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Should You Buy a House for Yourself or Buy an Investment Property?

by Ali Boone on January 18, 2014 · 65 comments

  
ponder

I hear this question pop up quite a bit.

Someone has a nice little chunk of capital sitting around and they are trying to decide whether they should buy a house for themselves or buy an investment property (or 2, depending on where you are living and/or buying).

Well?

I am usually of the mindset that buying a house for yourself is absolutely not a good investment. If I buy a house for myself, I consider it a liability rather than an asset. However, I am willing to explore this a little more in case you are still undecided.

I’m not going to say that buying a house for yourself will never be a good investment. If you buy at exactly the right time, in the right market, and the right property, you might be able to make a profit off of it. I will say, however, that this does not end up being the case for most people buying. Why not?

Why Buying a House isn’t as Profitable as You Think

Most people see that they buy a house in year 1 and it appreciates x amount by year y, and boom they’ve made a profit. Well let’s really look at this:

  • Expenses. Have you ever really tallied up how much you spend on your home while you own it and live in it? Expenses include: mortgage interest, closing costs, repairs, improvements, property taxes, and insurance. According to the Office of Federal Housing Enterprise Oversight, the total expenses over 30 years, on a $290,000 house purchased in 2007, totals $783,000. I admit that some of the numbers they used to calculate that seemed quite high to me, specifically their improvements and repairs costs, plus interest rates were a little higher back then too, so to feel better about the expenses on this property, I’m going to knock it down to $600,000 in expenses just to be nice. Regardless, the expenses on this property are more than double the original purchase price, just in expenses! So in theory to profit on a sale from this house, you would have to sell it for more than $600,000. Well, maybe appreciation jumped it up that high. Or maybe it didn’t…
  • Appreciation. It doesn’t happen quite as nicely as you think. Don’t get me wrong, it does happen for sure thanks to inflation (which I’ll touch on in a minute), but the reality of appreciation isn’t always what it seems. Appreciation oftentimes only keeps up with inflation, so really that doesn’t help you out much. And too, despite what people think, this most recent real estate crash we experienced is far from the only crash we’ve seen. Not only have there been industry-wide crashes (maybe not as devastating as this most recent one, but crashes nonetheless), there have been several market-specific crashes as well. Remember when the oil boom went bust in Dallas in 1986? We don’t even need to talk about Detroit. What about other industry crashes you remember that sent the associated markets into the toilet? Now, with that said, I fully believe if you ride anything out (real estate, stocks, whatever) that you will see an upside and you can do something then. But what if the timing is off? What if your elderly parents get sick and you have to move closer to them but you own your house so will now need to sell, but it happens to be a horrible time for the market? You can’t tell your parents to hang on. You might be able to rent the house out, but if you’re like me and paid too much for your first house only to then take move unexpectedly, you will rent the house out but lose money on it every month while you wait for the market to come back. You can’t time everything to work in your favor. Timing aside though, what about appreciation versus the expenses? The Office of Federal Housing Enterprise Oversight continued their studies of the numbers associated with owning a house and decided to look at the total cost of owning a house versus appreciation. They give an example of a house purchased in 1977 for $50,000. In 2007, that same house was now worth $290,500. Whoohoo!! Oh wait… Over a 30 year lifetime, the expenses on this house (again including everything mentioned above, but not adjusted for inflation), came out to $394,000. That is including financing costs if you were financing, so let’s also look at the expenses had you paid all cash and the property been paid off the whole time. Now you’re looking at $344,000 in expenses (basically just less principal and interest). So even with all of that perceived appreciation, you are still negative either $103,500 or $53,500 on that property, depending if you were financing or not. You’re in the hole! I bet you didn’t see that one coming. And what about inflation?
  • Inflation. Inflation is both your friend and your enemy in this. One nice thing about buying real estate, of any sort, is that it is one of few hedges against inflation. If inflation happens, housing prices go up. Yay! But at the same time, if your house value goes up so does the value of every other house you would ever want to buy. So even if you sell at a nice profit, you inevitably need somewhere to live and to buy a new place, and you will have to pay the inflated price which will likely take any profit you made.

