Buying 1st Investment - Do I Keep Renting?

12 Replies

My wife and I are currently renters. I'm just now getting into REI. I'm wondering if our first property purchased has to be our own. I see advantages to continue renting while we invest in other properties.

  • Only have to take out one loan for the investment
  • Renting keeps us from any personal maintenance costs we have to incur
  • Investments can eventually pay for our home

I don't know much about lending rules, but I'm curious to hear from experienced folk on advice here. If you could start over and you were in my position, what would you do?

Dude, house hack!!

I left the Chicagoland area (Chicago proper - not the 'burb dwellers who like to claim Chicago) and WISH that I had house-hacked while I was there. I was so enamored with living the downtown life that I shunned any opportunity to get a 2- or 3-flat via FHA.

Any downtown deals are immediately killed by assessments (even if you're looking just to buy for yourself) - because it becomes way cheaper to rent for a 3-5 year period... and don't even mention special assessments.

  •  You can take out one loan for a 4-flat
  • you can bake in maintenance costs into the rent for the other 3 units (depending on the property and location)
  • if you play it right, the other 3 units will cover all PITI payments for the entire 4-flat
  • BONUS: you can then save whatever you're currently paying for rent, and after 12 months, turn around and buy an out-of-state SFH - then you're renting out 4 units in a 2 year timeframe.

Good luck!

My first unit was a house I built with my wife. It was easier to get started that way for me. However, I have rented after I owned 10+ units. I had a unique situation (big family) and I did not want to redirect my investing dollars into my personal residence just yet. We needed to move and there was nothing on the market we liked. Lucky for me, my wife was on board. I only stayed in the rental for about 18 months but it allowed me to add about 5 units during that time. Additionally, since I was not forcing a purchase, I was able to buy a great deal in a Fannie Mae foreclosure as an owner occupant. That is my experience.

Here are my responses to (my interpretation of) your points-

1. One loan- not sure what you mean by this. I have multiple loans of different types. That is the way I am able to grow. Your first home loan will probably be pretty easy if it is for owner occupants.

2. Maintenance- If you are going to be a buy and hold investor or fix and flip, you will need to develop the skills and resources to make this statement untrue.  My tenants pay me more than it costs to maintain their property. You should always be your best tenant. I don't think this is a good reason.

3. Investing now for later- This is where renting helped me. I had an opportunity to move to a property that would have killed my ability to invest if I was buying it. Instead, I was able to live in a much nicer place because there is a limit to the rental market that does not seem to apply to owner occupied homes. My wife and I are making the conscious choice to delay purchasing the home we want until our real estate has grown enough to support it. 

Paul Choate

    When we decided to start investing in 2011, our idea was to continue renting while buying an investment property. We liked where we lived and didn't want to "waste" a mortgage on ourselves. The mortgage broker put the kibosh on that, saying we needed to bring our own housing outlay (rent) down first in order to better qualify for the investment property. We did, and wound up buying three properties (our own SFH, a second SFH nearby, and a 4-plex) in a span of six months. We are in Phoenix, and the low costs our housing here were even more depressed in 2011. Your situation will be different.
    Originally posted by @Jacob Vincent :

    Dude, house hack!!

    I left the Chicagoland area (Chicago proper - not the 'burb dwellers who like to claim Chicago) and WISH that I had house-hacked while I was there. I was so enamored with living the downtown life that I shunned any opportunity to get a 2- or 3-flat via FHA.

    Any downtown deals are immediately killed by assessments (even if you're looking just to buy for yourself) - because it becomes way cheaper to rent for a 3-5 year period... and don't even mention special assessments.

    •  You can take out one loan for a 4-flat
    • you can bake in maintenance costs into the rent for the other 3 units (depending on the property and location)
    • if you play it right, the other 3 units will cover all PITI payments for the entire 4-flat
    • BONUS: you can then save whatever you're currently paying for rent, and after 12 months, turn around and buy an out-of-state SFH - then you're renting out 4 units in a 2 year timeframe.

    Good luck!

     Totally Agree!!!  I wish I could do it over again and buy a 3-flat!

    Derek Walvoord

    I would say it really depends on your numbers. If it's lower monthly cost to rent verses owning then renting is better. This varies by area and type of place you live. The main benefit of buying your primary home first is the first time government home buyer programs and the fact that you will get the lowest interest rates here plus the tax advantages and lower down payment etc.  It's usually an easier way to get started. But there is no one way to do this business so go with whatever makes sense for you. 

    Would echo @Jacob Vincent and suggest you house hack with a 2-4 unit property. Look into an FHA loan as an owner occupied building has strong financing options. Not sure of any investing strategy where it makes sense to own property while you pay rent to someone else.

    @Jacob Vincent , @Derek Walvoord , @John Casmon

     Those are good words. I didn't know there was the term "house hack," but I like it. I've definitely considered the 2-flat option for the family and many people I know are going that route without a longer term perspective. It does seem to make a lot more sense.

    Jacob - I live in the city-proper (Lincoln Square). What are your thoughts on trying to start out here? We'd really not like to leave and I see REI as a way to hopefully keep us in the city.

    Originally posted by Account Closed:

    If you could start over and you were in my position, what would you do?

     Find a multifamily that you & your wife wouldn't mind living in & purchase it;    Rent out the rest of the property then start looking for your next deal.  

    So far, I haven't met anyone investing in real estate because they love owning and maintaining lots of properties..  We are in this to build wealth.

    I believe that given the goal of building wealth in the most rapid and manageable manner, that the advantages of buying a multi-family property, living in one unit, and renting out the remaining units far outweigh the advantages of buying a standalone investment property as a first investment.  

    I bought a property of this type and here are some of the advantages I've experienced so far:

    1) I am the property manager.  When something goes wrong, I open my door, take 5 steps, and fix the problem.  That's a huge cost and time savings.  While it might be different if I had a wife and family that would not put up with having tenants to be managed next door, I think that from a wealth building perspective, the advantage in property management is clear.

    2) Financing.  In every case I can imagine, you will have better access to financing (lower rates, less money to be put down, easier qualifications, etc) if you occupy the property yourself.

    3) Tax advantages.  If you continue to rent, you will pay both your rent AND the mortgage on the investment property.  If you move into the investment property, you will only pay the mortgage on the investment property.  That interest will be tax deductible, and will replace your rental expense.

    4) General handiness.  This may differ for you, but I was a spoiled pansy as a renter.  I did not own tools in any serious fashion (a screwdriver and hammer do not count), and could not make any basic repairs.  Now I do a ton of work myself.  This is a huge boost to my ego, and my wallet.

    5) Care and attentiveness.  You are going to do a MUCH better job screening tenants and showing the property when your potential renters are not only going to be your tenants, but your neighbors too!  This again is good for both your sanity and your wallet, in my opinion.

    Hope this helps!

    Scott Trench, Real Estate Agent

    Another 2 cents.  Lincoln Square is really great, if you can afford a 2-3 unit there, you will probably do really well.

    Derek Walvoord

    Hands down, if i started over again and didn't have kids. I would totally "house hack" or buy a duplex or triplex (which all falls under a normal FHA loan). It is a great way to start if you don't mind dealing with people. Great way to build reserves.

    My only encouragement is to make sure your spouse is on board.

    Good questions.

    Chris

    Chris Wood

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