Buy a primary residence or rental property?

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

Allaenna Williams I agree, multi family/duplex would be ideal, but that seems close to impossible here in LA with our budget. We're hoping to save close to 50-80k for a down payment by next year.

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Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

10y

MFU 2-4, live in one, rent the rest and then end up paying your mortgage :)

5 Reply

Ciprian L.

Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes

10y

@Shamim Toufighian You can buy a 2-4 unit with FHA , you can put 3.5% down. You don't need a big down payment to purchase a primary residence.

4 Reply

Trevon Peracca

Wholesaler · Chicago, IL · Member since 2015 · 245 posts · 102 votes

10y

Originally posted by @Ciprian L.:

@Shamim Toufighian You can buy a 2-4 unit with FHA , you can put 3.5% down. You don't need a big down payment to purchase a primary residence.

I agree. You should take your time and find a good 2-4 unit multifamily property on the MLS. That will be the best way to get the most bang for your buck. Make sure that the numbers work and read up on Brandon Turners new book on investing in multifamily properties. Also, network with the experienced landlords in the area to figure out common trends in your market and help you run your numbers more accurately.

Let me know if you have other questions!

3 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

@Shamim Toufighian I am with everyone else on the West coast my thought and advice is to always buy a 2 to 4 plex so you have your base under you.

Plus if you keep it 30 years and pay it off you will probably have a million if not a multi million dollar property.. if you did nothing else in RE you will have won.

buying in many other areas that do not appreciate unless you can really scale up.. I think the West coast is far better place and a 4 plex is the way to go.

I know personally buying my first house in Santa Clara county ( Silicon Valley) was the best thing I ever did and set the stage for the rest of my RE career.. now again this was because of appreciation ...

In a non appreciating market historically then I don't think owner occ is quite as important but its still a great way to buy your first 4 plex with great terms.

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OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

@Jeff B.

Wow, thank you all for the great responses! Seems like the consensus is to go for a 2-4 plex. The only thing I'm not understanding is how that's possible, even with a FHA. From what I've briefly seen on redfin/zillow, plexes are very pricey in Los Angeles... sure I can afford the 3.5% down, but that makes the monthly costs really high. The tenants would maybe cover 50-75% of the mortgage, but that remaining 25-50% is way out of my monthly budget.

I definitely still have a lot more to learn with the numbers, especially since I've only been researching this for about a week now. But I would love everyone's input!

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

10y

My thought process has always been that you need to own your primary residence 1st. Additional property second.

Paige Clarke

Harrison , NJ · Member since 2015 · 33 posts · 23 votes

10y

Congrats on embarking on this adventure! It's tough and you definitely want to begin with a solid foundation of education. If you're looking at a 4 plex and the 25%-50% that you'd have to cover is STILL out of your monthly budget- it's not a good investment and it's not a "deal" in the current market place. Unfortunately, you're probably reading that MFH are dried up right now and it's true- you'd have to dig dig dig to find a motivated seller and use some more creative techniques to find the right property. Be patient and have a set criteria- only seriously consider something if it fits PERFECTLY within your numbers budget.

Also- consider if you want cashflow or appreciation. If the market tanks in a few years, are you going to be able to make your payments and at least break even or better- still have positive cash flow? If the answer is yes, it's worth it. If you can't ride out a crash in the next 5-10 years, be more cautious in your purchase- especially in the LA market where the 0's are plentiful :-) AKA easy $1M dollar properties.

best of luck!

Paige

Ciprian L.

Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes

10y

First step is to talk to a lender to see for how much you qualify with an FHA loan, then look for properties.

It's hard to find a good deal in this market but not impossible.

Bryan O.

Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes

10y

Do the numbers: If you buy locally, how much do you need to spend with down payment, then monthly payments? If you rent locally, how much do you need to spend with security deposit and monthly rent? In some places, it doesn't make sense to buy. You can save that extra money and buy another cash flowing property elsewhere. You said you already own in Atlanta. Why not expand there?

Vanessa Vandervalk

Investor · Madison, WI · Member since 2015 · 44 posts · 31 votes

10y

I was (am) in the exact same position and was very torn about whether to put my 80k of cash savings into a home of my own or to buy my first rental property. The decision I made was to buy a small inexpensive condo in Santa Clarita with 20% down and live in it for one year or more. According to current rents and all my research and analysis, it will cash flow when I decide to rent it out. I am only using 50k of my cash, so I can still use the remaining 30k to invest out of state. As far as timing the market, I missed the crash and there's a chance another one will hit LA. But, this property is already inexpensive at $235k and I believe I will be able to hold onto it for the very long term. If you can find a duplex you can afford, I think that is also a great idea. I specifically wanted to be in the SCV where they seem to be scarce.

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

Originally posted by @Paige Clarke:

Also- consider if you want cashflow or appreciation. If the market tanks in a few years, are you going to be able to make your payments and at least break even or better- still have positive cash flow? If the answer is yes, it's worth it.

I'm focusing on buy and hold, so I'm okay with breaking even at the very least. If if there's a crash, I can continue renting out and just wait it out until the value goes back up. That's what happened with the condo I own in Atlanta.... bought it right before the crash, value dropped in half, had it rented for 10 years, and now it's valued back to what it originally was, all the while the mortgage being paid down.

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

Originally posted by @Ciprian L.:

First step is to talk to a lender to see for how much you qualify with an FHA loan, then look for properties.

It's hard to find a good deal in this market but not impossible.

I think that's a good next step. I have no idea what I'll be approved. Have a decent amount saved up, but I'm also self-employed, and I hear it can be difficult to qualify because of that.

