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The Millennial First Home Purchase to Launch Your Future Retirement

investing real estate Feb 28, 2019

You've graduated college, or soon will.  Or, you've completed alternative education for a career, and you're in your new job.  You've been watching the real estate market and saving for a down payment, even though you may be paying off student debt.  Buying instead of renting a home is a goal, but you've been slow to embrace the idea because you're still unsure about how home prices and mortgage interest rates are going to act in the near future.

Don't rush into any decisions, but one thing you can decide on now is an approach to home ownership that can launch an investment portfolio for you and start your retirement savings.  Think about buying a duplex, triplex, or even a fourplex residential property.  To not get too far out ahead of your financial abilities, a duplex can be your first target property.

How Can You Finance It?

You can get an FHA mortgage to finance a duplex as long as you are an owner occupant, living in one of the units. You can get a loan with a down payment as low as 3.5% as well.  Credit scores as low as 580 can qualify, depending on income. 

Can Rent Be Considered as Qualifying Income?

You'll need to get with a lender to discuss your unique situation, but often the rent you'll generate from the other unit can be considered as income to qualify for the loan.  It can't be your only income, but it can help in the qualification.

Can the Numbers Work for You?

Using an example purchase of a $250,000 duplex home with 3.5% down, you'd be financing around $241,250, and your monthly payment before taxes and insurance escrow would be around $1,208/month.  Add in around $240/month for taxes and insurance; you would be paying $1,448 for your monthly note.

If you rent out the other side of the home for $700/month, you've just cut your payment almost in half, but there are other financial advantages.  You're now a real estate investor, and at some point, you can move out and rent both sides.  However, there are some great tax advantages as well. 

You can depreciate the other unit by square footage, which gives you a nice tax deduction each year, even though you didn't spend any money to get it.  You can also deduct all expenses related to the rental, such as maintenance for that side and other expensed directly attributed to the rental unit.  You're going to have these tax breaks contributing to your monthly cash flow, and that amount depends on how much of the mortgage you were going to pay anyway.  One approach would be to use the extra cash to pay down the mortgage, building equity for when you're going to sell, at a profit of course.

While a duplex may not have been your idea of the perfect first home, think about the future and how you've taken the first step to build wealth toward a comfortable retirement.

A quick note about downpayments: thought it can be alluring to put down the least possible, it's almost always a better idea to put down at least 25%-30%. This gives you peace of mind and enough cushion should a market go sideways and you need to exit the deal.