Trying to understand if live-in-then-rent is just moving house forever

Question

I mostly research land and holding patterns, so buying a house to live in feels like a different sport, and I want to check whether I understand the basic shape of this before I spend more time on it.

As I read it: you buy a house with a small down payment because you're going to live there. You live there a year. Then you move somewhere else and the first house becomes a rental. Repeat. After five years you have five houses and you've moved five times.

What I don't get is why this is described as low capital. You still need a down payment each time, plus closing costs, plus moving costs, plus whatever the new house needs. That's not free. And I read somewhere that people run out of ability to get approved after three or four because of debt-to-income. So is the real ceiling four houses and then you stop?

Also does the first house need to cash flow before you buy the second, or is it fine if it's break-even?

Rena Guide · Accepted Answer

Your description of the shape is right. Low capital means low per acquisition, not free. An owner-occupant loan can go as low as 3.5 percent down on an FHA loan, versus 20 to 25 percent that's typical when you buy the same house as a declared investment property. On a 300,000 dollar house that's roughly 10,000 down instead of 60,000 to 75,000. Closing costs run a few percent on top, and moving costs are real. So call it 15,000 to 25,000 per house rather than nothing.

Debt-to-income, or DTI, is the ratio of your monthly debt payments to your gross monthly income. Lenders cap it. Each house you keep adds its mortgage payment to the numerator. Rental income can offset that, but lenders usually discount it, often crediting something like 75 percent of gross rent to account for vacancy and repairs, and many won't count it at all until it appears on a filed tax return or they accept a lease with that same haircut. That's why the wall shows up around house three or four for a lot of people. It isn't a hard legal ceiling. It's an arithmetic one, and higher income or stronger rents move it.

On cash flow, break-even is fine and common right now, since you bought at retail owner-occupant pricing rather than hunting a discount. What matters more is whether the property drags your DTI down enough to stop the next purchase. A house that breaks even on cash but counts as a net negative in the lender's calculation is the one that stalls you.

Worth thinking about before house two: who manages house one when you're living twenty minutes away and working a job.

megan_doyle15 · Answer

Wait, the lender only counts 75 percent of the rent? So a house renting for 2000 with a 1900 payment reads as negative 475 in their math even though it's actually positive 100?

ehernandez74 · Answer

@rigging yes, roughly, and that's the single thing that surprises people most in this whole strategy. The haircut is meant to cover vacancy and maintenance, which are real costs, so it isn't unfair. It just means "cash flowing" and "helps me qualify" are two different tests and you have to pass both.

priya_n21 · Answer

The part arbor said about moving five times is the part I keep stalling on. I want income without a second job, and packing a house every twelve months for five years sounds a lot like a second job. Has anyone actually costed out what a move runs? I've seen 2,000 to 5,000 quoted for a local move with movers, plus deposits and utility hookups.

karen_whitfield · Answer

Five moves in five years is the version people write about. The version that works is closer to a move every eighteen to twenty-four months, because you stay past the occupancy period, get the property stable, and only move when the next deal makes sense. Patience costs you nothing here. The financing advantage doesn't expire.

devon_pierce · Answer

I've got a list going and the thing that killed my enthusiasm slightly was realizing the houses you buy this way are houses you'd live in. Which means school districts, decent finishes, no roof at end of life. That's the opposite of the discount you'd hunt as a pure investor. You pay retail and hope rent growth catches up.

angela_burke · Answer

@bramble not entirely the opposite. A house that's genuinely livable rents faster and turns over less. I run a small service team and the properties that eat our hours are the cheap ones bought at a discount with deferred everything. Paying retail for a sound house buys you fewer 11pm calls.

laurenkim53 · Answer

In the rural markets I look at the numbers flip a bit. Purchase prices around 140k, rents around 1,200. The down payment on 3.5 percent is under 5,000, which makes the per-house capital genuinely small. Problem is the appraisal and the lender appetite, some of these loans nobody wants to write on a 40 acre parcel with a house on it.

tylerbrooks9 · Answer

arbor, on your cash flow question, I'd rather have house one break even and be boring than cash flow 300 and need a new furnace. The boring one lets me sleep.

mitchell_ray4 · Answer

Roof, HVAC, water heater. Get the ages of all three at inspection and write them down. If you're going to hold a house for twenty years as a rental and you're only in it for one, you won't be there when the bill lands, but you'll still pay it. A full HVAC replacement is running 8,000 to 14,000 in most of the markets I work in, and a lot of people budget zero for it in year one because everything was fine when they moved out.

carlos_nunez · Answer

Nobody's answered the actual ceiling question properly. It isn't four. Conventional financing caps at ten financed properties for a lot of programs, and plenty of people hit DTI long before that. But the way past it isn't a trick, it's income, or a spouse's income, or refinancing one into something that carries itself better. The people who stop at three usually stop because moving got old, not because a lender said no.

Trying to understand if live-in-then-rent is just moving house forever

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