Real Estate Investing Basics

Plan to Sell Your Primary Residence? STOP… And Consider This First.

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
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young man placing sale sign in front of his house

As a real estate agent for close to 30 years, I realized early on that many people make their biggest mistakes with real estate between the ages of 25 to 35 years old. Our working years really take place between 25 and 65 years old, and I believe the decisions we make in the beginning towards home ownership often dictate our future financial outcome as we sprint forward towards retirement.

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What Happened to My Down Payment & Closing Costs?

If you think about it, most young people first try to rent as much property as possible, and then they try to buy as much property as possible. Is it the overachiever in each of us, or are we just trying to impress our family and friends? Maybe we simply feel we deserve it.

Next, we often listen to our real estate agent when it comes time to moving up to our next home. They may encourage you to sell the first home, saying that you can't afford two mortgages, but they may be squeezing you into as much home as possible on the next purchase. After all, we all have to keep up with the Joneses. Keep in mind, most real estate agents aren't accountants or financial advisors.

Related: How to Create a Diversified (Yet Still Manageable) Real Estate Portfolio

If things are going well for a nice couple, after they’re in their second or third home, their accountant might tell them it’s time for a rental property or a beach home. The accountant might say that they could use more write-offs; they’re making too much earned income, and they could use more deductions.

But what’s really wrong with this picture? Do you see where the real estate mistakes were made early on?

thrifty-deals

Against the Herd: A Different Approach

Let’s say you took a different approach, like I did when I was young. I didn’t even realize what I was doing until much later, and I majored in accounting in school. I took a more conservative approach after graduation.

First, I lived at home for two years to save up some money. Then I rented the most affordable apartment I could so I can save more money for my first house. I didn’t really care what my friends or family thought; I was on a mission, and time was of the essence.

Then I bought my first duplex, owner-occupied, and it needed fixing up. But here's the real difference: When it was time to move to the next property, I kept it. There were no stressful moving days for me. And guess what I did when I moved the next two times? I kept them as rentals, too. Now, let's look at the real impact of doing that.

Advantages of Keeping Your Primary Residences

First of all, I had lower down payments and more favorable interest rates because I purchased these homes owner-occupied. I also purchased properties, which I could rent out for more than my mortgage payment. So now, I never really lost my down payment and closing costs because I kept them all. Most people forget about this real money that they spent to acquire a home. Seems like they just look at the monthly payment, much like they do when buying a car.

Another thing that's overlooked is the time spent in the property, paying towards a 30 year mortgage before it becomes a rental. My first property I lived in for five years, my second property was two years, and my third property was 13 years. That was 13 years of payments towards my 30-year loan. Today, my mortgage payments are mostly principal, and my tenants are buying them for me.

investing-is-easy

Related: 3 Negatively Cashflowing “Assets” That Devastate 20-Somethings’ Finances

Sure, it took a little more time to save money between moving up with my primary residences, but it was well worth the wait. My properties enabled me to build additional wealth, and they're almost paid off now. They not only give me depreciation and write-offs to offset earned income, but they can pay for things like college and weddings, and they provide a nice, passive cash flow in retirement.

As you can see, this has been one of the best investing strategies that I’ve taken in my entire life. It makes you wonder why this strategy is not taught more or is not more popular with young people starting out.

So, let me ask you, “Was selling your primary residence a mistake?”

Let me know your thoughts with a comment!

Since 2007, Dave Van Horn has served as president and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nat...
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    Darnell Brown
    Replied about 2 years ago
    Great info! Should I get a heloc out of my primary residence and use for a down payment on a 2nd property? My plan is to rent my primary out…90k in equity..I need some advice
    Jennifer West from Stow, Ohio
    Replied almost 2 years ago
    I have lived in my primary residence for 6 years and do not have a mortgage on it. I’d like to move and rent out the house. The house needs some basic improvements (carpet, paint touch up) and the basement could easily be improved to a finished basement and add a half bath. My question is, would I have to move out before making these improvements in order to add them to my basis and/or write them off?
    Susan Maneck Investor from Jackson, Mississippi
    Replied almost 2 years ago
    I think the biggest danger of primary residences as investments is that while we are living in them we might not think of them that way. The upgrades we do are to meet our own needs and do not necessarily improve the value of the property. But I was always careful when I bought real estate even before I got into investments. I bought my principle residence at a price I could walk away from in a year and still make money.
    Spencer Anderson from Southaven, Mississippi
    Replied almost 2 years ago
    Susan, i enjoy your posts on BP and seems like you have had some great success in the MS market. I like the idea of house hacking , but in my area ( North Mississippi) multifamily units are scarce. So I’ve thought about finding an REO/ foreclosure with we could purchase and add equity to for our next move. Am I on the right path or should I reconsider? Im curious about being able to use the equity we have in our current home to acquire another property. We have a 3% rate on a 15 year that only has 10 years left on it with 50% equity on the current market. How would you suggest the financing Susan? We want to start building a real estate portfolio with rentals but looking for any wise methods such as this article Dave, thank you!
    Keaviona Palmer from Baltimore, MD
    Replied almost 2 years ago
    Good article! This makes me feel better about my current situation. I bought my first home last October, and kind of fell in the trap. It’s a new construction home with 3 bedrooms and a garage…probably more space than I actually need. The only redeeming qualities about the purchase is the area is on the “up and up” so I’m hoping it appreciates within the next few years…and a few months after buying I received a major promotion so the mortgage is really affordable now. But I can’t help but think how much more money I would have to really get into active real estate investing if I was still living at home with my folks when I got this big promotion. But I guess hindsight truly is 20/20. I’ve been thinking of renting it out in the next 2 or 3 years hoping that the changes in the surrounding area justifies the rent to cover my mortgage with a little left over to pocket. In the interim, I’m hoping to buy a rental property sometime next year with the conventional 20% down. With having this limited information of my current situation, does this sound like a good plan? At one point I even considered selling after the one year mark (FHA Loan) and downsizing to renting a modest apartment so that I’ll have more money saved faster for RE Investing, but I’m now thinking that I should stick it out and hold on to my house. Any thoughts, comments or insights to this newbie would be greatly appreciated! 🙂
    Ellen McKinley
    Replied about 1 year ago
    Would the same be true if your primary residence was a single family home, vs. a multi-family?
    Lewis Christman Financial Advisor from Macungie, PA
    Replied 11 months ago
    I'm curious if you would keep the large single family in the same instance. I have one 5 unit building and my SFR. Daughter will be off to college and I would love to find a mixed use / mulit to live in one, rent the other apartment(s) and have my business in a commercial space. Do I keep the large SFR and refi out to 30 to lower the payment and then rent it or use the equity to buy (down payment) on the multi / mixed use? I run my business from my SFR and like the master bath / closet, size etc so going to a 2/3 bedroom, smaller closet, single shared bath is a mind F.