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Updated over 8 years ago, 08/31/2016
Primary residence or rental property
I once heard something that will always stick with me. Smart people rent. If something breaks, you'r not responsible. You may save 100-200 a month by living in your own property as apposed to renting but is it worth it. You have to consider your own wear and tear on the property. Any accidents can't be taken out of the renters deposit. Also it helps your DTI to rent instead of live in your own home. My plan for the next 20 ish years of my life is to house hack each year though. There's ups and downs for each side of the argument.
@Clementene Taylor Hi Clementene, if you are willing to do so, buying a duplex or even a 3 or 4 flat if you have them in your area would be an incredibly smart thing to do. My wife and I are currently house hacking our 2nd property and we've enjoyed it so far. The biggest drawback that I can think of is obviously you are living right next to your tenants. We are fortunate enough that we live in an area where quality applicants want to live and we do not have to live next to sketchy people. The biggest advantages that immediately jump out to me are you are getting experience firsthand at being a landlord and will find out right away if you have what it takes to be a buy and hold investor. You are also substantially reducing your monthly living expenses by having your tenant pay a portion of your mortgage in the property you live in. You are also able to buy the property with a smaller down-payment as an owner occupant. More than likely you could probably qualify to use a conventional mortgage with 5% down to get into a duplex. If not, there is generally the option to use an FHA loan with 3.5% down to buy the property. The FHA option has a few fees associated with it and you have to refinance to eliminate the monthly PMI as with the conventional loan the PMI automatically drops off once you get to roughly 78% equity.
@Clementene Taylor, I would pursue the duplex idea: Purchase one in a decent area, live in one side and rent out the other. Doing so will give you the best financing terms and it will provide good experience and an education in learning how to be a landlord.
Good luck!
Start with your personal residence. Way too many people loose money in real estate investing... especially on their first property.
Build your base.
Sorry... many here will not like my conservative approach. Safety first!
@Clementene Taylor $70k will get you 2-5 rentals. If each nets you $400 per month that is $9600-2400 per year cash flow.
A personal residence will give you zero cash flow and might save you a few hundred a month.
I say rent until you can buy the house you want.
What I have read and learned from speaking with others, it ultimately comes down to your goals, family life-style and expectations.
70k you could get a 10% down conventional loan through certain banks in your area. Meaning, some banks will let you put 10% down rather the usual 20-25%. I know that in my area I can do this but it is not as cut and dry. I can do 10% down, but need to have six months mortgage payments in reserves, and have enough income/credit to fit the bill.
Sooo... You could buy a 200,000 residence of your own with FHA 3.5% down (7,000) + fees. So round to 12,000 to be safe for closing. That leaves you 58,000 cash! You could now buy that duplex you want for 10% down as you also will have the six months in mortgage payments saved. $240,000 for duplex = 24,000 down + closing costs = est. 30,000. Then you subtract your say 10,000 for your six months. That still leaves you 18,000 in cash on hand. You could use this for renovations or add it up more cash with your cash flow if needed and buy a single family property with 20% down.
The prices could be way cheaper or higher depending on your area. I used these numbers as a good solid example.
I like this way as I just feel good about having my own house where I can relax and not be around renters. My family would appreciate this as well.
I hope that if I am mistaken, I am sure other members will correct me.
Thanks for the input everyone this really helps. I really don't want to rent for much longer and didn't want to sit on the fence when it came to investing and I wasn't sure which should come first, primary residence or rental property. My current lease expires in June of next year and I want to make a sound decision. Thanks again for all of your advise.
Hi Clementine-you can have the best of all investor situations with best loan terms, owner occupied PRIORITY TO WIN HUD BIDS and get bank foreclosures, all while maintaining complete control over timing, tenant selection and growing your appreciating income producing portfolio at your own pace. (Investors usually buy duplexes for monthly cash flow which is small. It's hard to find an affordable duplex, townhome or condo that appreciates and someday you WILL want to sell.)
In my experience it's best to buy your own home first, live in it awhile as short as 6 months, ( buying it owner occupied for the lowest down payment and best 30 year interest rate: do an adjustable ARM, 5 year if you can get it.) When you decide to turn it into a rental, you go rent for 3 to 6 mos until you can find another perfect house to buy owner occupied. LENDERS won't count your 1st property's mortgage against your income if you have a signed written lease and 6 months verified tenant paid rents.