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

Originally posted by @Bryan O.:

In some places, it doesn't make sense to buy. You can save that extra money and buy another cash flowing property elsewhere.

I'm very interested to hear more about that. I've heard that buying a primary residence in LA doesn't always make sense. My rent budget is around 2k, so the idea of throwing away 24k a year towards rent doesn't sit well with me. If I can just find something where I can at least break even, I'd be okay with that. 2-4 plex seems like that would be difficult with my monthly budget.

Bryan O.

Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes

10y

Hi @Shamim Toufighian I think people are referring to 2-4 unit buildings because they might accomplish that for you. If you buy a 4-unit for (absolute guesstimates) $500k and pay $2.5k/month, you are paying more than your budget. But if you are renting 3 of those units for $855 each, then you are using other peoples' money to pay your debt and live for free. That means you are really making money to live there, which is far below your $2k/month threshold ;)

That said, in your area this may not be possible based on the cost of property and the rent rates. That's why I advocate running those numbers. In Denver, I found that it was much more beneficial to buy a $400k'ish property and rent 2 units because now I only pay $200/month to live there.

If you cannot purchase 2-4 unit properties, just look at your costs and then look hard at your opportunity costs.

Happy buying, wherever it is! :)

forget to add: In some high-cost markets, you may be cash flow negative as a property owner and have to rely solely on appreciation. In that type of market, you may be able to live in a property as a renter for (say) $2k/month, but if you bought it to live you would be paying $3k. In that scenario, it may be worth renting your primary and buying investment properties elsewhere.

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

@Vanessa Vandervalk

It's nice to hear stories of what people did when in my exact situation... especially because I have about 80k saved up as well. That's what I essentially did in Atlanta. Bought a condo, lived in it for a year, and rented it out with positive cash flow. Unfortunately, I bought RIGHT before the crash, but I stuck with it, continued renting, and 10 years later the value has gone back up.

I'm beginning to think a condo might be my best option here in LA because a 2-4 plex seems impossible with my savings/budget.

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

@Bryan O.

Right, those numbers seem difficult to pull off in LA (strictly basing this off redfin searches). People talk about really digging in and using creative ways to find good leads, and I will absolutely do that, but from my brief searches, none of the numbers seem to make sense here in LA.

Franklin Romine

Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes

10y

I chose investment properties for the last 6 years. Glad I did. Has been paying off.

Technically my primary residence is a 5th wheel. I don't live in it but bought it for travel.

Frank

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

@Bryan O.

I think I found one where the numbers make sense:

https://www.redfin.com/CA/Los-Angeles/4010-Baywood...

3 unit multi-family for 800k... with FHA, that's about 28k down. Monthly payments around $5,100.

House in front and duplex in back. My family lives in house and we rent out the duplex for around 4k total, leaving us with around $1100. That works out for us. Although I'm not sure if there are other costs that I'm missing when it comes to multi-family homes. I definitely need to familiarize myself with those costs.

If the numbers I ran are accurate, then that gives me hope that I can actually pull this off.

John CasmonPro Member

Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes

10y

Would certainly recommend an owner-occupied 2-4 unit with FHA financing, at least until you have kids. Even if you decide to buy a SFR home in the near future, you can use FHA again (have to refi first home) and the rent from the unit you were living in will offset your personal mortgage.

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

Originally posted by @John Casmon:

Would certainly recommend an owner-occupied 2-4 unit with FHA financing, at least until you have kids. Even if you decide to buy a SFR home in the near future, you can use FHA again (have to refi first home) and the rent from the unit you were living in will offset your personal mortgage.

That is our hope (although we already have a kid), and we're used to living in apartments, so I have no issue with getting a 2-4 plex to owner/occupy. The question is, can I find one in LA where the numbers work and I'm not exceeding my own personal monthly "rent" budget of 2k?

Account Closed

Writer · Cambridge, MA · Member since 2015 · 5 posts · 4 votes

10y

This is the same question I am currently asking myself, and I think I have already come up with my own answer. Keep in mind, I am in no way actually giving you this advice because I haven't even started investing, so I don't know how it would turn out. But, these are my thoughts.

I am in a similar situation as you. I live in the Boston area, and there's basically no way I could afford to start real estate investing in this area. Sure, I could come up with a 3.5% down payment. I could even probably come up with around 10%. But, my mortgage payment would be so incredibly high that I am under no illusion than any bank would even consider financing it, especially since I have no prior land lording experience to show on my financial statements. And, you just don't get that 1% of the purchase price monthly rent around here. Fixer uppers in my neighborhood sometimes cost around half a million, and that's just for a condo, much less a duplex or triplex. It's just not affordable, and I don't want to have a crazy 2 hour commute into work by buying outside of the city.

So, I've pretty much come to the conclusion that I have no choice but to be an out of state investor. I'll be renting my primary place here in Boston, and will start building my investments with properties that will actually cash flow and build my wealth by going out of state.

3 Reply

OP

Freelance Interactive Developer / Investor · Los Angeles, CA · Member since 2015 · 66 posts · 19 votes

10y

@Account Closed Thanks for that Keith. I've owned a rental property in Atlanta for the past 10 years and have been long-distance landlording for several years. I've always told myself that my next investment property would be local, so I'll continue researching/marketing and hope that something sticks. I really would prefer to find a primary residence here so I'm not throwing away over 20k a year.

Account Closed

Writer · Cambridge, MA · Member since 2015 · 5 posts · 4 votes

10y

Believe me, I get the dilemma! I just can't seem to get the numbers to work for me locally no matter how many times I try - or unless I want to take on roommates - which I do not. :D