Buy my own house first or invest in real estate?

Question

I live in San Jose, CA and the largest dilemma I have now is whether I should start investing in real estate, then save up another deposit to buy my first home, or vice versa? The reason I would like to purchase a home first (it would be a mobile home, because this market is crazy!) is due to the fact that I pay extremely high rent. At least with my own home I would pay a high mortgage, but it would be toward my own home. Though, purchasing an out of state home and collecting some profit could allow me to save up for another deposit, while renters pay toward my property sounds appealing as well. If I go that route I see it as, that additional profit going toward my current rent, so I am still dumping money into someone else's mortgage..

What was your experience starting out and what advice would you give?

Jon Schwartz · Answer

Briana,

I faced the same dilemma down here in Los Angeles.

I highly suggest you look into buying a duplex. If this is your first home, it's certainly not your "forever home," and an owner-occupied duplex is an incredible investment in a HCOL area like San Jose. The rent you collect on the second unit will blow away the trickle of return you'd earn on an out-of-state rental.

Out-of-state rentals are alluring because they're inexpensive and cashflow positive, but it takes scale for that return to be meaningful. When I mathed it out, I saved more faster by owning one rental until in LA (the other half of the duplex I live in).

Best,

Jon

Jason Wray · Answer

Briana,

Your best bet is to buy your first home because you get to have a lower down payment.  Mobile homes are a good idea to keep the monthly bills in check.  One thing to keep in mind before you go out and start looking is make sure you get approved first.  Not only approved but be sure to find a bank/lender who will finance a Mobile Home.  There are a lot of lenders who will not fund mobile homes due to the foundation type.

The guide lines are it must be a double wide and built after June 1976 (But again try to buy 1985 or newer).  Must be on a permanent foundation and with concrete skirtings and in some states hurricane tie downs.  Cannot be on a rented lot or a leased land contract. You could always look for a piece of land and do a site built home (true modular) which could be used as new construction where they include the land/lot.  Keep in mind it cannot have an over valued piece of land like acreage over 5 acres where land is generating the larger portion of appraised value.

Brenden Mitchum · Answer

Hey @Briana Phelps

It's all about the numbers, right? Sure, you could buy a home and pay down your mortgage but likely any long-term gains you see from this will be wiped out by expenses and interest. Plus, more expensive areas, like the Bay, get hit hardest from a home value percentage loss perspective during recessions. So, there goes any equity built up plus more. If your big plan was to refi and put that into an investment property in the future, you're now out of luck.

Your primary residence is just never an investment, unless you're house hacking. Is this an option for you? If not, I would stick to renting. Find the most affordable place you and your family can comfortably live in and invest OOS. It's pretty tough to find decent returns anywhere in the U.S. but keep working towards it. Do you research, know what area you want to invest in, and set yourself up to take advantage of opportunity once it does come. Sink your money into a primary residence now and it could be stuck there for years to come, right?

Hope this helps a bit! Please, feel free to reach out anytime if you have other questions or just want to chat!

Brian Garlington · Answer

Why not get an FHA loan where you only have to put down 3.5% or 5%?    I have clients all the time that say they can't afford a down payment, but they pay a high amount in rent. Once they cut out a few things like........

Stop always ordering food from DoorDash/Grubhub. Utilize them as a side hustle. I have 4 clients that made a pact that on Friday and Saturday nights they would not "go out with well meaning friends" anymore until they got the down payment for a property. The math was simple. Instead of spending about $100.00 out each night, they made $100 a night. That's a $400.00 differential per weekend. They all started right as the pandemic was starting and this accounted for an extra $30,000 to $35,000 per client. More than enough for a down payment on an FHA loan.

Always taking Uber and Lyft when they already have a car.

Pay off credit cards....starting with the lowest balance ones.

Countless times someone lives within a mile of a gym (membership they are paying for). They drive to the gym....then get on the stair machine and/or do walking or running exercises. Cancel the gym membership and get outdoors to do the same thing....and here in the Bay Area it is often sunny outside and not as much rain compared to other places in the country.

If you are paying a high amount of rent,,....househack where you rent. Why pay $3500/mo in rent? Get a roomate.

Stop going out "for fun" a couple of times a week.....change that to a couple of times a month.

Trade in the $700.00 per month car you lease and either buy one with payments of $300/mo or buy a "hooptie" to get from point A to Point B.

There's lots of ways to save up the money for a down payment.

Jaron Walling · Answer

I'd house-hack or at least buy/find/create a DEAL with the intent to rent it out completely once you move. This is exactly what I did years ago and it jump started my REI journey. Cash-flow maybe next to impossible to find in your market but hopefully you can find a property that cuts it close. That's all you got given our market conditions.

Don't bank on appreciation to justify your investment goals. I think the ship sailed on major appreciation and most experienced investors know this. OOS investing is great if you have experience. You get experience by living in your own place and figuring out what goes wrong.

Forrest Williams · Answer

Why not both? Have you considered house hacking? I did it when I was getting started and it was a great experience. You learn a ton about what it takes to manage a house reno, repair, budget, and hire. Single family homes are the way to go. 3 bedroom 2 bathrooms are best, get a couple roommates for it and you'll be set. Or, even better, if you can get a small 2-4 flat and house hack that you'll be golden.

I would stay away from mobile homes. They don't hold their value well, and you still have to pay the rent on the plot you're parked on. And they aren't really that mobile, it can cost up to 20k to move it. If the landlord who owns the plot jacks up the rent 15%, are you going to shell out 20k to move? Your investment can turn into a money pit quickly.

Chad Hale · Answer

@Briana Phelps  Try to do both by getting a multi-family (2-4 units) with an FHA loan or some other low money down option.  Check with a good mortgage broker to see what are your options.  Live in one unit, rent out the others.  There are a lot of variables in the bay area.  There is also saying I heard many years ago.  Owning real estate is the Bay Area Retirement Plan equivalent (or better) of 401k's, savings, etc.  Turns out it true!

Briana Phelps · Answer

Hi @Jon Schwartz,

Awesome, it’s nice to hear success stories out here in the Bay Area! I appreciate that information and I am going to definitely steer in that direction rather than a mobile home. A duplex would be a great start and provide experience on how to even begin handling a rental.

Thanks again!

Briana Phelps · Answer

Hi @Chad Hale,

I am definitely going to look into duplex options, I was fixated on a mobile home due to the price, but I think this is the better route to take. Thanks!

Briana Phelps · Answer

Hi @Brian Garlington! Thanks for all the great advice! I appreciate it :)

Definitely trying to work some side hustles in to save a large down payment!

Buy my own house first or invest in real estate?

Most Popular Reply