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?

[Rudy Avila]

Sup.. im in the same boat. I rent where i live at because its too expensive to buy in El Monte, but i have properties and will continue to buy rentals. I can make them cashflow far more than if i would to buy and "save". If i want i can have some cashflow pay my rent, what i pay for rent my share is only $800. Now if i was in an area that properties where alot cheaper then it might be a different story. 

[Dylan Vargas]

@Jimmy Chao Welcome! Here are a few thoughts. If rent is the same or less than buying typically people choose to buy and your payment never goes up like rent does plus you build equity and principal pay down. If you can handle roommates or a duplex/triplex or whatnot you can have a real cheap mortgage while payment never going up, building equity and principal pay down. I would not for example pay $2000 rent and to buy is $2700 but thats just me and you would still need to run tax numbers to see what the final return would be. I will tell you this. I rented for years in Los Angeles when I was younger in the 90s. Man I wish I would have bought something, anything!!!!! Good luck and keep us posted.

[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.

[Rudy Avila]

@Jon Schwartz I love El Monte man born and raised here they say, I feel i never want to move out of this city. But ill move around within the city to change the location.. If you ever want a tour hit me up. Now I love it here but I dont know if ill always want to stay here. I also love some of the surrounding citys that i would love to live in too. Arcadia, Bradbury, Monrovia, Duarte, Covina, Glendora, San Gabriel, Temple City, I would love to live there too one day maybe. I own a Tire shop in Baldwin Park, so I got live live close by say 20 min drive or less. Or maybe one day ill be like screw it, I already making over 100k in passive income, I dont got to live close by cause I can have someone run the shop because i dont need that income no more ill move to Riverside county! Cheaper rent out there, I like it out there more land so i can work on some kind of auto biz because I want to not because I have to... Renting give me that flexibility. 

They way i look at appreciation is i look at it as a Bonus, not as my my squeeze they say. So If buy your average house now at 550k in El Monte, or Duplex even more, in 2020 when properties are at low supply high demand, and theres buyer bids on every house pretty much, Im going to get a high price on whatever property it is, most likely over the asking price. Next year property prices will begin to come down in this area. By 8/20/2021, Do you think this property will be worth more or less? what about 2022? 2023? The property will be worth less by then. Now I agree since your holding long term it will bounce back in value but say in 7 years do you think the value will be back what I would pay for it? Maybe. Right now all we have seen is increase in value every year for 10 years, thats not the case today moving foward. So the way I see Appreciation is if I get it Great, If I dont it dont matter because im going to make Cashflow from it every month. By the way Riverside county where my propertys are at, it Appreciates and will continue to Out Appreciate over El Montes Appreciation % per year if we compare apples to apples. It was the number 1 county in appreciation in the state.  

Cashflow. Robert Kiyosaki says you should pay your small Debt and your big Debt someone else should pay for it. If i buy a home here im going to pay for it. If I were to buy a property here in El Monte do you think I would have positive cashflow or negative cashflow every month? with me in it or not. For every rental property I buy out there I am getting very high cashflow, so much that with just one stream out from out there can pay for my rent out here, not one property, im talking about one unit! Not to mention the other units in the same property. 

In this very expensive market where im at, running the numbers which is the most important, it is far better for me to rent and continue to raise my passive cashflow. I only give a $800 deposit and $800 per month and thats it (for my end). 2 bed 2 bath here in the city average in my area is $1600 a month. When things break here I dont got to fix it, landlord does, about a year ago there was a main drain issue of the property over 3k in repairs. I paid zero. It was a very old system from the 50s that finally gave out. My money goes to savings and investing.

[Jon Schwartz]

Originally posted by @Rudy Avila:

@Jon Schwartz I love El Monte man born and raised here they say, I feel i never want to move out of this city. But ill move around within the city to change the location.. If you ever want a tour hit me up. Now I love it here but I dont know if ill always want to stay here. I also love some of the surrounding citys that i would love to live in too. Arcadia, Bradbury, Monrovia, Duarte, Covina, Glendora, San Gabriel, Temple City, I would love to live there too one day maybe. I own a Tire shop in Baldwin Park, so I got live live close by say 20 min drive or less. Or maybe one day ill be like screw it, I already making over 100k in passive income, I dont got to live close by cause I can have someone run the shop because i dont need that income no more ill move to Riverside county! Cheaper rent out there, I like it out there more land so i can work on some kind of auto biz because I want to not because I have to... Renting give me that flexibility. 

They way i look at appreciation is i look at it as a Bonus, not as my my squeeze they say. So If buy your average house now at 550k in El Monte, or Duplex even more, in 2020 when properties are at low supply high demand, and theres buyer bids on every house pretty much, Im going to get a high price on whatever property it is, most likely over the asking price. Next year property prices will begin to come down in this area. By 8/20/2021, Do you think this property will be worth more or less? what about 2022? 2023? The property will be worth less by then. Now I agree since your holding long term it will bounce back in value but say in 7 years do you think the value will be back what I would pay for it? Maybe. Right now all we have seen is increase in value every year for 10 years, thats not the case today moving foward. So the way I see Appreciation is if I get it Great, If I dont it dont matter because im going to make Cashflow from it every month. By the way Riverside county where my propertys are at, it Appreciates and will continue to Out Appreciate over El Montes Appreciation % per year if we compare apples to apples. It was the number 1 county in appreciation in the state.  