Related: How to Achieve Consistent (and Legal) 12%+ Returns Through Passive Real Estate Investing

Risks in Buying a House

I admit the things I’m about to mention are extremely dependent on the buyer. Some are risks and some are temptations. The temptations depend on the person and not everyone will fall for them. Some people will be very smart when they own their own house and not make any rash (or expensive) decisions with it. However, owning a house opens up a lot of dangerous roads.

  • Refinancing. Don’t be tempted. It is very easy, when you have equity, to refinance your house and use that money for who knows what. Now, if you are a smart investor and you use that equity money to buy more properties, then that’s one thing and I support that. However, what do most people buy with equity? Vacations. Or some other big expense item. Then you are essentially paying interest on that “vacation” for the next 30 years. Whatever you do, don’t do that.
  • Buying at the top of the market. Well that’s just silly. If you’re going to buy a house for yourself, at least get a good deal. Buying at the top of the market will cost you a fortune, both on the front-end and the back-end.
  • Losing your house. If you are financing your house and in 20 years you lose your job or life gets crazy and suddenly you can’t make the payments, you can lose the house to the bank. If you do, you just lost 20 years’ worth of payments on that house and you have no house. That’s worse than had you rented for 20 years.
  • Trusting your house to support your retirement. People become too trusting that their home will serve as their retirement income. Think again! Back to that timing thing, for one, and then factoring in expenses, how much have you really made? Not enough to support a full retirement, for sure.

As a concluding note about the downside of owning your own home, due to interest payments and expenses to buy, buying a house almost never turns out to be worth it before about year 7 (sometimes year 5). The average homeowner only lives in a house for 7 years. That math doesn’t seem to support profitability. And please, do you really plan to live in the same house for 30 years? Maybe 15 if you have a 15-year mortgage I could understand, but I can hardly think of anyone I’ve ever known to be in the same place for 30 years.

And Investment Properties?

I will never say buying an investment property will always protect you from financial hiccups. However, investment properties do mitigate a lot of the risks of owning a home. Looking at the same factors as for buying your own home:

  • Expenses. Guess what! Your tenants pay the majority of your expenses, if not all (if you set it up right). So no factor there.
  • Appreciation. If appreciation happens, great! Bonus. For one, how much it appreciates doesn’t matter as much because you don’t have the expenses to subtract out of your profits because your tenants covered those. But also, if appreciation doesn’t happen, oh well! You still made money for the time you owned it so you likely still profit.
  • Inflation. The more inflation, the higher the value of your investment! Woot!
  • Refinancing. Still a risk if you spend it the wrong way, but if use any equity you have to buy more properties, you’re golden!
  • Buying at the top of the market. Still don’t do it. Still stupid.
  • Losing your house. If you made cash flow along the way, who cares! You still profited. Same as appreciation.
  • Trusting your house to support your retirement. The cash flow each month is the best support for retirement. Have enough channels of passive income coming in and you are much safer than with most other methods of income!

Granted, I say all of these things like they happen every time and with every property which is often not the case. But it is certainly all possible. If you buy right, manage right, and stay smart, you can nearly mitigate every risk of owning a house (and make some nice coin on the side!).

The American Dream?

Absolutely. I totally get that owning your own home has been a lot of people’s dreams since they were little. I’m the last person to try to rip anyone’s dream away from them. If all your life you have wanted to own your own house and in doing so you will be that much happier, I say buy the house for yourself! I get it. Life isn’t always about numbers and logistics. If you lead your whole life doing everything “right”, you won’t necessarily be happy. Ultimately you should do what makes you happy, even if it means buying the most expensive absurd house you can find for yourself. But if you are in the debate about which to buy because you have extra cash to spend and want to be smart about it, or you are just out of school and ready to pick a path, or whatever… think it all through carefully.

I agree with Robert Kiyosaki on this one. He says to buy enough assets to fund buying liabilities. Translated to this conversation, buy enough investment properties that will support you buying your own house. If you don’t consider your own house an investment but rather as a toy, you aren’t putting everything you have into it and hoping it works. If you buy with expendable funds, if you lose them you are fine. But then if you profit, well then kudos!

If you still want to buy your own house, I’m far from one to stop you. I’m not convinced it is a good investment (usually, with some exceptions for the really right buys) and I know I personally am far from a stationary-enough person to buy a house because there is no telling where I’ll be tomorrow versus today. But maybe you are stationary and know how to buy right and you can profit from it. Who knows!

