Buy home + spend all savings OR rent apartment + keep savings?

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Buy home + spend all savings OR rent apartment + keep savings?

Joe Evans
Rental Property Investor · Austin, TX · Member since 2019 · 5 posts · 5 votes

I'm currently renting and recognize that my money is better spent going towards an asset. I have a modest amount of money saved up that, if paired with an FHA loan, could land me a home here in Austin, TX!

My dilemma: Doing so would require spending all my savings which are in an IRA, wiping out my principal investments along with any gains.

My question to y'all: Is it worth spending everything I have so that my living expenses are at least going towards an asset while I recuperate my savings OR is it better to continue renting and use the money towards my first rental property, either immediately or in the nearer future?

Note: I originally intended on house hacking via multi-family properties but have concluded this isn't the strategy for me.

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Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
5y

@Joe Evans buy a single family with an ADU or a duplex with a garage? There's a way to make this happen. Either way you need to buy something or you're going to have trouble making music in a rental. A househack will give you more freedom to make music since you won't have to worry about money as much.

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  • Allen L.
    Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
    5y

    You can do a quick calculation on a spreadsheet. Say your rent is R, and if you buy a place, every month your expenditure is E = mortgage interest + taxes + insurance + depreciation (yes just like an real estate investment) + HOA if you have one. Is E - R > 0? If yes, then ask your self, is the quality of life improvement of owning a house worth the extra cost? If E - R < 0, then I say do it. If you are in the Austin area, that's a great place to be. I'd like to invest in Austin but the prices are already kinda high to cash flow, but obviously a lot of room to go so you can capture appreciation on your primary residence.

    0Reply
  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    5y

    @Joe Evans, it sounds like your savings are already going toward an appreciating asset, albeit not a leveraged one. If you liquidate your IRA now you'll have to pay the income tax on it plus possibly the penalty (there are some exceptions for COVID). I'm a huge proponent of real estate as an avenue to financial freedom, but it's also capital intensive, so getting into your first property without savings is generally not such a good idea.

    Let me ask you this, though; what makes you so sure that your first property will entirely wipe out your savings? Is there an opportunity to buy something slightly cheaper or to put less down so you still have reserves and/or don't have to raid tax-advantaged accounts?

    1Reply
  • Antonio CuccinielloPro Member
    Investor · Austin, TX · Member since 2016 · 531 posts · 310 votes
    5y

    Hey @Joe Evans is it possible for you to live in the single family and rent out the bedrooms?

    I just moved to Austin and looking to do this strategy myself.

    732-402-6988
    2Reply
  • Andrew Powers
    Investor · Cincinnati, OH · Member since 2018 · 304 posts · 185 votes
    5y

    Yes look at room renting in a single family. Low down payment loan option is 3% conventional first time home buyer loan (single family only). If you don't want roommates you can target a mother in law suite property or something similar. 

    Either way make sure you analyze the property including cap ex, repair, vacancy reserves. And have "adequate" cash reserves for unexpected issues.

    1Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    5y

    @Joe Evans just curious, why is househacking not for you?

    [email protected]512-888-9122
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    1Reply
  • Timothy Douglas
    Realtor · Austin, TX · Member since 2018 · 154 posts · 82 votes
    5y

    Like @Jordan Moorhead, I am curious why house hacking isn't for you too. It's a really cheap way to get into a property, and if you get a multi-unit, you can still live alone. I would love to talk to you about where you're at and how you can get to your goal. I will say, going out on a financial limb can cause unnecessary stress. The purpose of investing is to produce freedom, so don't give up what little stress freedom you have right now... Patience can be great. A year or two of saving can really set you up well!

    0Reply
  • Tom Wagner
    Real Estate Agent · Minneapolis · Member since 2019 · 338 posts · 219 votes
    5y

    Buy buy buy! 30-year fixed interest rates at all time lows. Just make sure you are buying an asset and not assuming a liability.