Cashflow. Robert Kiyosaki says you should pay your small Debt and your big Debt someone else should pay for it. If i buy a home here im going to pay for it. If I were to buy a property here in El Monte do you think I would have positive cashflow or negative cashflow every month? with me in it or not. For every rental property I buy out there I am getting very high cashflow, so much that with just one stream out from out there can pay for my rent out here, not one property, im talking about one unit! Not to mention the other units in the same property. 

In this very expensive market where im at, running the numbers which is the most important, it is far better for me to rent and continue to raise my passive cashflow. I only give a $800 deposit and $800 per month and thats it (for my end). 2 bed 2 bath here in the city average in my area is $1600 a month. When things break here I dont got to fix it, landlord does, about a year ago there was a main drain issue of the property over 3k in repairs. I paid zero. It was a very old system from the 50s that finally gave out. My money goes to savings and investing.

 Rudy, renting offers the huge advantage of convenience, no question!

Renting and owning cashflowing properties is a great way to keep the month-to-month even. But where are you building equity? How significantly has your net worth grown over the last couple of years?

To answer a specific question: I think properties will be worth less in one year than they are today. But as you pointed out, I'm looking at a longer investment horizon, so I'm okay with that.

My main argument is that it's flatly wrong to look at appreciation as a bonus. Robert Kiyosaki made some excellent points in his book, but his book is far from gospel. We live in a high-rent, high-appreciation market. Most people on Bigger Pockets don't. We shouldn't take the general wisdom of BP and follow it blindly given our unique circumstances.

[Michael A DeAngelo]

i would consider trying to "house hack" or maybe even a live in flip. both of these options allow you to get in a home with low money down and help build equity quickly or live for free while a tenet pays your mortgage. look for a duplex triplex or 4plex live in one and rent the others. youll be able to live for very cheap or maybe even free if you get a great deal. if you dont like the idea of living next to tenets find a property that just needs some work fix it up while living in it and reap the reward of sweat equity when you go to sell or refinance 

[Caleb Brown]

House hack either a MFH or do room by room on a SFH. Best to start early!

[Rudy Avila]

@Jon Schwartz I am not building equity where i am renting in this one property but I am building equity over several rental properties. My networth has grown even more over the last several of years. But to me the most important thing is to keep increasing my monthly cashflow, thru tenants and business. And buying a primary residence will slow my progress not accelerate it. 

[Michael A DeAngelo]

Originally posted by @Rudy Avila:

@Jon Schwartz I am not building equity where i am renting in this one property but I am building equity over several rental properties. My networth has grown even more over the last several of years. But to me the most important thing is to keep increasing my monthly cashflow, thru tenants and business. And buying a primary residence will slow my progress not accelerate it. 

  Not if you utilize a house hack or live in flip for your primary residence. live cheaply or free and build equity either from your own sweat e

[Rudy Avila]

@Michael A DeAngelo Sup I have a family so If I house hack it would have to be a duplex minimum. Ask Jon if hes living at his duplex cheaply or free lol

[Jon Schwartz]

Originally posted by @Rudy Avila:

@Michael A DeAngelo Sup I have a family so If I house hack it would have to be a duplex minimum. Ask Jon if hes living at his duplex cheaply or free lol

LOL?

Here are my actual numbers from last month for my duplex:

• PITI: $9000 (and that includes earthquake insurance)
• Renter's Utilities: $87
• Rental Income: $4975
• Principal Paydown: $2160

So I'm living in a 1600 square-foot 3/3 in Hancock Park, one of LA's most expensive neighborhoods, for net $1952/month.

And that's not including appreciation. If we assume something really small, like 3% longterm appreciation, that adds $5000 to my net worth last month.

But enjoy your cashflow, my friend!

[Rudy Avila]

@Jon Schwartz I didnt mean it in a bad way ma boi lol its expensive out here in LA. Im in the same boat. But I dont count your principal paydown out of your monthly expenditure. To me your paying $4,112 a month to live in that property. To me your last month using your numbers your increase networth is $2,840. Hey its still good not saying its not, im not calculating my principal paydown in my cashflow. 

[Rachel S.]

Originally posted by @Rudy Avila:

@Jon Schwartz I didnt mean it in a bad way ma boi lol its expensive out here in LA. Im in the same boat. But I dont count your principal paydown out of your monthly expenditure. To me your paying $4,112 a month to live in that property. To me your last month using your numbers your increase networth is $2,840. Hey its still good not saying its not, im not calculating my principal paydown in my cashflow. 