DON'T BUY YOUR dream home now, buy the most rent-able property: a minimum. 3 BR 2 BA SINGLE FAMILY HOME , bigger if you can afford and a garage is a huge plus. AREA to buy in? ONLY look where the best schools are, in the best neighborhoods you can afford.
The neighborhood and house should have instant curb appeal, sit 'at or above' street level, yard for the kids to play in. Families are the best tenants in your area-- most stable, mature, settled and usually 2 or 3 working adults with income.
KEY: Make money the day you buy.
Use an investor savvy realtor that you personally like and can build a relationship with. Of course buying HUDs is an option but be choosy because you may find a GREAT house in a not so great area.
BANK and ESPECIALLY local Credit Union foreclosures are a dream, as owner occupied you can negotiate repairs, new wood flooring, HVAC units can be installed and cost added to the purchase price banks will add New Appliance packages and even BLINDS for all the windows. KEEP YOUR CASH IN YOUR . POCKET. ALWAYS!! ..once you are negotiating with the bank and agree on a NET PRICE to them, you can boost the purchase price adding in all rehab costs as part of the deal..you can even have the bank give your Buyers Agent Realtor a $2000 bonus which in most states your realtor can REBATE to you on the closing statement (limited to a max of up to 1% of the agents usual 3% commission..so there's probably a few extra bucks going to your realtor in the end and she will love you for that.
At our NCSECU cr unions in Charlotte they offer their fixed up foreclosures FOR RENT and HELP the owner occupant buy it, even if you are not a member! SWEET.
ANYWAY, when buying especially your first property buy something of quality that you 'would' choose to live in and rent to tenants you thoroughly check out: verify income, pay stubs and 3 mos of bank checking account statements!! and job stability and former verified LANDLORD REFERENCES ( check tax records to make sure you are talking to the property owner NOT a tenant prospects cousin.
Ok, THE SUMMARY : LOW RISK & COMMON SENSE
1. MAKE MONEY THE DAY YOU BUY. Buy at a discount aka below market and tax value. Proactively structure the deal with no cash out of your pocket for rehab, closing costs.
2. NEVER owe more on a property than its market value.
3. BUY quality SINGLE FAMILY homes SFH.that appreciate.
4.Always do a home inspection using a certified home inspector ( with utilities turned on) and separately hire an A.C. company to thoroughly inspect the state of the HVAC ( it might be blowing cold air today , which passes a home inspectors test) but the coils might be shot and the system riddled with leaks and crushed air handling tubes. Do the land survey at purchase for your protection and because it can be financed into the loan closing costs.
5. ALWAYS make clear title a condition of closing.
6. YOU CANNOT BUILD WEALTH IF YOU SELL OFF YOUR APPRECIATING ASSETS .
Buy Smart. Structure the deal.
HOLD the property, refi and take out cash repeatedly if you need it and current lending rules allow ( that option cycles about every 5 years!)
7. Use a CPA! for your taxes at least the first year!!! To take every possible tax deduction...put notes and receipts in a shoebox ( worst case) save EVERYTHING!
8. Check out your Renters income and bank statements.
And join the local APARTMENT ASSOCIATION and use their tenant lease!!! Never use the Realtor Association lease which is not LANDLORD friendly!
9. HOLD YOUR PROPERTIES at least 10 years and 15 if you can...they should at least DOUBLE in price by then. And the tax write-offs make your W2 Earnings a lot higher in take home pay.
10. Fasten your seatbelt ... 10 years will fly by and only having 3 good solid properties will provide you with excellent retirement funds.
Hi Clementine-you can have the best of all investor situations with best loan terms, owner occupied PRIORITY TO WIN HUD BIDS and get bank foreclosures, all while maintaining complete control over timing, tenant selection and growing your appreciating income producing portfolio at your own pace. (Investors usually buy duplexes for monthly cash flow which is small. It's hard to find an affordable duplex, townhome or condo that appreciates and someday you WILL want to sell.)
In my experience it's best to buy your own home first, live in it awhile as short as 6 months, ( buying it owner occupied for the lowest down payment and best 30 year interest rate: do an adjustable ARM, 5 year if you can get it.) When you decide to turn it into a rental, you go rent for 3 to 6 mos until you can find another perfect house to buy owner occupied. LENDERS won't count your 1st property's mortgage against your income if you have a signed written lease and 6 months verified tenant paid rents.
DON'T BUY YOUR dream home now, buy the most rent-able property: a minimum. 3 BR 2 BA SINGLE FAMILY HOME , bigger if you can afford and a garage is a huge plus. AREA to buy in? ONLY look where the best schools are, in the best neighborhoods you can afford.