If you are set on buying a house for yourself before an investment property, why?

Photo Credit: where are the joneses via Compfight cc

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{ 65 comments… read them below or add one }

Ryan Ebanks January 18, 2014 at 10:35 am

Ali, great job in putting the hard facts on the table. Homeownership is a socialization spillover from the Great Depression. Many things have changed and become more dynamic since then. My perspective on this is that if you and I go to a doctor with the same symptoms, we both may be administered different medications based on gender, weight, history, pre-existing conditions etc. So it is with real estate investing. What is good for the goose may not be good for the gander. Important lesson: individual goals must be based on the facts not feelings or hear say!

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Ali January 20, 2014 at 10:22 pm

Great put Ryan! I totally agree.

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Sharon Tzib January 18, 2014 at 10:40 am

As usual, another great article, Ali. I think one of the biggest gotchas when buying your own house is that people buy emotionally, and then they proceed to remodel/decorate it emotionally, so that if they do need to sell, no one would possibly like it as much as they do, which of course affects their bottom line. As a former realtor, rarely have I seen homeowners NOT buy without a healthy dose of emotion controlling their decision.

Also, even if you pay off your home, don’t think you really “own” it – just try missing your property taxes and see what happens. Nuff said! But if you do that with an investment property, like you said, oh well. At least you have any profit you made along the way.

We talk about it all the time on BP, and many, many successful landlords have started out by buying a duplex, triplex, 4plex and living in one unit and having the others pay their mortgage. If you live in an area where you can find an affordable plex, that really is the way to go. I know, I know, not everyone likes to live next to their tenants, but deal with it. You’re getting a place to live rent free (or close to it) – I think that’s a sacrifice worth making.

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Jason R January 18, 2014 at 11:15 am

Or, an alternative to the —-plex idea. Buy your house, live in it for a few years. (5 max!) Then, convert it to a rental property. Do it again if you are so inclined. (and again…)

The great thing about doing it this way is you don’t need to use your chunk of cash for a down payment. Plus, personal residences require less money down than investment property.

Even if you don’t have that chunk of cash, you can still acquire your first “rental” property now. Call it your home; live in it for a couple of years, then convert it. Rinse and repeat as many times as your wife will allow. :)

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Sharon Tzib January 18, 2014 at 11:22 am

That’s exactly how I got my REI start, Jason :) Luckily, I bought my first house in an area very desirable to tenants, and in a price range that allowed me to rent it out and still cash flow. My point being, you need to have this intent going in, or you may very well have a primary residence that isn’t in an area tenants want to live in and/or won’t cash flow. But it is a great strategy!! I know some investors buy houses, live in them and fix them up, and then sell after a few years. That can work too – but again, intent is everything!

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Mike S January 18, 2014 at 3:33 pm

That’s exactly what I am doing right now. on my 5th year living in my house now, going to have it paid off too. collecting 750 pure profit next year while living in my next “rental property” there should be some kind of fancy real estate name for this! abando-rental? haha

Maybe its me but paying property taxes is really not that bad… mine is 700 a year. 58$ a month.. don’t buy expensive houses.

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Ali January 20, 2014 at 10:26 pm

I totally agree Jason. It can be a really good idea, especially if you are able to do work to the house while you live there to increase the value. Just be sure to run the numbers ahead of time as if it were a rental property to ensure those numbers will work out once you change it over. So many people buy houses and plan to rent them out later, having no idea they won’t profit off of it once they do. Numbers are the most important! But a great idea as long as you do your homework.

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Adrian Tilley January 20, 2014 at 11:13 am

The argument that having a mortgage or having to pay taxes means you don’t really “own” your house is bogus. There are just costs associated with that ownership, just like a car (taxes, insurance, maintenance, etc). There are costs associated with most purchases. Heck, even plants need watering. That doesn’t change legal ownership.

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Will M January 20, 2014 at 2:20 pm

The point that you’re missing is that while it is true that there are costs to everything, they are not like property taxes. Once you pay off a car loan, no one has the right to take it from you if you don’t pay someone every month. Granted you do have to pay for insurance IF you want to operate it on public roads but off highway vehicles have no costs other than maintenance. Homes on the other hand are built on land that you never truly own. No matter what you do, you have to pay taxes every month. If you fail to do so the government will stop letting you live there and sell it to some lucky investor.