I bet you could still house hack a duplex in El Monte and come out ahead though. It's not one of LA's most swanky areas and the price will reflect that. I feel ok saying that, because I also live in a neighborhood that is somewhat lacking in swank. :-D

[Rudy Avila]

@Rachel S. All I know is El Monte ive never lived anywhere else. Believe me ive ran the numbers over and over thru the years for myself and my family. I understand what you and the others are saying clearly. I understand your point of view and ill like show you my point of view of what I see. I dont do things the conventional way.... Buy, rent, pay down mortgage in 30 years your debt free with the property... all you got in it is your down payment... that takes too long. Ive been level 1 financial freedom for awhile now will probably never stop working or investing in RE I love it. Moving foward for the next property im going to buy.

If I buy in the city of El Monte, NOT the city of South El Monte, these are 2 different cities, a SFR is 550k. Average. Or a Duplex 700k. Choose what ever you want. If you House hack or even rent out both, you have Negative Cashflow. Me and my wife and 15 year old daughter cant live in one bedroom lol we need a 2 bed 1-2 bath to live in. Here are small lots Maybe if your lucky 2 cars will fit inside and one or 2 cars fit inside for tenants. How much down would i need to buy this? say i put down 20%, $110k down. Doing my math of what im currently paying now for rent i will save $400 a month. So instead of me paying $800 a month (negative cashflow) ill be paying $400 a month (still negative cashflow)

If i buy in Riverside County... Hemet to be exact. I can buy a property for 170k that needs a little work. That property will have some land something el monte property dont have. In that land what i do is add some things i can rent out to my parientes out there. So rent out the main house with utilities, rent out a trailer, add some storage containers and rent them out at $200 a pop. Say the property all in cost 220k. I put down $110k, seller finance 60k to be paid in 1 year. I throw in that 50k within 5 months for the upgrades in the and then get it all rented out when its all done. Gross Cashflow is $2500, mortgage at 1k a month. I fully cashflow in month 7 $1,500 a month, then after my year is up and loan is paid off my cashflow goes up. This is what I see and I do.

Now there is utilities cost say about -$400 a month water, electricity and trash. Tentants use propane of there that they payon there own. I also want to add I am focused one one property at a time for the whole year pretty much From starting to look at properties, close, upgrading all and finding the right tenants. Say it took 9 months then it starts cashflowing. Hemet is 1 hour 10 min away from me, If you know hemet, you see almost all properties have trailers, boats, big storages, in multiples. I work all year long in this putting my money into building the property just throwing that out. I wouldnt buy a SFR or Duplex in El Monte to cashflow negative still when this more than pays my rent every month plus cashflow to spare.

[Jon Schwartz]

Originally posted by @Rudy Avila:

@Jon Schwartz I didnt mean it in a bad way ma boi lol its expensive out here in LA. Im in the same boat. But I dont count your principal paydown out of your monthly expenditure. To me your paying $4,112 a month to live in that property. To me your last month using your numbers your increase networth is $2,840. Hey its still good not saying its not, im not calculating my principal paydown in my cashflow. 

Cool, man! I'm sorry I read your "LOL" in a mean way. That's on me -- I'm kinda a cynic. I'm from DC on the east coast; people aren't as nice there!

Seriously, good luck with your empire. It sounds like you have a number of plates spinning, which is impressive and admirable. We should get a beer when COVID ends and I'm visiting El Monte every weekend!

[Rudy Avila]

@Jon Schwartz Im down hit me up when your coming to the hood lol

[Rachel S.]

Understood. I bought a SFR in the inland empire in 2011. I got it for a rock bottom price and it cash flows nicely. For my next investment I would like a small multifamily in LA. I will be looking in more transitional areas though with a much smaller budget. I wouldn't be comfortable carrying an almost 2 million dollar mortgage on a single property. That's too much risk for me personally. Unless it were a commercial multi-family with 4-5 units, because then you would need to be pretty unlucky for all your tenants to stop paying all at once. Everyone has different comfort levels though.

[Dan Schwartz]

@Jimmy Chao unless you take the house hacking advice/route, do whichever is the lowest housing cost you can put on your first mortgage application.  We had this same question when we started and our mortgage broker pointed out that we could lower our housing cost by $300 a month by buying in our area.  Not only was that a wise financial decision, but it allowed us to get a primary house (which has since been Section 121'd) AND our first rental.  Lowering our monthly housing outlay was key to that step.  Good luck!

[John Felix Perez]

@Jimmy Chao that’s a good question. Why not house hack and buy a duplex for low to no money down live on one side rent out the other. 

[Joshuah Salkind]

@Jimmy Chao buy a multi to owner occupy

[Jimmy Chao]

@Rudy Avila My rentals have all increased my net worth significantly as well, but rent and home prices where we live rise faster. Like you, I intend on staying here in LA for the very long term. So eventually, I would like a house. I can't justify renting for the rest of my life.

@Caleb Brown Currently looking to house hack a duplex..