Buy primary residence or continue investing?

Question

Aloha BP!

I'm currently in a crossroad between continuing to invest in real estate to build long-term wealth for my family or purchasing a personal residence and moving out my in-laws home. If I go forward with buying a home for us, investing will have to take the backseat for probably 2 years. Reason for that is Hawai'i real estate is ridiculously expensive so I won't even be close to having 20% down. I'll probably be closer to 5% but I am willing to work overtime at my job (less time with my family) to pay down the principal and eventually remove the PMI. We are still trying to figure out how to increase our down payment and have chatted with my wife's grandma and parents about taking a HELOC from their home to help us. No matter what, I will make sure they get paid back in full but that probably won't happen for awhile since we'd be asking for such a high amount (somewhere near $50k-60k). Suggesting a house hack won't work for us either, those are hard to come by in good neighborhoods. My wife and I agree that we'd like our 3 kids to grow up in a place they can call "home" and allow us to set the standards and rules for them vice having multiple different "parents" to listen to. Plus I know my in-laws miss having a quiet home.

On the other end, I don't want to take a break from investing for that long either. The longer I'm on the sideline, the longer it will take for me to remain at my job and not be able to retire earlier.

What are your thoughts on the situation? Has anyone been at this crossroad before? What did you do to overcome it? Thanks in advance.

Loren Clive · Answer

Has anyone considered the $250k per person tax-free advantage to buying a home as an owner occupant?! Meaning, if he sells this home in a few years as an owner occupant and buys up, he gets to keep the cash, up to $500k with your wife, with no capital gains. I know investors on Maui who do this every 3-5 years and this is their sole means of investing! This tax-free gain more than offsets the 10% sales costs which are deductible anyway.

Moreover, when you lease, you get absolutely NO return on your rent and may have to shell out for improvements as well.

@Justin Young let me share my story as a Maui broker and real estate investor. In 2013 I bought a short sale duplex, lived in the home for a bit, improved it, tapped my equity via HELOC to buy another home down the street. A year later I flipped that house and used the profits as 25% down on my dream home, an oceanview pole house on 1.5 acres in the jungle.

It would have worked out better to sell the owner occupant home, but its return was so much better as a duplex I sold the home that was always a rental and paid the capital gains (OUCH!).

Especially in Hawaii, you can benefit quite a lot from appreciation, and also enjoy the stability that owning your home home offers. I don't know about Oahu, but here on Maui rentals are super tight and people are always having to move when the house they're renting gets sold out from under them.

There is no shame in taking a break from investing to enjoy your money a little bit in your own home. With the red hot market now, I bet it won't take you two years to get back into investing.

Isi Nau · Answer

Hey @Justin Young

Form an investing stand point, this is a no brainer.  Stay where you are, save, work overtime and save more, then buy a home.

But there is a life-style aspect to your situation that is significant.  There is a lot of value in owning your own place.  Value that doesn't show up on a spreadsheet.  For example, how much is it worth to you to make the rules of the home, or how much is it worth to you to allow your kids freedom to be kids (run around and make noise) without getting scoldings, etc. etc.  Those are big pluses to homeownership.  That doesn't mean you go nuts, but just something you can call your own.

There will always be opportunities to make money and invest, but your kids will only be little once and only in your home for a short period of time.  Making money is easy.  Building a solid family, not so much.  Some things truly are priceless (cue the cheesy music).  I'm only in my 30s so I don't actually know yet if these statements are true, but some very wise people I know have told me they are.

Hopefully you guys can settle down in Mililani, the best neighborhood on Oahu.   :)

Andrew Olmstead · Answer

Justin you might want to check with Bank of Hawaii as I know they have a Piggyback loan option.  They definatley have 10/10 and maybe even 5/15

Justin Young · Answer

@Isi Nau you speak volumes to what I've been running through my head the past few months. One of the great things about living in Kaimuki (second best neighborhood after Mililani?), at least in my wife's perspective, is the schooling. She really loves the elementary our son attends and doesn't really want to move out to the west side if hes not in a good school. I've asked her to decide if she wants our kids to be in a good school but we live with her parents, or try to do it on our own and sacrifice a few things that we've grown accustomed to. She is still on the fence and unsure of which one she wants. I'm still trying to figure out how to invest in RE without using the cash reserves we've saved for a down payment. This is definitely forcing me to think more creative and outside of the box, although the creative juices don't flow as well when you don't as much as you'd like.

Jordan Sunshine · Answer

My group and I are looking for wholesalers who are willing to drive for dollars, yellow letter, or scour the listings to find us properties. If you find one we like and we buy it then obviously you can get paid without doing any of the work to flip the house. We also have ways for you to invest with little to no money and even make more from your wholesale if we don't have to pay you upfront.

If you'd like to learn more feel free to get in touch with me and we can sit down and talk.

Andrew Johnson · Answer

@Justin Young I think I'd hold off until you had enough down to purchase a home that you'd want to raise your family in.  If you have that today (it sounds like you don't) then you can take advantage of the low (historically) interest rates and get yourself a nice 30 year mortgage.  If you can't do that maybe you buy another investment property to (again) lock in that nice 30 year mortgage.  What you don't want to do is be on the ladder where you go from one personal residence to a "slightly better" personal residence ever 5 years.  Even if a good appreciating market you're still spending (at a minimum) 6% to sell.  You do 4 times over 18 years and it really, really, REALLY adds up.

You could always crank of the spreadsheet and look at what a "good for 20 years" home costs and look at the mortgage payment at 5% and the mortgage payment at 7%.  Add that monthly number up over 20 years to see what the "total cost of waiting" is and also (for fun) just look at the annual number.  I don't know what that number looks like for you but it might alter the way that your wife's family thinks about helping with the HELOC.  Will that save you $50/month by locking in a lower interest rate or will it save you $400/month?  If you bought a house now but were confident you could buy a "better one" (and would want to) in 2-4 years what's 6% of that home that you would by today?  Your numbers will change but I'd encourage you to take an educated guess in quantifying the scenarios and see how that impacts your decision.

Loren Clive · Answer

Also, Justin, I'm curious about your comment about not investing for two years and then not being able to retire. Do you mean to say you're not saving for retirement independently of your real estate investments??

I hope not. Contributing to a 401k is very important for your retirement future aside from real estate investing.

The capital gains from flipping can be very substantial depending on your income level, something I learned the hard way this year.

Another thought regarding the house hack is to get a duplex, ohana, something with a separate unit that would allow some income but also insulate your family from tenants.

Andrew Olmstead · Answer

Justin, the loan officer at the Bank of Hawaii officer in the Kapolei branch told me about the piggyback loan and the rates were good.  I ended up just doing an fha and paying a bit more on the MI but it was ok as it is a duplex property that has cash flow.

Thomas S. · Answer

I personally have allways considered a personal home as a liability and a road block to investing. Buying and maintaining a personal home is a life style choice not a investment. During the life time of owner ship all the associated costs will amount to more than the propery will ever be worth except in specific areas of very high appreciation. Also keep in mind unless you pull out the equity you have in a personal home, through a HELOC or refinance, your money is dead and buried for eternity.

Renting is less expensive even if you rent the home you would likely choose as the home you might want to buy if investing is your primary goal.

Something else to keep in mind is that kids don't care where they live, their life revolves around family and friends not buildings. When they grow up they seldom remember actual buildings.

Buy primary residence or continue investing?

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