Buy first investment property before buying a primary residence?

Question

Hello All. The past few months I have been doing much research in rental properties and wish to buy one soon. I currently live in the Twin Cities but am looking to relocate to San Diego area if all goes well with my job transfer. The transfer may take a year or two. I currently own a home and if I sell, and the prices remain as they are, I would end up having about 150k. I'm seeking advice on either buying my own home in California first, and then pulling out a HELOC for an investment property, or should I buy an investment property first? The prices are quite steep in CA so I would love some insight from the locals there. I've been in MN for 3.5 years now, and it is much too cold to stay here any longer.

Dan H. · Answer

I would not suggest you buy in San Diego until you move here.  Here is some of the rationale:

• rent risk has never been higher in San Diego.  We received all of our LTR rents, but I know San Diego LLs who have not.
• price risk: No one knows what the virus will do to local prices, but my prediction is a decline of between 5% and 20% (I know it is a big window).
• OOS.  Managing OOS rentals has more risk than in state.
• Currently impossible to evict a bad tenant.
• Initial cash flow: Most San Diego RE with high LTV is initially cash flow negative as a rental.  It usually changes fairly quickly.  Over the last 7 years San Diego average rent has increased over $100/month annually.  However, with the virus and potential home values declining I am less certain of rent increases than I was 2 months ago.  Without rent increases, the negative cash flow takes longer to turn to positive cash flow.

I suspect that I would also not invest in the twin Cities if I were only staying a year or two.  Here is the Rationale:

• OOS.  Managing OOS rentals have more risk than locals.
• Price to sell.  5% to 6% RE commissions. 2% to 4% other associated costs.
• Rent risk.  See above.
• Value risk.  See above.
• Currently impossible to evict a bad tenant.
• Buy n hold is a long term play.  1 or 2 years does not qualify.

I would look for other liquid investment options.  When you move to San Diego maybe rent for a short while then house hack a detached duplex or a property with an ADU.  A detached duplex is challenging to discern that it is a duplex.  Most ADUs are new and therefore nice.  ADUs are also available in higher class areas than duplexes which for the most part are in C areas with a few in lower B areas.

Good luck

Twana Rasoul · Answer

@Ilya Plugovoy I would not suggest buying here until you decide to move here so you can owner occupy your first property here and have low down payment options since the prices are much higher here.  If you know the market in San Diego well and can count on people here to guide you in the right direction it is really best to wait till you are closer to getting here to start looking.

Once you get here I recommend owner occupying/house hacking a 2-4 unit property to start, unless there are certain neighborhoods here that you know you want to live in that don't have multifamily properties.  I personally recommend to buy your own home first before starting to invest.

Best of luck to you!

Ali Boone · Answer

I always vote for investments over primaries. Here's why-

https://www.biggerpockets.com/...

Outside of those arguments, I'd say just run the numbers on various scenarios and see what they look like.

Maxwell Ventura · Answer

Hello @Ilya Plugovoy, Hope you can make it out to San Diego! I moved from Philadelphia a little over 5 years ago and I love it. No turning back.

Right now inventory is super low. Absorption Rate/Month's supply of inventory county wide for all property types is 1.7 months. Note, this can vary greatly throughout the county in the micro markets. I'm not seeing prices drop too much over here as there is very low supply and high demand.

In fact, depending on the price range, I'm still seeing multiple offers on homes coming in above list price.

# of Homes sold / Pendings / Active listings etc.. are all down because of the Pandemic but w/ the low supply of inventory and interest rates holding low, the market is still very much alive and moving.

Cheers,

Adam Tafel · Answer

@Ilya Plugovoy - slight typo on my end. What I meant was recoup your entire down payment on an FHA MF househack, which would come out of your 150k. You could get into a solid investment for around 15k out of pocket, live expense free for the next few years, bringing your reserves back up to 150k before you move.

Steph Cochrane · Answer

In the part of SD that I live it is wayyyy cheaper to rent than to buy, so it's been an easy decision for me to keep my money in investments. If I had a family and kids that might change things tho.

Ilya Plugovoy · Answer

@Adam Tafel What do you have in mind when you say recoup the 150k? As in taking the money back out of the property with a HELOC or HE loan?

Adam Tafel · Answer

If I were moving to an expensive market I would start with a multi-family househack. Your 150k likely won't go very far in San Diego if you're shopping with an investment loan (25% down). Occupy a 2-4 unit property for a year with 3.5-5% down, then find a SF for the longer-term.

I'm obviously biased, but I would start the investment property search in the Twin Cities rather than San Diego.  You could sell your current residence, occupy your new investment until you move, and likely recoup the entire ~150k before heading to CA.

Kenneth Donaghy · Answer

@Ilya Plugovoy in the current market its hard to know what a year or two will look like. Currently getting a HELOC on your primary residence is possible in CA, because of the restrictions on Jumbo loans, a lot of lenders and buyers are getting creative using HELOCs. It's more difficult to place a HELOC and/or refinance a investment property in our current situation. How that changes in the next two years is uncertain, and sitting on the sideline for two years seems like a long time. So ask yourself what are some strategies you can implement today, to put you in a better position in two years when you are ready to make that move to Sunny San Diego!

Noah Chappell · Answer

@Ilya Plugovoy great question! My opinion is go for the investment property here first all day. This will benefit you in multiple ways.

First, here you're physically in the market which will make obtaining finance & setting up a team with a great property manager, etc much much easier.

Second, speaking of your $150k, you could put 25% down on a $150k rental property here, then use the rest for an house hack in CA, or buy the investment property here outright & obtain a secured loan against that for your CA home - my point being the HELOC idea could be used either way.

Third, in investing time is one of your greatest & most undervalued allies - if you wait 2yrs to invest you're missing out on the likely 10% appreciation, loan pay down, cash flow, & tax benefits you'd benefit from otherwise, this is a huge profit you'd forgo.

Buy first investment property before buying a primary residence?

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