Which strategy is better for starting out?: Higher rate of savings or higher net worth/equity

[Jessica Sorensen]

I need some advice on whether or not to take a deal...  My husband and I are in the market for our first home purchase. The goal is to buy our first property, then a few more that cashflow, and eventually replace our W2 incomes with incomes from rentals. (That's the dream isn't it?) 

Our market is really hot right now. Very few properties cash flow without lots of cash put into them up front. (30, 40, 50%+ down payments.) Even then, lots of properties go above asking price for all cash. Simply put, to get a cash flowing rental we need CASH. 

With that in mind we've been targeting properties that would allow us to keep up a high rate of savings. In 2 or 3 years, we should have enough for a down payment on house #2, adding cash flow to savings until we purchase house #3, and snowball it from there. HOWEVER, we have an opportunity to purchase a home from a family friend for about 60% ARV. We would gain at least $50k in equity after completing some minor upgrades, and once a retail project down the street is completed we could have even more.

But the purchase price would still max out our budget and nearly obliterate our savings rate. Not to mention it would nearly double our living expenses, making it that much harder to replace the W2 income. I'm totally torn between slowly building up a healthy chunk of liquid cash (for investing, emergencies, whatever) or gaining instant equity (and lots of it). Given that the next goal is to purchase a second property, what should we do? How could we use this equity to our advantage? Is it worth it?

[Alexander Felice]

This one isn't too complicated. Your primary home isn't an investment, it's an expense. 

If you're going to max out on your primary and be cash poor for hopes of equity, then pass. Being trapped in a non-cash flow generating asset is not investing. You say you're buying at 60% ARV but one of the biggest mistakes beginners make is property valuation. This whole deal is speculative.

You may miss out on some equity, but if you're so over leveraged as you say you won't be able to borrow against that equity in the future anyway. 

Sounds like you're better off buying a duplex. That or buy a house below what you really want to live, so you can later fund your business.