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Sharon Tzib January 20, 2014 at 3:41 pm

Yeah, and stop paying your mortgage and see what happens. Surprised people don’t get this concept. Thanks Will!

Ali January 20, 2014 at 10:28 pm

Totally agree Will.

Ali January 20, 2014 at 10:28 pm

I see your point Adrian but I do agree with Will. Once there are no loans on all, there are different setups for houses, cars, etc.

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Ali January 20, 2014 at 10:24 pm

Agh Sharon! I totally meant to include that option into the article. Totally forgot. But yes, that is a huge option. There are some markets however that are an exception to the awesomeness of doing that. For example I know a woman who was dead-set on buying a duplex in LA to live in and rent out the other half. She bought one but ultimately it wasn’t in the prime place she would normally want to live and the tenant’s payment far from covered that much of the mortgage. So is it really worth it at that point? No idea. But in most markets, absolutely I recommend doing that. Get the cheaper mortgage that way! :) Just be sure the numbers work and especially if you eventually move out and rent out the whole thing.

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Rachel January 18, 2014 at 12:43 pm

Excellent topic for conversation, Ali!

It’s definitely not a black and white issue — everyone’s situation is different and must be evaluated on a case by case basis. With that being said, my personal opinion is your personal residence is not an investment; it’s simply a place to live. Choosing where to live is a personal decision and should be based on market fundamentals due to each individual’s personal preference.

The decision whether or not to buy a home is probably one of the biggest decisions for most people. For those who have decided for it, it’s a good experience and introduction to learning the intricacies of real estate transactions firsthand.

Though you can learn by participating in other real estate transactions (such as purchasing investment properties), in my opinion there’s nothing that can compare to the experience of buying your first home. The personal residence is perhaps at times more carefully explored by the individual — it’s where they have decided to live and a large commitment on their part.

Again, each person’s situation is different — there’s no right or wrong answer. Like the saying goes, “To each his own!” :)

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Ali January 20, 2014 at 10:31 pm

Totally agree Rachel. I like that you say it’s a decision on where to live. You’re right on that and it introduces a new way to look at it- you have to pay to live somewhere, the question is how do you want to do it. I think if people go ahead and buy their own home and realize that it may not put a return in your pocket, but maybe it will, that is a smarter way to go into it. I think so many people buy it ‘as an investment’ which sets people up for loss. Change the going-in perspective and it may change when and if people buy. At least then people aren’t snowed into believing it’s always an investment.

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James Pratt January 18, 2014 at 2:38 pm

I see a couple of problems:
1- You forgot tax write offs.
2- As a renter you’re paying enough in rent to cover all the owners cost, plus.
3- Upon retirement if you still have a mortgage the payments will be a whole lot less then renting.
4- Buying a duplex requires very little down and rent can cover most of your mortgage.
5- Up to $500,000 tax write off on your home when you sell, sweet! Do that every couple of years and retire real early.

Bought my home in 82 for $20,000, put $30,000 into it, now worth $130,000. Beats renting or 401K all to heck. Buying a home is the number 1 investment plan- force savings. I have a lot of renters paying for my retirement, retired at 42 of age.

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Ali January 20, 2014 at 10:36 pm

Thanks for commenting James. My responses:

1. Tax write-offs are better for rental properties than they are your own home. And I can’t quantify tax write-offs well enough to bring them into the debate.
2. More support for being a rental property owner, your expenses get covered. But if you are renting, how much of the owner’s expenses you are paying is irrelevant to your own life (who cares).
3. Which only makes up for the atrocious expenses you have paid so far in interest and other expenses. Note you say it’s about retirement time before your payment would be less than renting. That’s a long time away for a lot.
4. Yes, but it depends on the market. It won’t in all markets (I live in LA, won’t happen here).
5. If the market stays where you want it to every time. If you had tried to pull that off in 2009, you would’ve failed and lost.

I’d be curious to know how much you’ve paid interest and expenses since ’82 on that house and then look at the inflation rise since then to see what your real profit is. If there is still a profit after all that, congrats for sure!

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James Pratt January 22, 2014 at 9:55 am

Ali, my total expenses on my home is $30,000, interest ?? It’s a lot cheaper than renting! The neat thing about owning my own home is I don’t have to sell unless I want to, when I want to. The way that I buy in my area- western Washington, every property I own is worth more then what I have in them even in 2009.