    0Reply
  • Tina Tsysh
    New to Real Estate · Orange County, CA · Member since 2020 · 214 posts · 184 votes
    5y

    I am curious as well of why house-hacking isn't for you. You can buy a duplex, live in one unit and rent out the other one. You can rent it out to a friend / colleague and make some money while still having your privacy in your separate unit. The longer you are saving up, the higher the prices get while you wait. Plus we should see higher interest rates in the future. However, getting into real estate and having zero savings is not ideal either. You can buy something with as low as 3.5% down payment, and benefit from the tenant living in the other unit help you pay down your principal and cover part of (if not full) your mortgage payment. You might not be buying class A new construction home, but you are investing money towards an asset rather than helping someone else to get wealthy. 

    0Reply
  • Joe Evans
    OP
    Rental Property Investor · Austin, TX · Member since 2019 · 5 posts · 5 votes
    5y

    Thank you all for the discussion so far!

    @Allen L. Good call, I'm definitely going to do some financial analysis to help clarify the decision.

    @Jacob Pereira For a more productive conversation: I have $20k total. Say I'm pre-approved for a 5% downpayment, whether FHA or traditional, for a $300k property, that puts me at $15k already. Now, 3.5% of $250k would be just shy of $9k which is obviously a different story.

    @Tom Wagner You're getting at my dilemma there! Are renting an apartment vs buying a primary residence equal liabilities, or is one liability better than the other because it has the possibility of being an asset?

    @Antonio Cucciniello @Andrew Powers @Jordan Moorhead @Timothy Douglas @Tina TsyshMy "Why" is the desire to spend more time making music, amongst other benefits of financial freedom. I experienced what you'd call a life event last year that made that "Why" a lot more urgent. To put it short, I need a space where I can comfortably be loud and not be concerned with disturbing neighbors, or even worse, my tenants! I don't think I can put music on pause for the hopes of doing it in the future, because that future is not guaranteed.

    Would love to hear your takes on the above!

    0Reply
  • Timothy Douglas
    Realtor · Austin, TX · Member since 2018 · 154 posts · 82 votes
    5y
    Originally posted by @Joe Evans:

    Thank you all for the discussion so far!

    @Allen L. Good call, I'm definitely going to do some financial analysis to help clarify the decision.

    @Jacob Pereira For a more productive conversation: I have $20k total. Say I'm pre-approved for a 5% downpayment, whether FHA or traditional, for a $300k property, that puts me at $15k already. Now, 3.5% of $250k would be just shy of $9k which is obviously a different story.

    @Tom Wagner You're getting at my dilemma there! Are renting an apartment vs buying a primary residence equal liabilities, or is one liability better than the other because it has the possibility of being an asset?

    @Antonio Cucciniello @Andrew Powers @Jordan Moorhead @Timothy Douglas @Tina TsyshMy "Why" is the desire to spend more time making music, amongst other benefits of financial freedom. I experienced what you'd call a life event last year that made that "Why" a lot more urgent. To put it short, I need a space where I can comfortably be loud and not be concerned with disturbing neighbors, or even worse, my tenants! I don't think I can put music on pause for the hopes of doing it in the future, because that future is not guaranteed.

    Would love to hear your takes on the above!

    I guess my question is how do you get by in your apartment without disturbing other people? Also, there may be ways to outfit a specific room in your house that allows for you to be loud and not disturb others. HomeAdvisor told me it would be around 1,000-2,500 dollars to do it, but I don't know much else about it. It might be worth getting into a house hack and soundproofing a room. Why not build wealth in Real Estate and pursue your dream?

    2Reply
  • Tom Wagner
    Real Estate Agent · Minneapolis · Member since 2019 · 338 posts · 219 votes
    5y
    Originally posted by @Joe Evans:

    Thank you all for the discussion so far!

    @Allen L. Good call, I'm definitely going to do some financial analysis to help clarify the decision.

    @Jacob Pereira For a more productive conversation: I have $20k total. Say I'm pre-approved for a 5% downpayment, whether FHA or traditional, for a $300k property, that puts me at $15k already. Now, 3.5% of $250k would be just shy of $9k which is obviously a different story.

    @Tom Wagner You're getting at my dilemma there! Are renting an apartment vs buying a primary residence equal liabilities, or is one liability better than the other because it has the possibility of being an asset?

