Strategies to Becoming a Real Estate Investor – Part 1

Over the years, I’ve encountered many people who have expressed a desire to invest in real estate. They see the benefit, have the desire, but don’t really know where to begin….

In this series of blog posts, I will lay out a few strategies that have proven successful to the average person who may not have access to piles of cash.

“Vacating Primary Residence”

For those who currently own a primary residence, the “Vacating Primary” strategy has been an effective way to secure their first rental. One of the hurdles to securing that first rental property is keeping the debt-to-income (DTI) ratio within lender guidelines. Adding a second mortgage payment to the equation pushes many potential investors above the DTI limit, and due to their lack of rental history, the lender will often not allow them to use future rents received from the investment property.

One solution is to purchase a new primary residence, converting the current home into a rental, or a “Vacating Primary Residence.” Requirements may vary from lender to lender, but generally, they will require a 12-month lease agreement in place on the current home. The lender will then use 75% of the gross monthly rent to offset the mortgage payment of the current home. This frees up room in the debt-to-income ratio to go secure a mortgage on the new primary residence.

Here’s an example of how it works:

Let’s say a family has a $2,500/mo mortgage payment on their current home. They secure a 12mo lease agreement for $2,200. The lender will use $1,650 to offset the mortgage ($2,200 x 75%), and now this family has $850/mo ($2,500-1,650) included in their DTI when qualifying for their new home.

Note that there may be additional lender requirements in terms of reserve funds, downpayment requirements, etc., based on the overall application/credit profile.

Your situation is unique — because of that, I recommend consulting with your trusted advisors (mortgage consultant, financial advisor, CPA, etc.) to see if this would be an effective strategy in your journey to building out your portfolio.