Buy my own ome first or a rental property

[Shanna Warren]

Hello,

I live in the San Francisco bay area and my question is if you have the capital would you buy your home first or would you buy a rental property first in the bay area?  Our goal is eventually have several rental properties but starting out should we buy our first home outright or use the money and buy a duplex and continue to pay rent and build our little empire that way?

[Mark Elkins]

Originally posted by @Ola Dantis:

@Shanna Warren Welcome to BP! :) 

What about having both? Best of both worlds? A scenario in which you own your home and get rent from it as well? Buying Multifamily is a really good way to start your journey into the real estate investing realm. 

Also, you can invest somewhere else in the country where your capital can work harder for you, but I normally won't encourage unless it is a stabilized asset, meaning it has good paying tenants, and for small multifamily assets, the occupancy is 100%. 

Another approach is to find a market in which you can leave in and start by buying there with the intent of leaving in that city some point in the nearest future. Yes, Real Estate investing requires sacrifices too. 

In any case, you do have a couple of options. 

Hope this helps. Good luck. Thanks! - Ola 

What Ola says is spot on! The new term for this type of multifamily purchase is "house hacking". That's because any dwelling of 4 or fewer units is considered residential so when you apply for the mortgage you can take advantage of the FHA and other favorable programs along with owner-occupied interest, property tax savings and reduced insurance costs to "hack" (beat the system in some creative way) the rental ownership starter problem.

Either way, if you decide to use payments from renters in other units of your own dwelling, get a family member to spilt costs with you or just buy it outright, personal home ownership is the single most important investment you will ever make.  This is even more important if your home is in the San Francisco Bay area where personal home prices continue to spiral out of sanity away from the rest of the nation.  If you live and work there and you have the advantage of being able to afford a home there, someday you will find this advice to be quite sage indeed.  The price of an ordinary home in that area can easily buy two or more, ordinary homes in a less expensive market.  There are only 8 markets in the world more expensive than San Francisco (only 3 in the USA) so your viewpoint may be a little bit askew if you have never lived anywhere else.

The value and the basis of your first home is the thing that will carry you into your retirement years safely.  It's available for equity dollars for other investments or simply to raise the money to buy your next home so that your retirement dwelling has no mortgage and provides you the safety that your home is supposed to do. DON'T SKIP IT!  Mom and Dad won't be here forever and someday may want you and your new bride out of their home.  

Another thing to consider is that rental income is never a guarantee.  Real Estate is a risky investment!  That's why we make the big dollars.  We are willing to take the risks that others won't.  While they rent, we own and count on them to pay.  If you own your own home, you reduce your risk by having a stable cost of living while you build your fortune.

If you start with a 1-4 unit you will get all the advantages of personal home ownership along with the bonus opportunity to have others pay your costs.  In any given month that they don't, all you have to pay are your own expenses which you would have had to pay anyway (the bank will see to it you can afford the mortgage with your own resources).  You will also get the opportunity to learn property management close to home without additional expense and keep an eye on your investment.  

One other advantage that is rarely mentioned is that when you rent space in the residential dwelling you also occupy as a primary residence, Equal Housing Opportunity restrictions do not apply.  This will allow you to rent only to those people you feel comfortable with rather than just any qualified applicant.  So if you are uncomfortable with confrontation or, ethnic customs or you just prefer to rent to people your own age, you may choose your tenant on any criteria you like.  The example they talk about in real estate license classes to explain this is, suppose an elderly woman wanted to rent her own place but was afraid of potential confrontation with young men, she could choose to rent only to young women to satisfy her safety concerns.

I hope this helps!  Holler if you need me.

Best regards,

Mark