Rent or buy

[David Y.]

So I wondering if any other experienced investors out there could share your insights on Rent or buy the primary residence property?  I have $250k equity in my primary residence property currently. Should I sell it and use the $250k to buy 5 houses and get positive cash flow for $2000 and rent a comparable house in my area for $3000? I heard that buying the primary residence to live in is the worse form of REI investment, what do you think? Thank you for your insights.

David

[Rob B.]

I disagree that buying your primary residence is a bad investment. Especially if you are willing to buy a 4-plex and rent out the other units. The rate and down payment requirements are incredible, plus you will have an easier time qualifying. My wife and I move every year or so and keep picking up new rentals that way. I won't lie and say it's not a pain in the butt; but it's our retirement plan in action. 

Leverage is really key. Why not buy a 4-plex with an FHA loan at 3.5% down and then invest the remaining money into investment properties. Just remember your DTI, we had a ton of cash but we still couldn't purchase any more residential properties because of the number of mortgages we have (all cash positive), so we started into commercial as well. Now I'm getting ready to sell two investment properties so our DTI will be low enough to purchase another 4-plex here in the Bay Area.

Don't forget about the capital gains write off for an owner occupied property. If you live in it for 24 of the 60 months before you sold it, you can write off up to $250,000 in capital gains; $500,000 if you're married. 

[David Y.]

Thank you @Rob B.!  Right on!  I totally agree with you.  What I was referring was a single family home tho.  So do you think I should see my sfh and take $250k to buy 5 sfh and cash flow them, and in the meantime rent a nice house for my family?  Is this a better option than sitting on my current sfh and see those equity doing nothing for me?  Appreciate your insight!  :-)

[Rob B.]

I would consider refinancing or selling it, depending on circumstances. But leverage is key in investing. I actually had the same circumstances 18 months ago. I could either have bought a primary residence all cash or bough 4 investment properties. I chose to buy the investment properties, but in hindsight, I would have done it a little differently. I would have bought my primary residence and used whatever was left for investment properties. 

The interest rates and down payment requirements are a lot less on a primary residence. Also, if you live in it for two of the last five years before sale, you can write off $250,000 in capital gains, $500,000 if you're married. So you can buy a house, live in it for two years, rent it for 2 1/2 years and then sell it. So you can have a rotation of three primary residences in addition to your investment portfolio. 

The more that you leverage, the more appreciation that you will see. I have a strong investment portfolio, but we're still buying more primary residences to take advantage of it. 

[Jack Butala]

Is it better to Rent or Buy (Primary Residence)?

How many times have you heard somebody say some version of this statement: “We made 100,000 on the sale of our house and we only lived there for five years. Can you imagine if we continued to rent the apartment we used to live in all that time? We would have lost all that money…

What they really mean is that they sold the house for $100k more than they paid for it.

Most of us here on BiggerPockets chime in to help new investors, so I put this post together hoping to help them on this topic.

I have long been an advocate of renting your primary residence vs. owning it. A lot of years ago, I wrote a technical paper on this topic (long before there were blogs or MicroSoft Word). It turns out I was right. Well in most circumstances, anyway.

For the record, I own two homes (I paid cash for the both).

Of course there are several financial factors that are involved when making a decision like this.

Home price

How long will we live there?

Down payment amount

Future economic factors

Maintenance costs

And that concept call Opportunity Cost

I ran across this Post in the New York Times today and I’ve spent two hours analyzing it.

NEVER HAVE I SEEN SUCH A CONCISE WAY TO REVIEW THIS TOPIC.

It confirms what I have what I have been saying for many years.

Please take a look:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=1

Here’s my synopsis: We are all involved in real estate because we know how to, or we are trying to learn how to, generate a secure and attractive rate of return on our money.

I regularly double or triple my money or more buying and selling vacant land. Usually in less than 30 days (or I don’t do buy in the first place).

The input in the post only allows for a 20% annual return. If it went any higher the argument for renting would become even stronger.

The opportunity cost of tying up all that cash, time & energy is almost never worth it.

One of the only times it makes since to finance your primary residence is when you know you are buying a property substantially under market, and reselling it. Some folks call that flipping. Or if you buy a duplex, live in one side, and work the deal so the tenant is paying all or most of the mortgage (some circumstance like that).

Buying a rental house (or 20) the right way, and renting them out forever is one of the best passive business models I’ve ever experienced. This discussion is only about your primary residence.

And that’s just half of the decision. The other half is location. Every apartment or townhouse I’ve ever lived in centered around a ton of fun. Every house I’ve lived in was in the quiet suburbs where we did chores on Sunday.

A few years ago, I sold my primary residence and paid cash for a townhouse in Old Town Scottsdale, Arizona smack in the middle of all the fun. We completely renovated it and I can’t imagine living anywhere else.

It was one of the best financial and lifestyle decisions I’ve ever made.

Renting is almost always better, when you consider every aspect.

@David Y.

[James Wise]

Primary residence = buy