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Rookie Podcast 148: Rookie Reply: Should You Buy a Rental Before Buying Your Primary?

Rookie Podcast 148: Rookie Reply: Should You Buy a Rental Before Buying Your Primary?

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Real Estate Rookie Podcast

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This week’s question comes from Brandon through Ashley’s Instagram direct messages (follow her @wealthfromrentals). Brandon is asking: I live in a great neighborhood where my rent is less than a potential mortgage. I’m looking to invest in a different town experiencing great growth, but I would live there myself. Is it a bad idea to purchase a rental property before purchasing my primary residence? 

Both Ashley and Tony had to ask themselves this same question as they started their real estate investing careers. While they took different approaches, in the end, they both agree that this decision is far more subjective than many people think, and it will entirely depend on your family plans, cash flow, and net worth calculations.

Here are some suggestions:

  • Ask “will this home purchase contribute faster to my cash flow or net worth goals?”
  • Decide on the importance of having a “home base” in your name
  • Understand how your financing options may change after buying the property
  • Calculate how long it will take you to invest/buy your primary after your purchase
  • Make the decision through a five-year lens
  • And more in the episode…

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real Estate Rookie, episode…

Remington James:
48.

Ashley:
148. My name is Ashley Kehr and I am joined by two co-hosts today. Tony Robinson and…

Remington James:
Remington James.

Ashley:
And Remington James. Tony, what do we have today on today’s Rookie Reply? What is the Rookie Reply for the new listeners that are tuning in today?

Tony:
Yeah. So for those of you that are joining us for the first time, every week, twice a week, we give you the inspiration information, education, motivation and every other ‘tion’ you might need to get started in your real estate investing career, or keep it going and blow it up if you’ve already started, so… Love that we’ve got a third co-host here today to kind of spice things up, but Ash, what do we got on the docket for today? What are we getting into?

Ashley:
So, today’s question is actually from my DMs on Instagram. So if you guys want to send us a question, you can DM me or Tony. I’m @wealthfromrentals on Instagram and he’s @tonyjrobinson. So this week’s question is from Brandon Goldman and he said, hey Ashley, I had a quick question that I was thinking might be a relevant topic for many new investors. I’m currently renting a home in a great neighborhood at a great price, less than I’d pay for mortgage, taxes, insurance, if I were to buy the same home in today’s market. I’m looking to invest in my first rental property in a different town that is experiencing great growth. I wouldn’t live there myself due to work and family obligations, but is it a bad idea to purchase an investment property before purchasing my first personal residence? Tony, what’s your thoughts on that?

Tony:
Yeah. So, Brandon, I’m super glad that you asked this question because it’s one that comes up a lot, especially amongst people who are looking to get started in investing and I was in the same situation myself before I got my first real estate deal. The short answer to your question, Brandon is, is it a bad idea to buy an investment property before buying your personal residence? The short answer is no, but I think there are a few ways that you can go about making that decision and honestly, whether or not it is the right decision, depends on each person and their unique situation. I think one lens you can kind of look at this decision through is just pure mathematics.
Let’s say that you have a goal of getting to a certain net worth number, or you have a goal of getting to a certain cash flow number. One of those decisions is going to lend itself to help when you get to that goal a little bit faster, maybe buying your primary residence will help you get to your net worth goal a little bit faster because maybe the house or the markets you’re buying in appreciates a little bit faster. But if your goals are centered on cash flow, then maybe going after the rental property makes more sense. I can tell you what I did in this situation, Brandon, and maybe it gives you some instruction. I was, kind of had the same decision to make of, do I buy my first investment property? Do I buy my primary residence? And I went with buying my primary residence before getting into real estate investing. The reason I did that was emotional. And I can say that, with 100% certainty for me, was it was purely an emotional decision.
My wife, who was my fiancé at the time, and my son, we were living in an apartment. I grew up living in an apartment, we didn’t have that family home growing up, or you got to not your height as you were getting older and stuff like that, so for me and my family, I wanted a home base, right? One spot where we could kind of build the memories for our family. And to me, that was more important than getting the jump on my investing career because I knew that I would get that first deal done eventually. But for me, the right decision for me and my family was to get our primary residence first. And like I said, it purely emotional, but it’s what helped me sleep at night. So those are my thoughts, Ash. I don’t know, what do you got?

