Investment property or primary residence??

Question

Hi Everyone,

I am really struggling with my next investment step and I was hoping to get some insight and opinion from other investors.

I live in CA. already have a total of 3 investment properties all cash flowing quite well. two in other US states and one in Australia. I want to make another purchase this summer and I am trying to decide whether to put my cash in another investment property in another state of a purchase price of about 80K that will cash flow or put a 3.5% down payment on a FHA loan and buy a primary residence here in OC that will cost me money but will probably be worth more in the long run.

I like the idea of immediate cash flow but hate that my capital is not going too far when I have to put 25% down. On the other hand I love that I can put 3.5% down and get into a much more valuable home that will be worth more in the long run but I will be losing money every month with my mortgage payments being so high.

I really am at a loss and would love to get some opinions from others to help me work through the decision.

Any input would be welcomed.

David

Shane Pearlman · Answer

Hi @David Rutledge. That is a really solid debate. One my wife and I really struggled in the early 2000s. Investing in the west coast is all about timing. We ended up buying a duplex in 2007 (oops) and watched it go from 925k to 675k while cashflowing negatively. Not a path I'd advise from an investment perspective. Thankfully I made a solid income and eventually found a way to refinance it and get it cashflowing. Today its value is 1.3M and it cashflows well bringing in a solid part of my wife's retirement income.

The market cycles on average every 7-12 years with peaks and valley ranging from 40% drops up to 160%+ rises depending on the regional market cycles. Where has your homework indicated we are in the cycle for Irvine / OC? In my two markets (Santa Cruz & Seattle), I've stopped buying and am watching. The indicators I trust show that we have hit the top, or are near it, and I have achieved the appreciation I am going to get for this cycle. Everything I am keeping is in long-term hold mode for the next cycle.

Should you buy a personal home in CA right now? If it makes sense for you lifestyle, go for it. Just be ready for a equity drop from a macro level before you get significant appreciation. You can easily hedge for it by buying intelligently, taking advantage of micro-trends, remodeling the property etc.

Depending on how quickly your coffers refill, I would tell you to buy in a market that will provide good return on your funds, and to keep a close eye on your CA market until this next down cycle has played out (maybe 3-4 years?). If this cash is all you have to work with, then just keep looking for a really unique deal in CA until it shows, where you are confident you can force 30-40% equity through a reposition, which should hedge you against a downturn. All in all. I vote wait and learn from my adventures.

-Shane

Don't forget to vote Thanks for the people above who put in good thoughts. If you are curious to learn more about the duplex investment I mentioned above, I talked about it in the first episode of our podcast.

Chris Mason · Answer

For the sake of diversity, you might consider a primary that you will live in for at least a year.

I'm guessing those three other properties are in low appreciation markets, yes?

So a decent hedge would be to get into something that might actually appreciate more than inflation unlike flyover state real estate. Like you say, the OC property will be worth more in the long run in all probability. Maybe that means a several hundred thousand dollar cash out refinance allowing you to lay the foundation for a base on Endor in a few years, who knows.

And it's also not crazy to continue personally renting, while buying rental properties in nearby cities that lack rent control. A favored Sith Lord client of mine has been living in a rent controlled apartment in San Francisco for well over a decade, and buying up rental properties in East Bay Area cities that do not have rent control. Working the rent control angle from both angles, and still in an appreciation market like Orange County & SoCal! Good for him.

David Rutledge · Answer

Very good point Chris, and that is exactly what appeals to me about buying something here. That instant cash flow is hard to pass up on though haha...

Kiera Underwood · Answer

@David Daily buy a duplex or quad plex. That way you can offset mortgage with rental income.

David Rutledge · Answer

Thanks so much Shane, that is really helpful!

Carlos Altamirano · Answer

Hello @David Rutledge

So many great options. Purchasing with an FHA 3.5% down is a great idea too. I would definitely get into a 3 or 4 unit residential with that FHA. You won't find much cashflow, depends where you buy, but you're right about appreciation.

On the other hand, you'll find great cashflow on multi-family in east coast. I guess it all comes down what your actual goals are and investing criteria. Personally, I love the cashflow multi-family provides. You can get both Forced appreciation and cashflow with multi-family. If I had a family though, I think investing into a personal home will make more sense. Why not get both? with 80k you can get a nice home here in OC with 3.5% down AND have enough for 5-10 unit complex you can put down 20% that cashflows great in midwest. I help and show people how to use some of their savings to create streams of income by investing in multi-family apartments. Happy to chat some more.

-Carlos

Investment property or primary residence??

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