Buying Rental Properties Before Your Own Home

Member since 2019 · 15k+ posts · 11k+ votes

3y

This has been covered a few times before on BP. Some people who live in expensive areas where it is significantly cheaper for them to rent than buy, will buy rentals in less expensive areas instead of buying a home for themselves. There are benefits to owning your own home, but it isn't always possible in some markets.

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Lydia R.

Investor · Austin TX · Member since 2016 · 1k+ posts · 2k+ votes

3y

My vote would be to keep buying properties for your rental portfolio. Your cash flowing assets can be taken into consideration when you actually decide to get a home loan for a homestead property. Your homestead is just going to cost you money not make you money, unless you decide to house hack. Eventually the rental portfolio will be able to cover your rent in CA and then some. It seems to me that focusing on building your rental portfolio is the better financial move.

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Jeff S.

Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes

3y

@Carlos Lopes there is no right or wrong answer here. People have done very well doing it both ways.

I might suggest there is no such thing as a killer deal.

You have to create a business model that works not just for your wealth but also for your families welfare.

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Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

3y

I own many rentals and can not justify buying a property for myself. I see cash as a tool, the money does not work if it is in my primary residence.

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Peter MckernanBusiness Member

Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes

3y

Quote from @Carlos Lopes:

I’ve been struggling with the idea of buying a rental without my own home to live in.

Back story. I own a rental in FL (first home we lived in), but moved to California 3 years ago. Decided to keep the FL SFH home as a rental, and I'm glad we did. The SFH currently nets about $1000/month after all expenses. Fast forward to today, we're looking to buy our own home again in Southern California, while at the same time, I'd like to keep increasing my portfolio in that same FL town our current rental is in.

I've found what seems like good deals in FL, deals I know would be profitable in the long run. Simultaneously in California for our own home search, that's been a bit tougher, especially for a price I'm willing to pay. Also should mention I have VA loans as an option.

All this said, I’d like to hear some people’s thoughts. Keep increasing rental portfolio at the risk of potentially hurting my ability to receive a loan for my own home in CA if I find a killer deal in the near future? Is finding good cash flow deals better than an asset that’s not generating any, even though it’s your own home? Thanks in advance!

I spent some time, the first part of my investing career with getting rental properties before I bought my own primary residence. I would look at those areas in FL see about snatching up a deal there and one out here for your primary (you could use the 20% down out there on a lot less expensive house) and then us the VA 0 day home buyer program out here in CA.

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Carlos Lopes

OP

Member since 2023 · 21 posts · 22 votes

3y

Thanks for all the encouragement everyone! Seems like everyone is in agreement that it's a good move, especially considering current CA prices. Goal would be just use a conventional loan with 20% down, and save the VA loan for my own home in CA when I eventually pull the trigger. My concern is, even if I'm cash flowing on rental properties, will that significantly impact how much a lender is willing to lend if they see I'm already 3/4 of a mil in debt with other properties? Is that a non issue for a primary residence, especially while using a VA loan?

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Jasmine Vida

Investor · Jacksonville, FL · Member since 2019 · 90 posts · 41 votes

3y

Quote from @Carlos Lopes:

Thanks for all the encouragement everyone! Seems like everyone is in agreement that it's a good move, especially considering current CA prices. Goal would be just use a conventional loan with 20% down, and save the VA loan for my own home in CA when I eventually pull the trigger. My concern is, even if I'm cash flowing on rental properties, will that significantly impact how much a lender is willing to lend if they see I'm already 3/4 of a mil in debt with other properties? Is that a non issue for a primary residence, especially while using a VA loan?

I am wondering the same thing and am in the same boat right now.

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Scott E.

Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes

3y

If you buy right (the right house, at the right price, in the right zip code, in the right neighborhood, on the right street) then you are almost guaranteed to significantly increase your net worth over the next 5-10 years by owning the home that you live in.

