Rent or Live in future rental?

Question

My husband and I are just getting started, we are still learning and hoping to make a move within the next year. Although we are excited about learning and helping each other understand what the other doesn’t we have already hit a wall. What we are currently trying to determine is our current living situation and looking for advice.

Currently we are renting a 2 bedroom apartment and paying $550. My husband thinks it will be a good idea to continue to live in our $550 apartment (because it really is dirt cheap for Houston), buy our first single family rental home and rent it out immediately. We are looking to stay under $200,000 for a single family home.

I think it is best to buy a duplex (staying below $350,000) live in one of the units until we can buy our next rental or buy our single family rental home live in it for about a year.

What is the wisest financial thing to do? Has anyone been in the same situation? What worked for you? We are not disagreeing with each other just looking to make the best move.

Thanks!

Joshua Noth · Answer

@Isabel Rosales It's an interesting strategy for sure, with a couple of factors as others have mentioned.The biggest difference I imagine you will see is the difference in interest rate from a owner occupied loan to an investment loan. If you do end up going the 200k SFH route, and not live in it, you will not qualify for the owner occupied rates, which could affect you more in the long run.Looking at it from a cashflow perspective... Another thing to consider: if you do purchase the SFH, and end up deciding to live in it in the future as your own primary home, you now have 0 doors to rent out. If you have a duplex, you at least have one rentable unit. Moreover, if you go the duplex/house hack route, if you move out of it in a year or so, you would then have 2 doors in your portfolio already. Moreover, if market rental rates increase, your economy of scale clearly favors the duplex (two rental increases compared to the one of a SFH). The only way I can pencil out the SFH/apartment strategy (from a cashflow perspective) is if you never purchase another rental property after this first one. But, if you do buy another property, why not just have the extra doors via the duplex if its an option for you. Hope this helps!

Isabel Rosales · Answer

Thank you all for your reply! It has given us a lot of clarity and ideas on which direction to go.

Jake Wiley · Answer

There is a degree of personal preference here that will have to be factored in. From a super high level and dollars and cents perspective, I am assuming you have a disparity between the duplex and the single family because of what you perceive you can afford, i.e. if you get a duplex you have to live in one side thus can afford a larger property because the tenant is paying the rent, or its related to being able to maximize the down payment of an owner occupied unit? If you can swing the duplex and rent out both sides, that would be likely the best ROI for you and maximize your investment dollars and thus create income from the property that will allow you to capitalize on the income for future investments. However, I also appreciate that there may be an owner occupied down payment thing working here. I'd say that if you are willing to keep renting the extremely affordable 2 bed to allow you to kickstart your investing portfolio, that's a great strategy. The way you feel about a property that you both live in and own is not always rational from a financial perspective and often times impacts the returns for comfort/wants. Good luck - no matter what the best piece of advice I can give you is get started and as soon as possible. Don't overthink it, you'll never make the perfect decision.

Steve Vaughan · Answer

We were in the same situation- renting cheaply when ready to start buying.We kept the cheap rent but down payments and rates on rentals are higher. A primary home loan only needs 5% down, investments need 20%- 25%. Because of this, for most it makes more sense to buy the duplex if you can and live in the cheaper side. We rented cheaply for 5 years, then bought a house with a mother in law unit for income. It works. We paid off that mortgage after 14 years.

Dave Jensen · Answer

are you able to move every year or so? buying a home in the houston area in a spot with strong rental value (there are several where taxes are low, rents are higher, and prices are not overinflated). starting off, you can buy as an owner occupant with fha (3.5% down plus closing costs) as opposed to buying an investment property (25% down plus closing costs). move next year and do the same thing but with a low cost conventional loan (generally 5% plus closing costs). in 6 years or so you can end up with a decent group of 5 single family rentals without the exorbitant capital needs of straight investment properties. also, each leased property income will contribute to your qualifying ratios making it easier to ramp up. i guess this is called house hacking. just a deliberative process to acquire income properties without overextending. it's not super fast, but it works. multifamily can work faster if you're ok with smaller living space (1000sf apartment homes vs 1800sf single family homes). depends on the capital you have available to deploy. houston is hot (and expected to remain so for a good while). there are other markets worth exploring too. think of anywhere you've lived or know people and see which place offers the best investing climate for you. good luck!

Wale Lawal · Answer

I would have both of you write short-term and long-term goals for the next year and fill in the crack between your each. Make sure you get an investor-friendly agent that can help, reach your goals. However, in my opinion, having two units working instead of one seems like a deal to me.