Should I buy an investment property or primary residence?

Question

Hi,

I currently rent and am contemplating whether to buy a house for myself or an investment property (duplex/triplex). The main hurdle I’m facing is that I live in a very expensive city and renting is actually cheaper than owning. My current monthly rent on a 1br apartment is $1.4k, which fits very comfortably in my budget.

Unless I move to the hood or far outside town, houses cost at least $650k and I cannot afford the monthly payment on that.

On the flipside, there are a fair amount of duplexes/triplexes for sale in sketchy areas that I could purchase and nearly break-even from a cashflow perspective. Given how much growth my city is experiencing, I feel confident the property values will steadily increase in a short term.

My Stats: Cash Available for down payment: $75k

Monthly Salary (post-tax/401k): $6kWhat do you think, should I buy an investment property or a primary residence?

Thank You!

Najma Osman · Answer

Hi @James Johnson, I would have to agree with the other posts that you're better off renting and buying an investment property. Especially since you have the capital upfront to do so. Once you get a few investment properties going, you can consider purchasing for yourself and have the rental income offset your morgage.

If the numbers are not working where you live look at investing in other markets. A good place to start would be markets in the Midwest with lots of population growth and job opportunities. I would recommend checking out Columbus OH and Cleveland OH.

Jimmy Lieu · Answer

Hey James, totally can relate with you being from an expensive real estate market - I moved to Columbus a few years ago (from Portland, Oregon which was super expensive) to become a full time real estate investor, and ever since, I've completed quite a lot of BRRRRs, flips, and own a successful rental portfolio here in Columbus Ohio. There's so many catalysts for population and job growth (Intel, Honda, Amazon, Nationwide Hospital, etc). I can definitely tell you there's still a lot of positive cash flowing and 1% rule deals and you get amazing appreciation. This past month, I'm under contract for over five investment properties for my clients (all great BRRRRs and flips deals). As an investor and agent here in Columbus Ohio, if you have any questions or want to connect, definitely reach out!

Aj Parikh · Answer

Hi James, as you might have heard multiple times on the bigger pockets podcast that "the best time to buy real estate was yesterday" , buying today is always the better option. Personally, I bought a rental property before my primary residence and it has helped me scale the portfolio but there is no wrong answer here. If it fits your budget and you are open to exploring investing out of state, turnkey investing in a good strategy that I used so feel free to reach out if you want to discuss.

Carlos Valencia · Answer

Hello James,

I would recommend buying an investment property that you can live as a primary. You can do FHA with 3.5 % down on a duplex and move out after 12 months of living there. That is one option or you can do triplex but you would need to pass the self sufficient rule which basically means that your rents need to cover your mortgage payment or better. I would stay away from rough areas as your tenants might not be the quality tenants you would want to manage. You might end up having a bad experience and not want to continue investing in real estate. I've seen it before where people have a bad experience on their first investment and call it quits after that. Just be careful and keep that in mind when looking at where to invest. Hope this helps. Good luck on your journey.

@Albert Bui @Matthew Kwan

Calvin Watkins · Answer

Hey James!

I am actually of the mindset that purchasing is always better not only for a learning process but also for insulation from a downturn in the market. Granted I don't think a downturn should come to Columbus any time soon, it is always good to be in a good CASH spot if it does. I agree about the moving to the hood comment in response to housing costs but I would suggest a couple alternatives to get you in to a purchased home versus an investment property.

Having cash available provides runway for possible turnover so knowing that expensive houses are out there that would fit what you want to live in, see if any of them have rentable space that you could use to offset the mortgage. You are in a 1BR apartment comfortably for 1.4K so see if there is a property with say a 2-3 car garage that has a mortgage of about 2-3k a month and you could rent out the garage space to supplement income. Houses in the nicer part of town are only going to appreciate more so purchasing that type of property would show high appreciation boosts year over year above rental increases in less ideal parts of town.

Have The Cash In The Crash - I cannot stress enough how having cash during a recessionary period will benefit you. Growing up in the 2008 crash we lost our home which was appraised pre-crash close to 1M and sold for 500k afterward. Currently the home is valued back where it should be and then some. I mention this because if you do a 3% owner occupied purchase you would then have the cash to move up and into a home of that nature if the market tides shifted.

The cashflow might look to break even in the less desirable locations but remember the other fees associated with that such as turnover, damages, and management fees. Just because rent covers the mortgage it doesn't mean the property will net you anything at the end of the year except a tax write off.

If you are putting 20% down in all cases then these arguments don't hold as much weight. I always suggest purchasing the home then using the equity you capture to expand. That being said I hate to side with the expensive house purchase but I see that being the most profitable move in the next 5-10 years.I hope this helped!

Anthony L Amos Jr · Answer

Use that downpayment to leverage financing for a 2-4 unit in Ohio

Tim Ryan · Answer

In your situation I would say keep renting and buy an investment property. You'll have to buy it out of your area though. You stated even the duplexes would be in a sketchy area - but close to you. What do you plan to do about it when you are close.  My point is, you being close won't help. You are not experienced nor a property manager.  For $75k down, you can buy a nice rental, in a nice area - out-of-state from where you are. I don't think you said where you live but I gather you'll have to look elsewhere.  It can be done and successfully. I live in Los Angeles and have been investing for years in the South and now midwest. You'll need to learn strategies however.

Jimmy Bostic · Answer

@James Johnson I think looking oos for an investment property would be a good play given your situation. That 75k could go a long way for a nice property in B/A areas in the midwest. If you go this route you should consider Columbus, Ohio for a potential market.

Basit Siddiqi · Answer

If you live in an expensive city, I think it is better to continue renting and buy an investment property in a more affordable area.

Should I buy an investment property or primary residence?

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