I admit that renters have more freedom and less responsibilities but, at the end of the day, less for retirement.

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Ali January 29, 2014 at 11:19 pm

It may be true in a lot of markets James, but not all!

Matt January 18, 2014 at 6:33 pm

What are the rental expenses over that same 30 year period? Using the 2% rule rent would vary from $290,000 x 2% to $600,000 x 2% or $5,800 to $12,000 per month which assuming constant appreciation would be $3.2 million over the 30 years. Sure those rents are high but even at 1% your at $1.6 M.

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Ali January 20, 2014 at 10:37 pm

I’m not sure I’m following Matt… can you explain a little more what you are calculating here?

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Kyle Hipp January 18, 2014 at 7:13 pm

Jim made some good points. I would say that the costs listed for home ownership would be the same wether you live there or rent the property out. I would actually call the investment property costs as higher because you have folks living in your house that on average will not care for it as well as you. Number 2 you are prohibited from doing a decent amount of the work yourself on investment properties by code thus costing you more money.
If you have owned a home for 20 years and then lose it to foreclosure it is a safe bet that you have something to show for it. The bank or financer cannot keep the equity that you have from the sale over your remaining balance and applicable fees.

The biggest factor in whether or not it is a good idea to buy your own home in my mind is that home ownership tends to lock you in to a location. It doesn’t have to but many times it does.
Nice overview of the topic :)

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Ali January 20, 2014 at 10:40 pm

Kyle, you’re possibly right except with the rental property, your tenants are (should be) paying enough to cover all of those expenses. So its a difference of you paying expenses on a property or someone else paying them for you. Then add in tax benefits of the rentals and those well cover a lot of other expenses. Why do you say you can’t do the work on an investment property yourself?

I totally agree. I’m horrible at being locked into a location personally :) I can plan for it, but you never know what life will throw at you.

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melodee lucido January 18, 2014 at 10:04 pm

Good argument Ali. I pretty much agree with Ryan Ebanks. I’ve owned a few houses in my lifetime (many decades) and it was once good but then the view changed. I’m in my (what I call my triumph years) stage where I want to travel and not be tied to keeping something up–like a house.

Life changes, views change, needs change. I like this flying free : >

Thanks for the reflection moment.

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Ali January 20, 2014 at 10:40 pm

I like flying free too Melodee! Great to hear from you my sistah investah. How are things?

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Ed Burns January 19, 2014 at 9:30 am

Your article stated “Over a 30 year lifetime, the expenses on this house (again including everything mentioned above, but not adjusted for inflation), came out to $394,000. That is including financing costs if you were financing, so let’s also look at the expenses had you paid all cash and the property been paid off the whole time. Now you’re looking at $344,000 in expenses (basically just less principal and interest).”

You failed to subtract the interest, which depending on interest rate of the mortgage would be anywhere from 2-3x the amount of the loan or $100 to $150K. Accounting for this, your example would be break-even or maybe slightly positive. In addition, you failed to take into account the savings from your rental costs. I do not believe home ownership is the best for everyone, but I do believe it is of value to many.

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Ali January 20, 2014 at 10:43 pm

Sorry Ed, I think I misspoke on part of that. Those expenses shouldn’t have included principal as that would be part of the purchase price. It should have just been interest as the difference between the two. Even if it got to break-even, then you have to deal with inflation to know if it’s really a profit.

I agree home ownership can be of value to people, sometimes financially but certainly emotionally.

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Gary January 19, 2014 at 11:49 am

Here is a question for the Group: Currently in the Army deployed to Kuwait, I am getting out of the Army and moving back to my hometown in Fort Worth, Texas. Question. I will soon have all four of my rental properties paid off and currently gross 950, 850, 775, 760 a month. Do you think it would be wise to do a cash out refi on all 4 of those properties (should get about 50k each) and use that as a down payment on a 330k property? I would like to move into a nice place I call home, but only if it is something that I could justify as a safe investment. I call it a safe investment, and correct me if I am wrong, because If my math is correct the cash flow I should get from the investment properties after the refi should be able to pay the refi payments and have cash flow to pay the remaining mortgage on the 330k property. Do you think this would make financial sense, is there something else, like reinvest the money in additional properties or some other better option?

