Rent or Own While Investing?

Question

After making a decent 60k profit on a 6yr first home live in self-rehab, we came out on top just doing what we enjoyed. Now with degrees, better paying jobs, and a new state we started out in a rental. This is the first rental since post high school. I enjoy owning because rentals usually are not that unique and were not neighborhood people. We are outdoor, big dog, big workshop, and two car garage doesn't cut it for hobbies type people. Armed with 25k down payment and 38k in old 401k, I want to start making income generating investments, but I do not like sacrificing for cookie cutter rentals. So I am looking for advice on circumstances. We are dedicating serious time to research and soon to attend local REIA basics courses. Prior to this mindset we started looking for our second home with a realtor Should I back out of looking with realator or be split it up i.e. combine 25k and 38k to invest while renting, or happy medium of 25k on second home and 38k in investment?  Thanks for any insight?

Account Closed · Answer

Hi @Ryan McCallister

I think you should make the decision more on location and the home price. I don't know how much homes are selling in GA, but if you are like me who lives in CA, my mortgage payment would be $1500 to $2000 more than my rent every month if I wanted to live in a decent neighborhood with good schools and somewhat close to work, not to mention the huge down payments needed to not have to pay PMI. I bought my rentals by renting and honestly there's no way I would be able to afford anything if I bought my home when I was considering it.

I think what needs to be considered is if your monthly payment would be lower than your rent every month, topped with minor to no major rehab/maintenance issues to deal with once you purchase, utility bills aren't going to increase dramatically from what you are paying now and the property tax is reasonable, then maybe it's not a bad idea to own! But if due to age/condition of the home you have to put in large amounts of money just to bring the house up to code and or have on going maintenance issue, due to the size of the home you have increased utility cost, and the addition of property tax you didn't have to worry about before, on top of not having a rental generating cash flow to cushion you from all that cost, it's going to be hard to save up!

Of course I am speaking from my point of view, where real estate is insanely expensive and most people living in LA can never even dream of owning. Your situation might be drastically different, but I think the points to consider are still about the same.

Ryan McCallister · Answer

@Doris W.

Great points! Thanks for your time and insight. Those things are definitely different in Ga and I have not considered them thoroughly, but will now.

Benjamin Blackburn · Answer

@Sarah Grise

I'm definitely looking for that freedom to break free of the 40+ hour work week and being stuck in a cubicle(which I'm in currently as I'm responding).  Thank you very much for the response.  It really just inspires me more to get out there and get going.  I'm actually talking with a lender today to see what they can do for me.

Thanks a lot.

Ryan McCallister · Answer

As poor young college students we used our HELOC refinance to fund materials and some labor jobs I could not handle like roof/framing and siding as well as pay down some debt. Then on our final sale we also payed down debt to nothing but our modest car payments now. I think our next step should be investing at some level. I read about a lot of people say don't buy, you should rent! So I am questioning how others have done this and compare the sacrifices. Does owning and depending on HELOC type method always mean slower return versus renting and going all in? At 30yr old I feel like we are in it and want to keep going up and not make a sandbagging decision. Realtor sent another house to look at today, but these are nesting homes(haha) not full investments. As far as my old 401k it seems like a self directed is the way to go.

Thanks @Sarah Grise

Sarah Grise · Answer

@Benjamin Blackburn

We waited approximately 14 months from the date we moved in to our home (which we own) until when we moved forward with the HELOC option, and we have no regrets. I think it may have been the best decision we actually ever made, as it provided us with a secondary income which has now become my primary income and has given me the freedom to break free of the 40+ hour work week being stuck in a cubicle.

We were approved for a HELOC of about $53k. We purchased two properties with that one HELOC. With those 2 properties, we used part of the rent generated to pay back our HELOC (which we'll be paying on for a while!) and the other half goes towards other personal expenses, and we've been adding on to the rental list since.

In this business/field, many times you need to get IN debit to get OUT of debt. Just my personal opinion on the investment world :) It can generate passive income if you do it the right way. My best advice for people looking to buy houses and rent them out - be very, very careful when choosing a tenant. Screen them, make sure you always have them provide proof of income, ALWAYS. Be strict with your leases. A bad tenant can ruin it for a lot of people so be careful who you let into YOUR investment.

Best of luck to you both!

Benjamin Blackburn · Answer

Hello @Sarah Grise

I have a feeling my wife and I are in the same situation as you and your husband were in.  We are in the very early stages of REI and are currently renting an apartment.  We feel like owning a home to live in is the only way to really get going.  I'm curious how the HELOC process was and if you would recommend someone else doing the same thing.  We are down here in the Houston, TX market.  I was initially going to purchase a home for about 100K, fix it up slowly to gain equity and pull that equity out somehow and purchase another house to move into, while making the initial one a rental...  but I see that you guys just stayed in the initial house and purchased homes to rent out.  How long did you all wait until you used the HELOC? Hope this all makes sense.  This is actually the first person I've come across that's done something similar to my plan.

Thank you

Sarah Grise · Answer

Hi there! For my husband and I, we wouldn't have been able to even get into the world of investment/rental properties by renting. Because we own our own home, we were able to use a HELOC to purchase our first 2 rentals, and from there it took off. You however are fortunate enough to have money saved up. If I was in your situation, however, I would purchase my own home to live in and worry about yourselves first. THEN, using the equity in your home that you own (I do think you'd need to wait a year+ to look into a HELOC, but i could be wrong), use that to purchase additional homes. I wouldn't tap into your 401k if you don't have to. There are some nasty financial/tax penalties for that one (depending on your age that is).

We buy cheap houses, fix them up ourselves and rent them out. That process works for us, but it's not for everyone as some people prefer to flip and sell instead.