The neighborhood and house should have instant curb appeal, sit 'at or above' street level, yard for the kids to play in. Families are the best tenants in your area-- most stable, mature, settled and usually 2 or 3 working adults with income.
KEY: Make money the day you buy.
Use an investor savvy realtor that you personally like and can build a relationship with. Of course buying HUDs is an option but be choosy because you may find a GREAT house in a not so great area.
BANK and ESPECIALLY local Credit Union foreclosures are a dream, as owner occupied you can negotiate repairs, new wood flooring, HVAC units can be installed and cost added to the purchase price banks will add New Appliance packages and even BLINDS for all the windows. KEEP YOUR CASH IN YOUR . POCKET. ALWAYS!! ..once you are negotiating with the bank and agree on a NET PRICE to them, you can boost the purchase price adding in all rehab costs as part of the deal..you can even have the bank give your Buyers Agent Realtor a $2000 bonus which in most states your realtor can REBATE to you on the closing statement (limited to a max of up to 1% of the agents usual 3% commission..so there's probably a few extra bucks going to your realtor in the end and she will love you for that.
At our NCSECU cr unions in Charlotte they offer their fixed up foreclosures FOR RENT and HELP the owner occupant buy it, even if you are not a member! SWEET.
ANYWAY, when buying especially your first property buy something of quality that you 'would' choose to live in and rent to tenants you thoroughly check out: verify income, pay stubs and 3 mos of bank checking account statements!! and job stability and former verified LANDLORD REFERENCES ( check tax records to make sure you are talking to the property owner NOT a tenant prospects cousin.
Ok, THE SUMMARY : LOW RISK & COMMON SENSE
1. MAKE MONEY THE DAY YOU BUY. Buy at a discount aka below market and tax value. Proactively structure the deal with no cash out of your pocket for rehab, closing costs.
2. NEVER owe more on a property than its market value.
3. BUY quality SINGLE FAMILY homes SFH.that appreciate.
4.Always do a home inspection using a certified home inspector ( with utilities turned on) and separately hire an A.C. company to thoroughly inspect the state of the HVAC ( it might be blowing cold air today , which passes a home inspectors test) but the coils might be shot and the system riddled with leaks and crushed air handling tubes. Do the land survey at purchase for your protection and because it can be financed into the loan closing costs.
5. ALWAYS make clear title a condition of closing.
6. YOU CANNOT BUILD WEALTH IF YOU SELL OFF YOUR APPRECIATING ASSETS .
Buy Smart. Structure the deal.
HOLD the property, refi and take out cash repeatedly if you need it and current lending rules allow ( that option cycles about every 5 years!)
7. Use a CPA! for your taxes at least the first year!!! To take every possible tax deduction...put notes and receipts in a shoebox ( worst case) save EVERYTHING!
8. Check out your Renters income and bank statements.
And join the local APARTMENT ASSOCIATION and use their tenant lease!!! Never use the Realtor Association lease which is not LANDLORD friendly!
9. HOLD YOUR PROPERTIES at least 10 years and 15 if you can...they should at least DOUBLE in price by then. And the tax write-offs make your W2 Earnings a lot higher in take home pay.
10. Fasten your seatbelt ... 10 years will fly by and only having 3 good solid properties will provide you with excellent retirement funds.
@Lisa Hoover WOW! Good stuff. Thanks for sharing
I'm always in favor of buying investment properties over a primary residence. Here's why-
https://www.biggerpockets.com/renewsblog/2014/01/1...
Hope that helps!
- Rock Star Extraordinaire
- Northeast, TN
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I have said this before on here, but if I were doing it all over from scratch I would have:
1. Worked like hell to gather some capital and lived in my van while I did it;
2. Bought a small, cheap fixer-upper. Lived in the fixer-upper while I rehabbed it;
3. Moved back into the van, sold the fixer-upper. Repeat until I have one cheap place that I own outright, and a portfolio of held properties that I rent out every month.
One should always remember that your primary residence is a residence first and an investment second. If your primary goal is wealth-building, you need to keep your existence costs as low as possible so that excess capital can be multiplied into more capital. For a lot of people, that would mean renting your primary residence while you shovel all your extra money into investments. In some areas, it might be better to buy, if your costs of ownership result in freeing up far more capital for investment purposes.
- JD Martin
- Podcast Guest on Show #243