Even though a lot of people are fleeing Southern California, I think most would agree that it will be a growth market for real estate over the next 5-10 years. Los Angeles is one of the top appreciating markets in the country, appreciating at an average of almost 10% per year for the past 10 years.

This means that if you bought a home for $800,000 10 years ago, that home is worth about $2,000,000 today.

Will your town see the same appreciation rate over the next 10 years? Highly unlikely. But you hopefully you get my point here. The direction of real estate over a long period of time is up, especially in a market like LA.

In my opinion, when you live in a growth market, anybody who says that you should not own the home that you live in is foolish. Especially when you have the VA loan available to you, meaning you can buy your primary residence with no money down.

Just my 2 cents. Also... thank you for your service.

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Keira Hamilton

San Diego, CA · Member since 2023 · 58 posts · 77 votes

3y

I would ask yourself what your reason is for wanting to own the home you live in. People tend to have an (understandable) emotional connection to their home and often feel more autonomous when they own it. While there's validity to that, those feelings can get in the way of making the best financial decision. If I were in this position, I would just focus on the numbers. What is the rent you're currently paying in SoCal and how would it compare to a mortgage payment should you choose to buy a home? How do those payments compare to the potential rental income of another investment property? There's not really a right or wrong answer here as every investor has different goals, but I would just see what situation would result in the highest monthly NOI.

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Carlos Lopes

OP

Member since 2023 · 21 posts · 22 votes

3y

Quote from @Keira Hamilton:

I would ask yourself what your reason is for wanting to own the home you live in. People tend to have an (understandable) emotional connection to their home and often feel more autonomous when they own it. While there's validity to that, those feelings can get in the way of making the best financial decision. If I were in this position, I would just focus on the numbers. What is the rent you're currently paying in SoCal and how would it compare to a mortgage payment should you choose to buy a home? How do those payments compare to the potential rental income of another investment property? There's not really a right or wrong answer here as every investor has different goals, but I would just see what situation would result in the highest monthly NOI.

Another fair point. Currently paying $3200 for rental all utilities included. If we bought our own home we'd be looking at spending at least $5000-6000 a month for the area my wife and I are interested in. Also that wouldn't be a "forever home" type of home either. That's just your typical middle class 3 bed 2 bath 1500 sqft SFH in SoCal. So when I look at those numbers it's a tough pill to swallow. But as mentioned above though, it is an ever appreciating market. So not sure if time is on our side there either. So where my mind goes is that extra 1800-2800 in mortgage I would pay could easily go towards another rental property elsewhere. But I guess I would have to do my homework and make sure that if I were to go the more rentals route, that cash flow would outweigh the potential equity gains of a owning a home in SoCal? It's a tough choice.

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Keira Hamilton

San Diego, CA · Member since 2023 · 58 posts · 77 votes

3y

Quote from @Carlos Lopes:

Quote from @Keira Hamilton:

I would ask yourself what your reason is for wanting to own the home you live in. People tend to have an (understandable) emotional connection to their home and often feel more autonomous when they own it. While there's validity to that, those feelings can get in the way of making the best financial decision. If I were in this position, I would just focus on the numbers. What is the rent you're currently paying in SoCal and how would it compare to a mortgage payment should you choose to buy a home? How do those payments compare to the potential rental income of another investment property? There's not really a right or wrong answer here as every investor has different goals, but I would just see what situation would result in the highest monthly NOI.

Another fair point. Currently paying $3200 for rental all utilities included. If we bought our own home we'd be looking at spending at least $5000-6000 a month for the area my wife and I are interested in. Also that wouldn't be a "forever home" type of home either. That's just your typical middle class 3 bed 2 bath 1500 sqft SFH in SoCal. So when I look at those numbers it's a tough pill to swallow. But as mentioned above though, it is an ever appreciating market. So not sure if time is on our side there either. So where my mind goes is that extra 1800-2800 in mortgage I would pay could easily go towards another rental property elsewhere. But I guess I would have to do my homework and make sure that if I were to go the more rentals route, that cash flow would outweigh the potential equity gains of a owning a home in SoCal? It's a tough choice.

