Primary residence or rental property?

Question

Hello BP community,

I am 30 y/o and live in Orange County, CA. I have been interested in real estate since a young age, and now that I am able to get started I'm stuck between two options. 1) I have been considering buying an out of state rental property. No particular market in mind. 2) I am also considering purchasing a primary home in Santa Ana because I currently qualify for a city incentive. The incentive is a $80,000 loan at 0% for 45 years, and could potentially get up to $40,000 forgiven over the course of the loan.

I will only qualify for this program until August 2023 because my income will be above the threshold. A few things to note is that if it wasn't for the incentive I would not be very interested in purchasing in Santa Ana.

Also, I have always wanted to buy rental(s) before purchasing a primary residence because I can take on more risk without a mortgage.

Since I lack the real estate knowledge I would appreciate your input. Is the incentive to good to pass on?

Thank you,

Ryan Thomson · Answer

@Daniel Gonzalez If your alternative is renting then buying a house hack usually makes sense.

Here are some resources I found really helpful on my House Hacking journey:
1. For podcasts I really like the House Hacking episodes on Bigger Pockets Podcast and other channels.
2. Great beginners guide: https://www.biggerpockets.com/...
3. The Book on House Hacking Strategies by Bigger Pockets is also a fantastic book
4. Happy to talk if you want more advice
5. Connect with a realtor who understands house hacking and has invested themselves
6. Connect with a lender to see what you qualify for and how you can improve that situation
7. Go to local Real Estate meetups and learn from people there

Account Closed · Answer

On one hand, if you're really not interested in Santa Ana you may want to avoid it. However, if you can secure that incentive and crunch the numbers and it makes sense go for it. Do thorough underwriting and trust your numbers. For your first investment, it is probably better to stay local. Should you be interested in OOS, Columbus, OH has a lot of great options at lower entry points. We see tons of Californian investors bringing their money here, particularly in Cleveland and Columbus.

Simon Ashbaugh · Answer

Find out if the city incentive applies for multifamily, if you could find a 2-4 unit to house hack that would set you up nicely!

Peter Mckernan · Answer

Sometimes this program is property dependent as I have seen properties with this program applied to the listing, which was one of the busiest open houses in the past year due to the incentive to purchase that property with this program. The one thing is that Santa Ana has some particular laws on landlord/tenant requirements, which are unlike all the rest of OC. That is something I would keep in mind if you are looking to keep that property.

I bought a rental before my primary, it was one of the better investments I did at the time, and this could be your course, the only thing is what is the fastest way to recoup that money to buy your primary or another rental. That could be BRRRR possibly, the drawback with that is you only have the option to cash out every 12 months instead of every 6 months right now per fannie and freddie guidelines. That will delay the next purchase and something to think about on what you will be buying for your first rental, and if you are going to buy your primary within that time, and also how much cash you will commit to that property.

Your cashflow will be negative on a house hack in SoCal (you'll be paying a portion of the mortgage), but you get the incentive of owning (taxes/equity build up), you have ability to reduce your monthly spend on a house hack, and that negative cashflow eventually turns to positive due to the hold time and higher than national average rent increases on rentals in SoCal.

Dave Rodwell · Answer

Hey Daniel,

As suggested above, would need to confirm program eligibility and terms but have you considered a 2-4 unit in Santa Ana? Or potentially a SFR with an ADU. I'm assuming you're planning on residing in Santa Ana long term if you're considering this program?

A 2-4 unit may provide you with the best of both worlds. It would allow you to take advantage of the program, wet your feet investing with a tangible investment and cut out whatever rental payments you currently have and build up equity.

It really depends on what your long term plans and goals are.

Local Los Angeles based Realtor here with investments in SoCal and out of state. Big fan of the South and Midwest for out of state! Feel free to message

Alfath Ahmed · Answer

I would weight out your options and follow your gut feeling. Is the $80k incentive really worth it to you from an investment perspective? Do you want really want to buy a home Santa Ana or would you rather invest it where you can achieve a higher cash-on-cash return?

I recommend looking into the Midwest, tons of opportunities to buy cash-flowing properties with strong appreciation.

Theresa Harris · Answer

What about buying a property with a suite where you can live in one part and rent the other?

How long do you plan on living in the area and what would the mortgage payments look like compared to what you are now paying for rent?

Chris Seveney · Answer

@Daniel Gonzalez

When you say you can take on more risk without a mortgage - so if you buy rentals you will buy them 100% cash?

Primary residence or rental property?

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