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Adrian Tilley January 20, 2014 at 11:05 am

Gary,
I think it really depends on your goals and situation. That’s primarily a personal decision. From a strictly monetary perspective, your best bet is probably to refi the rentals such that they still cash flow sufficiently, and invest the proceeds in your investment of choice. However, a personal residence is also a valid choice.

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Ali January 20, 2014 at 10:45 pm

Agree Adrian.

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Ken January 20, 2014 at 7:22 pm

Gary
In a similar boat. though you did not give current locations or expenses, doing a cash out re-fi netting you $50k will cost about 282 in P&I payments over a 30 year loan. a $130000 on a 3300000 house will be in the $675 – 700 P&I range, so will need about at least $200 a month from each rental to cover that, not including the Interest and taxes,(which in Texas are quite high I believe)
other option is sell one of your investment houses, then use the proceeds to put the down payment, and keep thee cash flow from your other three

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Gary January 20, 2014 at 9:05 pm

Thanks for the feedback, properties are in Fort Worth, Texas and the property taxes on each property avg. 180 a month.

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Ali January 20, 2014 at 10:45 pm

Ouch! Gotta love TX property taxes.

Ali January 20, 2014 at 10:44 pm

I always want to buy more investment properties for myself Gary, but of course it’s up to you. Technically there is no ‘right’ answer. But my worry for you would be, if you are in the Army how do you know you will stay in that particular city for very long? Are you not at risk for being transferred to another base? If you were, I’d say keep buying the investment properties.

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Shaun January 23, 2014 at 11:37 pm

Why refi the rental properties?

Get a 100% VA loan at a preferred rate if you want to buy a primary residence.
Even if you can do 4 cash out refinances on all your rentals at one time (hardly seems like something I’d take for granted) all you are doing is taking our more expensive debt (with 4 additional sets of closing costs) and putting your investments at more risk vs. taking out the exact same amount of total debt at better rates on only 1 property.

Not saying this is the best course of action but I can’t see any logical reason to encumber free and clear rentals just to put more cash down on your primary when you don’t have to.

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Ali January 29, 2014 at 11:24 pm

Not everyone can get VA loans Shaun. If I could get one, I may buy myself a house.

Refinancing the rentals is not to get money to get a primary house. I only recommend doing that to buy more rentals. And what’s the risk of leveraging? (I wrote an article asking just that before this one)

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Shaun January 29, 2014 at 11:37 pm

Yes very true about the VA loans Ali.

However this reply was in response to Gary’s situation where he said he was going to be looking for a primary residence after getting out of the army.
So he would be able to get a VA loan and IMHO that makes much more sense then taking out 4 different little mortgages on his free and clear rentals just to have a down payment for a primary.

Besides that original point I said about the rental mortgages being at worse terms and having 4 additional sets of closing costs (assuming you can even get 4 mortgages like that in quick succession) that would also give him 4 mortgages. While very possible to get more than that, generally getting the 5th is a bigger PITA then the first 4 so that is another hassle the original proposal could cause.

Ali January 29, 2014 at 11:39 pm

Oh, gotcha Shaun, sorry missed that part! You’re totally right.

Eric Reichelt January 19, 2014 at 12:19 pm

I bought my house because raising a family in a rental of apt makes less than no sense to me. I’m actually in the situation you brought up, I paid 79,000 for my house, just sold for 157,000 in under two years. Zero profit when I move but I have shit neighbors and two little girls. Next door to me a constant reminder that generally people lie and are shitty selfish beings.

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Ali January 20, 2014 at 10:46 pm

Lol. Where do you live Eric?

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Chris January 19, 2014 at 12:53 pm

Excellent topic of discussion!

I enjoy reading the comments to learn different points of view and experience

I also agree with much of Kiyosaki’s philosophy on assets vs. liabilities.

I’m still new to Bigger pockets community and am enjoying all the great content and discussions.

Respectfully,

Chris

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Ali January 20, 2014 at 10:47 pm

Welcome to BP Chris!

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Suzie January 19, 2014 at 3:36 pm

Hi Ali,
This article is timely for me. You made some important points.

I just made the decision to buy after 2 years of renting. I should mention that I did own a home from 2004-2011 and that I was a responsible homeowner. I lived in that first home for 7 years; I had a conventional loan; I never refinanced; and I came out even when I sold it (costs of buying and selling included). I also had a solid emergency fund and retirement investments in addition to the home.

