Home or rental property?

[Jimmy Chao]

I live in California and currently rent. I am considering whether to buy my first home or continue buying properties. Rent has been increasing as such a fast rate that i'd rather be spending on a mortgage than this. For those that dealt with this dilemma, what was your decision and reasoning?

[Jon Schwartz]

Originally posted by @Jimmy Chao:

I live in California and currently rent. I am considering whether to buy my first home or continue buying properties. Rent has been increasing as such a fast rate that i'd rather be spending on a mortgage than this. For those that dealt with this dilemma, what was your decision and reasoning?

Jimmy, welcome to the party!

This advice is for you and @Rudy Aliva, too!

I think you should do both: buy and move into a duplex, triplex, or fourplex.

As an owner-occupant, you can put very little down with an FHA loan. You'll also get the best rate available.

More importantly, though, it's difficult to wrap one's head around how powerful the equity build is thanks to principal paydown and appreciation. It's like utilizing two kinds of leverage: you have leverage in the financing, and then you have further leverage in the rental income you collect.

I'm househacking a duplex in Hancock Park right now. Now, my numbers are kinda big, but the same principles apply at any price point: I paid $1.85M, did some renovation, and appraised at $2M during a recent refi. However, because of the rent I collect, my PITI payment is the equivalent of living in a $1.2M home. LA's longterm property appreciation rate is a little north of 6.5%, but let's use 4% for this example. A $1.2M home should appreciate about $48K in that first year of ownership, whereas a $2M duplex should appreciate about $80K. And because appreciation compounds, the gap grows even more over time.

PLUS, the principal paydown every month is huge. I just started year two of ownership, and the principal paydown accounts for almost half of my monthly out-of-pocket. It's crazy.

So I say buy and move into a multifamily! Cashflow is fantastic in general, but if you don't need it right now (ie, you have income from a job or career), you'll do much better in the long run with sweet, sweet LA appreciation.

And Rudy -- I got my eye on El Monte! I think there's opportunity there.