    @Antonio Cucciniello @Andrew Powers @Jordan Moorhead @Timothy Douglas @Tina TsyshMy "Why" is the desire to spend more time making music, amongst other benefits of financial freedom. I experienced what you'd call a life event last year that made that "Why" a lot more urgent. To put it short, I need a space where I can comfortably be loud and not be concerned with disturbing neighbors, or even worse, my tenants! I don't think I can put music on pause for the hopes of doing it in the future, because that future is not guaranteed.

    Would love to hear your takes on the above!

    For me, if you're buying a house that will rent for more than PITI + repairs + vacancy after you move out --> you are buying an asset! If not, you are buying a potential liability. In Austin, if you're breaking even on cash flow I'd even consider that an asset, given the direction of the city.

    1Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    5y

    @Joe Evans buy a single family with an ADU or a duplex with a garage? There's a way to make this happen. Either way you need to buy something or you're going to have trouble making music in a rental. A househack will give you more freedom to make music since you won't have to worry about money as much.

    [email protected]512-888-9122
    The Moorhead Team5140 Reviews
    WebsiteView Page
    3Reply
  • Andrew Powers
    Investor · Cincinnati, OH · Member since 2018 · 304 posts · 185 votes
    5y

    I like the suggestions about HOW to make it work

    BTW, what kind of music do you make / produce?

    0Reply
  • Rick Reeder
    Member since 2019 · 124 posts · 95 votes
    5y

    If you're willing to look a bit farther out (Liberty Hill, e.g.) you could find a new home that qualifies for USDA which can be 0% down.  I read "Beat the Street" by Peter Lynch back in the 90s (yes - I'm old), and he recommended home ownership as one of your first investments.  It's the way most Americans build wealth.  I'm a huge believer in buying vs. renting.

    1Reply
  • Joe Evans
    OP
    Rental Property Investor · Austin, TX · Member since 2019 · 5 posts · 5 votes
    5y

    @Timothy Douglas I don't get by! Which leans me towards buying a home regardless of the financial implications, although it seems it would also benefit me financially even if it were my primary residence. Assuming I buy right!

    @Tom Wagner I like that take! I'll make sure I factor those numbers in when I make the leap.

    @Jordan Moorhead Right. My music relies on having the space to make it and renting doesn't cut it. Although a primary residence would be the most accommodating for music, @Timothy Douglas might be onto something with the soundproofing. Will need to factor that into budget!

    @Andrew Powers I produce electronic music, primarily in the house genres.

    @Rick Reeder Thanks for the suggestion! Sounds like you and @Tom Wagner are recommending I buy as long as I'm smart about it.

    This has been incredibly helpful everyone. I have more to think about and have regained confidence in the process!

    4Reply
  • Timothy Douglas
    Realtor · Austin, TX · Member since 2018 · 154 posts · 82 votes
    5y
    Originally posted by @Joe Evans:

    @Timothy Douglas I don't get by! Which leans me towards buying a home regardless of the financial implications, although it seems it would also benefit me financially even if it were my primary residence. Assuming I buy right!

    @Tom Wagner I like that take! I'll make sure I factor those numbers in when I make the leap.

    @Jordan Moorhead Right. My music relies on having the space to make it and renting doesn't cut it. Although a primary residence would be the most accommodating for music, @Timothy Douglas might be onto something with the soundproofing. Will need to factor that into budget!

    @Andrew Powers I produce electronic music, primarily in the house genres.

    @Rick Reeder Thanks for the suggestion! Sounds like you and @Tom Wagner are recommending I buy as long as I'm smart about it.

    This has been incredibly helpful everyone. I have more to think about and have regained confidence in the process!

     Yeah, I really think the soundproofing thing could solve your issues! Let me know if you want to talk more about it!

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    5y

    I always vote the latter-- rent while you buy a rental property. Buying your own home isn't an asset.

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

    Also depleting your savings, is risky. But run the numbers on buying a house for yourself and you'll see why it may not be very advantageous. 

    0Reply
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