortgage. You are also not restricted by the number of units. You can buy a single house or 10-12 unit apartment building or greater. Qualification is primarily based on the asset being able to pay for itself, so your personal debt ratio, personal income and taxes do NOT count in qualifying you for the loan. You will have to pay at least 20% down payment which can be affordable if you're buying in a small city or in a cheaper state.

-Depending on the lender roughly 75-80% of tax reported rental revenue generated from the prior year can be used to qualify the borrower.

-Remember what you're buying is also an appreciating asset that is building equity over time and can actually be sold in order to help fund your retirement. Alternatively you could live on the profits through your retirement or actually move into the one of the properties during your retirement.

-You can also deduct on your tax returns the mortgage interest, property tax, travel expenses, operating expenses, depreciation, and repairs.

-You can hire a property management team to take care of maintenance, tenant relations, collection of rent and evictions.

-You can also buy rental property in cheaper areas of the country.


-Your property management team can totally and literally rip you off; screw you over, provide an absolutely awful experience for your tenants and for your brand plus leave you holding the bag legally and financially if they screw things up and they often do. Curious? Just ask around or go to the internet for property management-owner horror stories. They DO exist so perform your due diligence first!!

You cannot simply set it and forget it. You have to keep a watchful eye, question everything and if it doesn't work out with one property management firm, then move on to another one. It’s all part of the learning curve of real estate investing. And watch a ton of YouTube videos and read books first.

- This option will require higher down payment ranging from 10-20% plus closing costs and cash reserves after closing.

Bottom line, if you're young and don't' want to be tied down to one location, city or a job OR perhaps you want to invest in cheaper areas of the country then buying rental/investment or commercial property while you remain a renter is probably your better option for now.

Herndon Davis Mortgage Broker, NMLS #161587 - Call Text: 754-264-0564


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