Newbie's Dilemma

[Trevor Lohman]

Hi Everyone,

Here's the deal. I really want to buy an investment property.

In my area, what really makes sense (at least to me) is a vacation rental. What's great is that one of the nearby areas that is great for VR's actually has some of the most reasonably priced homes. Not because the homes are lower quality, they are just less expensive. (its a lake resort area in southern california). I've spoken to property managers and lenders, and with conservative estimates I believe I would cash flow 300 per month using the lower end of their occupancy range. 

I see this as not just an investment but as an education that may pay me to learn. I will make sure I have reserves and can comfortably pay the mortgage.

Okay so that's all great. Here's the (maybe) problem. I'm a renter.

I pay 2200 a month for a little micro one bedroom apartment. Everyone thinks I'm crazy for buying a rental before my own house. Granted the people giving me this "advice" are more or less broke and are not investors. Still though, their point is well taken. I feel crazy buying a rental first. The problem is that I can't afford a home in my area, or even 30 minutes away from my area. I do however have a 25% down payment for a house in the 150k range which would comfortably buy me a nice vacation rental about 1 hour from my current apartment and leave me with an emergency fund and mortgage reserves.

If I want to keep my current income (which I do) I need to stay put. The geography in my area is such that in order to work in this region you pretty much need to live here or within 20 miles of here to work here. At one point I rented a home only 40 miles away and it was a 2 and a half hour commute each way.

So given all of this info, is it reasonable to purchase an investment property as a renter? If a deal makes sense should it matter if I am a home owner or a renter? Will it hurt my ability to obtain financing significantly? Where I live it would be miraculous to satisfy a .3% rent to value ratio, so investing here really doesn't make sense. Plus if I could afford to do that I would likely buy a owner occupant property first anyway.

Now before anyone tells me I can find a home in my area I can afford... well I believe you. But trust me when I say I have tried. I've found some condos in the 500k range with 400/month HOA dues. I just can't do it! Yes there are affordable areas within 50 miles or so... but like I said, the commute is almost too bad to consider.

I'm sure I left some info out, so please ask any questions that would be helpful, and feel free to tell me I'm crazy, my family already has! lol. I appreciate any advice anyone has offer. What would you do?

Thanks for the help BP.

Trevor

[George Fitz]

As a fellow Southern Californian, I definitely get it. And I did exactly what you are talking about. I purchased an investment property and kept renting. I was single and had a killer deal on rent at the time, and so it was an easy decision. Your rent is higher and I'm sure it hurts to pay that every month, but still, I'd stay put and invest in the vacation rental if it makes financial sense. And then look for a cheaper rental (if any even exist). If the investment home appreciates, you can always use the equity as a tool to buy other properties down the road, or even to help you buy a SFH if that is what your situation dictates. Even if it doesn't appreciate the way you hope, if you are cash-flowing and your numbers are sound, then it is still a nice asset that can be used towards your rent, your next downpayment, or whatever else. So I wouldn't worry about not owning a SFH right now. And I'm generally a pro homeownership kind of guy.