our First home turned rental property

Growing up in the Bay Area, there are certain areas that people idolize to be able to one day live and own a home in. My partner and I spent our early 20s fantasizing of a first home being in Mountain View, California. It was the city we worked in. The heart of Google. The place to be. 

The journey to our first home was very planned and calculated, roughly a 2 year discussion. Yet, there's a bit of irony with our final purchase. We ended up buying a home we hadn't originally envisioned at all, but it met all our requirements. So how did our journey start and how did it end? Below, I highlight the key items we aligned on immediately upfront (not in any specific order). In subsequent posts, I'll continue to share that journey. 

Goal of the home:
What is the long-term purpose the home will serve? Will it be a rental? Is this the forever home? If it's to be a rental property, when do you ideally want to convert it to a rental?
For us, we wanted a home that would eventually turn into a rental property. Our target was to move out and buy a second home in 3 years after purchase. 

Determine Your Needs vs. Wants
What is it that you absolutely need vs. what are wants (nice to haves)? We found this conversation specifically important for a rental property. 
I was that girl who wanted a brand new home, brand new appliances, hardwood floors, large garden and my partner had to consistently remind me of our goal.  Our goal was to convert the home to a rental property in 3 years. What I wanted were just that, wants.  They were not needs for the home that would allow us to achieve our goal. Realizing this forced us to refocus.

So what was it that we needed to make this rental successful? A high demand location. A home with basic utilities that were in decent condition. A home with projected rental rates that people could realistically afford.  A county that did not have rental controls or restrictions. A home where we'd realistically be able to rake in some form of rental profit after mortgage, property taxes, home insurance, etc...  See how that list drastically changes when we refocused on the goal?

Establish Budget
To achieve your goal, what budget can you work with? Refer to blog post here for budget planning guidance.
We established that our salaries projected out led to a total downpayment of $190k. Here, it's best to be conservative. 

Understand your Budget vs. the Market
What are interest rates? What are house prices around the area? What could your budget get you? Is it a seller's market or a buyer's market?
Again, it's so important to keep your goal in mind here. We wanted to be able to buy a second home within 3 years and turn a profit after rental income.  This meant we needed to be able to save a significant amount of our income post-home purchase for that second home. To save 40-50% of our income, we needed a low mortgage payment. To be sure we'd turn a rental profit in the future, we needed a low mortgage payment.  For us, everything came back to a low mortgage payment. 

The traditional 20% downpayment route method would have resulted in an overall house budget at $950,000 and 30 year loan considering we had $190,000 to liquidate.  The goal of saving enough for a second home in 3 years and turning a rental profit resulted in a different path. After mapping out interest rates, mortgage payments, property tax, loan duration, etc... what realistically made sense was a down-payment of ~50%, total house budget of $400,000 and a 15 year loan. Note the stark difference. 

By no means am I saying don't go the traditional 20% downpayment amount.  However, what I do feel is important is defining your goal so that you can set rational and realistic expectations to achieve that goal.