If it's not going to be your forever home, then another thing to consider would be how long you would plan to be there. Real estate does continue to appreciate over time, but we're also in a period right now where home values in many areas are going down. My property has dropped about $100k in the last year. Of course, no one can say for certain what's going to happen over the next few years, but you wouldn't want to be in a position where 3 years from now you want to sell and the value is too low to make that a good option.

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Edward Zachary Samperio

New to Real Estate · San Antonio, TX · Member since 2021 · 110 posts · 58 votes

3y

It's understandable that you're struggling with this decision, as both options have their pros and cons. Here are a few things to consider:

Loan eligibility: When you apply for a mortgage for your own home, lenders will look at your debt-to-income (DTI) ratio, which is your monthly debt payments divided by your monthly gross income. Owning multiple rental properties can increase your DTI and potentially make it more difficult to qualify for a mortgage. It's important to consider how your rental properties will impact your loan eligibility.
Cash flow: As you mentioned, rental properties generate cash flow, while your own home does not. However, it's important to consider the expenses associated with owning and managing rental properties, such as maintenance, vacancies, property management fees, and taxes. Make sure to factor these expenses into your calculations to determine if the cash flow from your rental properties is worth the effort and risk.
Investment goals: It's important to have a clear understanding of your investment goals and how each property fits into your overall portfolio. Consider factors such as location, market trends, potential for appreciation, and long-term rental demand. Make sure that each property aligns with your investment strategy and helps you achieve your financial goals.

Ultimately, the decision will depend on your personal circumstances and priorities. If you're able to find good cash flow deals in FL and you're comfortable with the potential risks and challenges of owning multiple rental properties, it may make sense to prioritize building your portfolio. However, if owning your own home in CA is a top priority and you're concerned about your loan eligibility, it may be best to focus on finding a property that meets your needs and budget. It's important to weigh the pros and cons of each option and make an informed decision based on your individual situation.

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Rick Albert

Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes

3y

I've always had an issue with buying rentals before buying your own property. You are collecting rent from one appreciating asset to pay for someone else's appreciation asset doesn't make sense.

With that said, investing in Los Angeles/So Cal is about two things. One is appreciation. A 3% increase in rent or home values here are a higher cash equivalent then in a low cost area. The second is the loan buy down. Because of the higher price points, you pay down larger amounts of cash, which you can then leverage later on.

You can always house hack here. I'm house hacking here and investing out of state. You can have our cake and eat it too.

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Brian G.

Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes

3y

@Carlos Lopes we rent in Burbank and have 3 rental properties (1 LTR & 2 STRs). If our kids were a little older we would be looking to house hack in So-Cal. It helps that our rent is under market but it’s still a lot of money. It’s would be a challenge to house hack in So-Cal but I believe with creativity that it’s absolutely possible. Good luck with your decision!

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Peter MckernanBusiness Member

Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes

3y

Quote from @Carlos Lopes:

Thanks for all the encouragement everyone! Seems like everyone is in agreement that it's a good move, especially considering current CA prices. Goal would be just use a conventional loan with 20% down, and save the VA loan for my own home in CA when I eventually pull the trigger. My concern is, even if I'm cash flowing on rental properties, will that significantly impact how much a lender is willing to lend if they see I'm already 3/4 of a mil in debt with other properties? Is that a non issue for a primary residence, especially while using a VA loan?

The one thing about your service and using the VA loan is that you can use that with 0 down, and still use the reverse that you have after buying the property in FL to cover any unknown expense that arise. You can have the seller cover closing costs too, so I would buy in Florida and pick up buying in CA. Just a heads up, prices in CA do not show to be going down or have a downward trend (they'll keep increases, or stay level).

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Buying Rental Properties Before Your Own Home

Buying Rental Properties Before Your Own Home

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