Here are my reasons for deciding to buy a home to live rather than to buy as an investor:

1) 25% down payment required by most banks for investment property vs. 10% or less for owner occupancy

2) I don’t know my local market well.

3) I plan to stay in my home for at least 10 years. (I can use this time to learn more about real estate investing by reading the BiggerPockets blog and by attending REA meetings.)

4) I can use some of the equity in my home to invest in a single-family home for cash flow in later years. It will also give me time to save for/research my first investment property because I am not a no-money down gal.

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Ali January 20, 2014 at 10:48 pm

I think your reasons for buying Suzie are great. Sounds like you are in a market that supports your goals too. No arguments from me! :)

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Alan Mackenthun January 19, 2014 at 5:30 pm

So you’re going to pay rent to another while buying houses to rent to others? Buying a house to live in is not primarily an investment, but unless your living under a bridge, you also need a place to stay. I use a little different criteria to buy houses to live in, but I’m still looking for a good deal. Owner occupant housing has financial advantages over owning investment properties including homesteaded property tax rates, generally lower interest rates, and the ability to exclude up to $500,000 in capital gains after living there 2 years among others.

If you plan on moving shortly, it probably doesn’t make sense to buy yourself a home, but if you’re thinking ahead and you buy with the plan to rent it down the road you’re a rock star. If you buy a dated home, live there two years and update it at the same time, you can then sell it pocket the gain up to $500,000 tax free. It’s a slow motion flip, but you don’t have to pay rent in the mean time offsetting the carrying costs.

I once bought a bank owned $525,000 farm , spent 1.5 months cleaning up and updating the kitchen, flooring and painting etc. before moving in. It was appraised later in the year for about $670,000. I could live here for two years, sell, and pocket over $100k tax free. Whether I’ll sell or not is to be determined. In the mean time I’m living in a bucolic setting on 61 acres. Certainly there are opportunity costs, but living in a dumpy apartment has it’s own opportunity costs.

I see the choice as either you pay rent to someone else to pay down their mortgage and get them a couple hundred a month in cash flow from you or you buy your own place and enjoy the American dream.

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Adrian Tilley January 20, 2014 at 11:12 am

I agree with Alan. Yes, there are costs to owning a home, but if you rent you’re paying all of those costs plus the profit for the owner. As Alan pointed out, it’s not a good idea if you want to move soon (unless you buy it right, which you should anyway), but if you plan to stay a while, it’s probably a good “investment”.

In addition, if you rent you’re at the mercy of the owner, who may decide he wants to sell because of an upmarket or wanting to get out of the rental game, and the owner can decide to raise rents to any amount at the renewal period. At least if you own a house your costs are (relatively) fixed.

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Ali January 20, 2014 at 10:51 pm

You found a great deal Alan and I’m totally in support of your thoughts in doing that. I actually agree with all of your points, except for whether I am paying someone else and their mortgage or not. I never think about who is making what in a deal because it has no impact on my life. I only worry about myself and whether a deal is good for me or not, or what will best excel my own success. Other than that part, I agree with you.

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Sergio January 19, 2014 at 7:49 pm

Well don’t forget that you are on biggerpockets website:)

First of all i would never buy a house in move in condition

I bought my first house for 20k put another 10k in repair(doing myself:)

I can easily sell it right now for 80k or rent it out for $800 a month

Again this is the market where i live so other placed might be different

Anyway my point is that if you plan to buy a house for yourself buy non move in condition,a house that needs work…make repairs yourself or hire someone to do it and you won’t go wrong

Just my 2 cents

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Ali January 20, 2014 at 10:51 pm

I agree Sergio!

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Aaron Yates January 20, 2014 at 6:44 am

Great topic to write about. I realized this as well years ago that your home isn’t truly a great investment financially. After interest, expenses and refi’s, you lose for sure when you sell the property.

Glad someone is bring this to attention.

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Aaron Yates January 20, 2014 at 6:48 am

UPDATE… this of course is aimed at the normal home owner. Many people here are adding in things that we as investors look at and is NOT what the normal home buyer looks at. I believe Ali is making a point for any newbies as well as anyone who reads BP just as an entertainment and educational value.