Ashley:
Yeah, I definitely don’t think that it’s wrong or that you shouldn’t invest in a property before you buy your primary residence, but just like you said, Tony, to look at the numbers. So maybe look at five years from now, what is your return going to be? So, if you buy your primary residence now, how long would you have to wait until you could save up cash? Or do you have another way to finance your investment property? So when would you actually be able to get your investment property?
And then the other way around too. If you go and buy an investment property now, how long until you could actually purchase your primary residence? I think that you have a property that you’re paying less than what you would on a primary residence. Yes, you’re not building up equity into anything so that’s really something to look at too, is you’re not gaining any equity by paying rent. But also, would you be able to afford to get into a property that is like kind of the one that you’re in now and be able to afford it and not have to struggle too and be able to live within your means or below your means still? So, I think there’s a lot of factors that play into mind, but I don’t think there’s anything wrong with getting an investment property first.

Tony:
I love the point you made Ashley, about trying to decide or determine how much time you’ll have to wait, whichever route you go down. Like for us, we got our primary residence and then, almost exactly a year later, we got our first investment property so that’s how much time we needed to kind of get ourselves ready. So yeah, Brandon, if maybe buying your primary residence is going to push off your investing by a decade, right, then maybe you have some reassessment that needs to happen there, but I think that’s a really good kind of barometer look at. And I guess there’s a few things to look at, right? First is your capital that you have available, right? Like how much of your available capital is going to go towards this first purchase. And then second is your ability to get approved for a loan. Like if you do out and get this rental property first, do you still have the DTI, the debt-to-income ratio, to allow you to go out and get a primary residence mortgage, whatever timeframe that that comes next. So, some things to think about for sure.

Ashley:
Yeah. And also if you’re married too, is to looking into putting properties into each other’s name so that one person has the debt-to-income ratio on the investment property and then maybe the primary goes into the other spouse’s name. And that’s, the debt-to-income affects that for the primary residence too. So there’s different ways to do that too, that you can look at if you are married. So one other thing I just wanted to add is that when I got married, we lived in, actually, my husband’s grandparents’ old house and it was still owned by his parents. And I started investing, in 2014 I bought my first property and we didn’t buy that farmhouse until 2015 and then we didn’t build our house until 2016. So technically we really did invest before we actually owned anything ourselves too. That ended up working out for us, so… Anything else to add on that, Tony?

Tony:
No, I think we hit it all. And Brandon, sorry that we don’t have a black and white answer for you, but I feel like these are the kind of things where it’s going to depend a lot on your unique situation and kind of what’s going on. But hopefully that gives you at least some kind of guard rails or some decision factors you can kind of look into to help point you in the right direction.

Ashley:
Yeah. Just figuring out the numbers and looking five years from now, 10 years from now. Just run those numbers for each scenario to see where you end up on that too. And I think the idea too, is that you’re looking to look-

Remington James:
[inaudible 00:07:22].

Ashley:
We’re losing a co-host.

Remington James:
Can I?

Ashley:
Yeah, go ahead. Say goodbye to everybody.

Remington James:
Bye.

Tony:
He’s like, I’m over this.

Ashley:
So, to kind of wrap it up. Analyze those numbers and look at it long term, and what’s going to work out best for you guys and your situation. And just to highlight too, what Tony said in the beginning is that cashflow you’re looking for, is it appreciation? Do you want to build your net worth? Do you want to become more liquid? So those scenarios play into factor, but overall there’s nothing wrong with purchasing an investment property before your primary. Especially if you’re going out and looking at more affordable markets that have that higher cashflow associated with them too than where you want to live.

Tony:
Well said.

Ashley:
Okay. Well, thank you guys so much for listening. We’re actually recording this on New Year’s Eve right now. So Tony, what’s your big New Year’s Eve plans?

Tony:
Well, I actually have COVID right now so my New Year’s plans are to pretty much sit at home and do nothing and try not to get anybody else sick, so…

Ashley:
Sounds like fun. Actually, I love staying at home so [inaudible 00:08:35].

Tony:
But you got big plans for tonight, Ashley. What’s going on in your New Year’s Eve resolutions for tonight?

Ashley:
Well, we’re doing the same thing we did last year. We’re going with a couple families to a hotel with an indoor pool and the kids just swim all night. We order food and have some drinks and just all hang out while the kids swim and entertain themselves, so…

Tony:
All right. Well take a couple extra shots for me in spirit of me not being there, me being locked away at home, so…

Ashley:
Yeah, I’m more like a seltzer person. Shots… You saw me in Las Vegas. Shots don’t do me well. Okay. Well, happy late new year everyone, because this will air a couple of weeks after New Year, but send us your messages on Instagram @wealthfromrentals or @tonyjrobinson if you want your question featured on a Rookie Reply. Thank you guys so much for listening and we will be back on Wednesday, but first let’s hear something from biggerpockets.com that can help benefit you.

 

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