Buy a House or keep renting and invest?

Question

Hello, I'm a 38 year old new construction plumber who has just moved back to CA from Hawaii. I lost my house in '08 and have started completely over. I live in Santa Rosa CA. and have almost paid all of my debt off.  I feel that I need to invest in property this year (2015) so that I don't get killed with taxes. I have been told by a few people to buy a house first and then work on investment property later on in life.

Also, I am interested in buying property in the Phoenix area. The reason why is that multifamily properties in Phoenix are much more affordable than here in the Bay Area  I have a brother-in-law who lives there and he can look at properties on my behalf.

I would like to know what the BP family has to say about 1) buying a house first and investing in property later on and 2) buying an investment property (i.e., multi family unit) in the Phoenix area.

Any and all input would be appreciated.  Thank you!

Jay Hinrichs · Answer

@Steven Lacy

If you can handle living by your tenants.. I would by all means buy in SR a 4 plex .

reasons are

1. 3.5% fha owner occ... nice to get into a CA rental for 3.5% down

2. you can rinse repeat annually until you have used up your 4 mortgage slots. there by owning 16 doors in Sonoma county all with 3.5% down on each.. does not get much better than that for N. Bay ownership.

I have a property I own in Rohnert Park ( 4 acres) zoned mixed use resi.. its right next to the Graton casino.. there is huge housing shortage in your area ... so rentals will stay absolutely full year in and year out.. plus you should get some increase in rents.. but the worse is you make some cash flow.. and your tenants pay down your mortgage and the next thing you know its 20 years later and you have millions in TRUE Equity..

that's one way to go

Account Closed · Answer

Aloha Steven,

Everything in life has a price. Properties in other states are cheap for a reason. Supply and demand determine property prices. It's economic 101. Investing in a supply constrained housing market almost guarantees appreciation in the long run. Not only we are living in a supply constrained market due to the geography and NYMBYism, we are also living in a one of the most desirable areas with high paying job growth. The Bay Area has always been expensive and will likely remain expensive for the foreseeable future. Getting in is hard, but once you're in, it's very rewarding.

People have been and will likely continue to underestimate the rent growth in the Bay Area. At $500/unit of rent increases over X years, it's equivalent to $100k in equity.  That's $400k in equity for a 4plex.  How long does it take for you to get an equivalent in cash-flow? 4plexes that were selling for $750k-$800k in 2011 are now selling for $1.2MM to $1.3MM in my area. The nice thing is that you can tap 75% of the equity tax-free.

Here is the catch. I believe you can only have one FHA loan at a time. That means you would have to have enough equity in your 1st purchase to refinance your FHA loan into a conventional loan before you can buy your 2nd property with another FHA loan. J. M. , who owns a handful of rentals in other states, can share his experience with you. I'm still green and am still learning everyday. I hope to learn on others' nickel though. That's why I'm here on BP.

Best of luck.

Jay Y. · Answer

@Steven Lacy As Account Closed mentioned, I'm an investor who own properties in both the Bay Area and out of state.

When it comes down to it, I think there can be a place in one's portfolio for both types of rentals. But if I was going to place a bet, and I have, I would put the bulk of my investment capital into the Bay Area. I've got 5 properties in the Bay Area, and 3 out of state. If you want to look purely at property values, over $2MM in the Bay Area, and about $450k out of state. So, about 80/20 split, which is what I'm comfortable with...

Yes, you can go out of state and get better cash flow on Day 1. But as Minh mentioned, one thing that often gets overlooked (and I overlooked this myself), is the crazy rent appreciation we get locally. Day 1 numbers don't tell the whole story and just like with dividend stocks, you want to find the right companies/properties that have a high GROWTH rate; that's the key to future wealth, and I believe you will be hard pressed to find a better market than the Bay Area for that.

Also, people will say that appreciation is just icing on the cake... if that's the case, I got a serious sweet tooth. I'm a big fan of appreciation. You only need to get lucky once (or preferably a few times) in the Bay Area to become a future millionaire/early retiree.

That's my get rich (relatively) quick plan, anyhow. Sure, drip cash flow works too, but it'll take a lot more effort, and a lot more time, especially if you're managing from afar. One major expense will easily wipe out cash flow for a year... If you have both cash flow and appreciation, you create a greater margin of error for yourself. Again, maybe that's tough to accomplish on Day 1, but if you can get to that wonderful place say in Year 5, you'll be on easy street... Then you can: sell, 1031, refi, or just hold and jack up rents. Either way, you win!

J. Martin · Answer

@Steven Lacy,

Sorry to hear about 2008, but at least we're in 2015, so you've "served" your 7 years and should be free from the credit issue this year. So that helps a lot.

Like @Minh Le mentioned, I'm a fan of doing both at the same time! Especially when supported by the government's dime! You can buy a primary residence, subsidized by tenants in a 2-4 unit, if you don't mind a little sacrifice by sharing walls, relative to a single family home. FHA will use 75% of existing rents (or market rents, if vacant) to add to your income when they are qualifying you.

I refinanced out of my FHA loan already due to the improved value from rehab and market appreciation (about half and half) just over a year after I bought it. That was a pretty good time though.. Can't count on it forever..

Be sure to chat with @Yuliany W. a bit about Arizona, and @Johnson H. has knowledge about the Phoenix market. @Jay Y. has good perspective also, having been in and out of state. I've never left the Bay! Good luck, and get ahold of us or come to a meetup next time you're in the Bay!

Mike F. · Answer

I'm always of the mind that you should stop paying someone else's mortgage off as soon as possible and spend that money paying off your own mortgage. Also your personal residence has the most tax advantages of any you will purchase. Equity can be withdrawn and interest will be deductible on that equity even when you invest it into an investment property.

Jay Hinrichs · Answer

@Steven Lacy

my reply to your post got 2 votes from two of the more astute investors in the Bay area.. so keep that in mind.  :)

Account Closed · Answer

Aloha. Unless you have accommodations in Mom's basement you should probably take advantage of making your home your first investment.  Multifamily  may be more affordable in Phoenix but more profitable in the Bay Area.  It would be a shame to squander your proximity to this to add the disadvantage of distance in REI.

Jay Hinrichs · Answer

@Steven Lacy

some nice deals on 4 plexs in phx... they peaked at 350k then fell to under 100 k not sure were they are at today.. If I was guessing I would say 150 to 200k

Amy Van Ollefen · Answer

This is a good question. I've really liked the idea of buying a multi-family and living in one of the units, but preliminary searches seems like multi-family are pretty rare in my area.

Tamela Shannon · Answer

I am having this issue with myself, I like the apt I live in and I'm comfortable here. But, I would like to begin investing once I get a better knowledge of real estate. From everything I have read so far, it does seem like a lot of people buy multi family homes and live in one unit and rent the rest out. Seems to be a great investment, when you move out you can just rent the unit you stayed in and continue to cash flow.