Sure some home owners make out in the end but most probably either break even or lose when selling their primary residence.

Again, great topic Ali

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Ali January 20, 2014 at 10:52 pm

Thanks Aaron! You are correct in everything you say also. This is more geared towards normal home buyers, not us smart BP investors who know how to make it work :)

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Ali January 29, 2014 at 11:21 pm

Thanks Aaron!

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Pete January 20, 2014 at 5:31 pm

I think this article is a little misleading, because it explains all of the issues of buying without considering the alternative. The cost of renting is just so much more in the long run. I would agree w/ your assumption of 5-7 years to hit the plus side (less cost) in addition to all of the benefits such equity build up and a payment that will come to an end. Are you going to rent forever?

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Ali January 20, 2014 at 10:56 pm

I don’t agree that the cost of renting in the long-run is always more Pete. Of course it depends on where you live, but for the most part I disagree. I don’t plan to rent forever, no. I’ve even bought a house for myself in the past, way back in the day long before I was in real estate and an investor. I rent now though, and plan to, until I have enough ‘spare’ cash to buy a place with. That way I’m not buying it as an investment, but rather just to have a place that is mine and I don’t have to deal with a landlord. If I end up profiting from it, great. if I don’t, no harm done because I bought it with spare money. Although I do live in Venice Beach so it’s going to take me a while to get that much spare money laying around. Plus, I also want to be at a place in life where I have a much better idea of how much space is needed and wanted, etc. Right now if I were to buy, I would buy for me and two dogs. That would be very inconvenient later if I end up with a spouse and kids on top of the dogs. On the flip side, I don’t want to buy that big of a house if the spouse and kids never appear.

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Gerry January 20, 2014 at 9:00 pm

To me this is a no brainer. If you buy your personal residence, you have a chance to recoup some of what you pay monthly, if you rent you recoup what? The basics on this site are buy property, get someone else to cover the payments plus give you a profit. Why not be your own landlord? You have to live somewhere, so to me, to purchase your own home makes cents over paying rent. A penny saved is a penny earned and with your own home it is tax free as well.

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Ali February 5, 2014 at 10:03 pm

Doesn’t it depend on how much you have to pay out in order to have the ability to recoup though Gary?

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KB January 21, 2014 at 8:40 am

Ali,

Great article! I’ve actually been dealt a unique hand — my wife and I were living out of state and she got pregnant. We moved back to be closer to family and are currently living with parents. We are doing this to be able to make the next move the right move.

I had recently proposed the idea of staying with the parents longer and instead of buying a house for ourselves that we just buy a rental property first, then focus on buying a house for ourselves.

Open to any opinions and suggestions from people?

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Ali February 5, 2014 at 10:03 pm

KB, I always vote buy a rental property first ;) But that’s just me.

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Pete January 21, 2014 at 12:08 pm

Ali, I agree it depends on where you live- but I think you wind up ahead buying. Even homes that were much more than renting w/ all the extra costs associated, would cost you less 10 years later on a fixed note. The inflation you mentioned is 100% working against you in the renter world. What will you rent be (as well as the cost of that house) be in 10 years when you decide to buy? If you lose your job, you wont be able to pay your rent either, but you might have enough equity in your house to get by for a little bit.

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Ali February 5, 2014 at 10:04 pm

That’s possible Pete.

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Gary January 29, 2014 at 11:42 pm

Tracking all! Thanks for the input. I have decided to NOT do any cash out re-fis. I will move into one of the current rentals in the Fort Worth area that is paid off, where all I will owe will be the 180 a month to include property tax and insurance. I will use the VA loan for a cash flowing 4 plex in Chicago. I will need to live there as my “primary” resident for 6 months to meet lender obligations so I will be using the property in FTW as a temp vactional residence during that 6 month duration. Sound Good?

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Shaun January 30, 2014 at 12:02 am

Unless you are actually going to live in the place in Chicago I think don’t that is a good idea.

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Gary January 30, 2014 at 12:17 am

Why not Shaun? I will live there for 6 months if that counts as living there.

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Shaun January 30, 2014 at 10:32 am

If the requirement is to live there 6 months and you will do that then no issues.

In the previous post you made it sound like you were going to have it as your primary residence then take a 6 month “vacation” to the TX house during that time.

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