Investment property or primary residence first?

Question

Hi there!

I'm a new investor just beginning my path to early retirement (woo!). I haven't purchased my first property, but I have saved up enough to finally consider buying.

I live and work in the Los Angeles / Orange County area (pricey). I currently rent. I plan to purchase my investment properties out of state. My question is - should I jump into purchasing my investment properties, or should I start by purchasing a primary residence for myself?

I have enough saved for a single unit home. If I wanted to house hack with a duplex, I'd realistically have to wait another year or so to add onto my savings.

Thanks a ton,

Yoselin

Joe Homs · Answer

@Yoselin Pearce I still consider buying a principal home being your first purchase in your investment career. If you had purchased a home in (2014) when @Ali Boone wrote her article it would probably be worth twice what you had paid for it.There are many things in deciding to purchase a primary, but tax savings are big for me.1. Are you staying in California for 5 or more years? Then buy.2. Are you able to write off the mortgage payments on your primary? Yes, same as an investment to reduce your gross income.3. Are you able to write off the property taxes on your primary? Yes, same as an investment to reduce your gross income. (However, right now your deductions are capped at $10,000 on primary, but look for that to change with new administration.)4. Are you able to sell that home you purchased in 2014 and not pay any capital gains taxes? Yes, see Section 121 exclusion which lets you exclude $250,000 per person, $500,000 per couple. Sell then invest with that money.5. Are you able to sell that investment you purchased in 2014 and not pay any capital gains taxes? Only with a 1031 Tax Deferred Exchange. However, if you had purchased that investment in 2014 I would tell you to hold on to it for the rest of your life and let your tenants pay the mortgage for you. Then retire in style 30 years later with a free and clear property earning you passive income.5. Would I have purchased an income property in 2014? Yes, I did. Would I purchase an income property now in California? No, not the right time to cash flow.6. Would I purchase a primary home in California with the information above? Yes and enjoy the sunny weather, no winter, Oceans, local mountain skiing, deserts, Cruise ships, and almost anything else you enjoy.7. Lastly, how best to learn about investing when you have your own home to take care of. Broken Garbage Disposal, painting, new flooring, all things you will need to learn if you have an investment.Good Investing...

Yoselin Pearce · Answer

Thank you to everyone who has helped me here. You've all helped me consider my "first step" from different perspectives. @Lee Ripma - I love what you said. If I were to make my primary residence a real estate investment, I'd be living in a risky neighborhood... unless I were to save up for a few more years. @Matt Leber - you also have a great point. I AM able to save up while still paying rent here. @Ali Boone - thank you for your article. It helped me understand the costs of a primary residence I hadn't yet thought of. @Tony Kim - yes, it would be a dream to house hack in LA. However, I'd need to save up a loooot more to get out of the risky neighborhoods I'd have to buy in now, whereas I can start buying decent properties OOS with what I have now. It's a goal I'd still like to strive for at some point though. Thank you. @Joe Homs - thank you for such an informative response! It's certainly convinced me that I definitely need to purchase a primary residence in the near future. As my first step - not so sure after a few of these other responses. However your response has certainly helped me understand the benefits.

Lee Ripma · Answer

@Yoselin PearceBe careful who you listen to. I have a rule, if I don’t want your life, I don’t take your advice. So this question should probably only be addressed to those who currently have what you seek. I personally don’t think living in real estate and investing in real estate have much to do with one another. Where I live is a terrible investment. I’m a real estate investor, so I don’t care that my primary isn’t a good investment. I own a portfolio out of state.

Ali Boone · Answer

I'm rarely, if ever, in support of going the primary home route. At least not over investing, and certainly not given the prices here in SoCal (I'm in Venice). Here's more on it-https://www.biggerpockets.com/...Hope that helps!

Lindsey Iskierka · Answer

Hi Yoselin!Do both! Make your primary residence a house hack and enjoy the benefits of home ownership while also having your first investment property. That first house hack will set you on a path to grow your portfolio even quicker. Like you mentioned, LA/OC is expensive so tackle your housing cost by purchasing a house hack and let your tenants pay down your mortgage. This is how I got started and now I own a portfolio of rentals. I help people get into house hacking all the time so if that's an option you would consider I'm happy to go over it more with you. Feel free to text me! (714) 393-1644

Carlos Ptriawan · Answer

I'm 1000% agree with @Lee Ripma. Many times, the most "profitable" and "the usefulness of investment/or property" is our own primary. Just think of our children, when they grow up they will need to work for 25 years to just saving for California houses.As we will live hopefully forever in California. We're buying more houses for our children and family hahaha...

Ali Boone · Answer

Yes, but we were also coming out of a crash in 2014 so prices have increased even more than usual. You're correct in that appreciation can be a big thing, but you have to actually know how much appreciation would be required for you to be profitable. The mortgage interest alone makes that number jump very quickly, and then adding in all improvements, repairs, etc. Buying in a crash, easy to make that happen. Buying a primary in a market like today... who knows. Appreciation, yes, but will it be enough to mean it's actually profitable.

Carlos Ptriawan · Answer

Even if you buy OOS, the cash flow has been greatly reduced due to cap rate compression so investor is already looking at appreciation anyway. In St. Louis Market, there're few houses that the PSF is already the same like in SoCal.Unless you're willing to move OOS, the best move is to buy primary everywhere you want to live.

Tony Kim · Answer

I would start out either investing OOS with a TK professional like Ali Boone or I would house-hack a duplex using an FHA loan. The down-payment requirements for an owner-occupied duplex or triplex should not be any more than it is for an SFR because of the flexibility of an FHA loan (3.5% down, among others).Also, right now is not a good time to buy an SFR as the market is about as hot as I've ever seen in my lifetime. Also, IMO, house-hacking is the best way to get started in RE investing if you live in a high-cost area where SFR's can never cash-flow.

Dmitriy Fomichenko · Answer

@Yoselin Pearce good luck with your REI journey!