We are currently renting and since houses/location that we would like to live in are priced beyond our reach for now, I would like to just jump straight into investing in other more affordable areas around us.
Are there any disadvantages to my plan that I should further consider? Such as, in terms of taxes or getting loans, any tax disadvantages to not owning a primary residence? Is it harder to get loans if the banks know we are buying for investment as opposed to primary residence?
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Buying a primary residence with the intention of later turning it into a rental is the lowest risk way to learn the ropes in my opinion. You are essentially your own tenant, your own contractor, and your own property manager in the beginning, and that is a great, low risk way to learn hands on. You don't have to buy your dream home in your dream location as a first property ... this concept seems to have been lost over time, but back in the day there used to be this great concept of a starter home, which was a place to sacrifice a bit, learn the ropes, and build up to your dreams.
On the other hand, you could buy a rental 1st, but that would be much riskier in my opinion since you would not have as solid of a base of hands on experience or financial base as you would by buying your primary first and then turn it into a rental to buy your next home later.
I speak from experience, and now have a nice portfolio of cash flowing single family homes in nice neighborhoods in Southern California. If I can do it, then you can do it!
I am new to the process and i am in a similar situation. I am currently renting and i want to own. It is very important to me to shelter my family and invest as well. I am considering a multifamily home where it is already occupied and bringing in extra income to help off set the cost of being a landlord. Have you given any thought to any house flipping or wholesaling to help raise more capital? also have you thought of any partnerships in doing so ?
i also have family in the PA area and would want to eventually look into that market one day.
Laguna Hills, CA · Member since 2015 · 17 posts · 6 votes
10y
I am renting my primary residence because I can't stomach the housing prices here in Southern California. So we bought a house in Henderson NV and will be renting it out soon. This way we own a house we could always move to (after the tenants lease is up of course) and can still live in CA without committing to a much more expensive loan and price.
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Buying a primary residence with the intention of later turning it into a rental is the lowest risk way to learn the ropes in my opinion. You are essentially your own tenant, your own contractor, and your own property manager in the beginning, and that is a great, low risk way to learn hands on. You don't have to buy your dream home in your dream location as a first property ... this concept seems to have been lost over time, but back in the day there used to be this great concept of a starter home, which was a place to sacrifice a bit, learn the ropes, and build up to your dreams.
On the other hand, you could buy a rental 1st, but that would be much riskier in my opinion since you would not have as solid of a base of hands on experience or financial base as you would by buying your primary first and then turn it into a rental to buy your next home later.
I speak from experience, and now have a nice portfolio of cash flowing single family homes in nice neighborhoods in Southern California. If I can do it, then you can do it!
Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
10y
It doesn't make it harder if you quality, the criteria is the same. Your down payment will be 25% if you get an investment property loan vs. 20% for a primary loan.
Have you thought about house hacking/living in one of the units of your investment property? You could then get an FHA loan with only 3.5% down but you'd have to live in it for a year. Using this strategy gets you a property, that if purchased correctly, will have the tenant/s pay most if not all you mortgage.
If I could go back in time this is the strategy I would use.
Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Chui O. I would use this opportunity to buy homes with low down payments and great interest rates as primary residences. So, buy a primary in your target area, move into it for a year, and then rinse and repeat until the point you decide to buy in your permanent location.
@Virgilio Garcia, I am really new to this RE thingy... so flipping and wholesaling is sort of beyond me right now. I was hoping to start small and learn along the way with a Single Family property first. Although the reading I have been doing seems to point me towards a 4-plex. But I am not sure where to find 4-plex investable properties in the Pittsburgh area.
@Kurt K., yes, my main concern is having to commit to expensive loan and price which will limit our ability to even go into rental properties.
@David Faulkner, yes, I understand what you mean about get started by managing our own first property. But we have young kids, so considering the need for a decent school district, we are sort of bound/limited in our choices for our primary residence. :-(
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
I hear ya ... having kids definitely changes the equation a bit. Heck, if not for the kids, my wife and I would likely still be in our starter home neighborhood, with much lower expenses; but then again, we wouldn't be up over a quarter mill on our primary residence by the beach either, so it is funny the way things work out sometimes ...
If the factor that is limiting you is the down payment, then I would say save up a bit. If it is income, then I'd say figure out a way to earn more. Or maybe you can't afford a huge turn key house in a good school district, but you could afford a small fixer in an decent district in the suburbs with a bit longer commute ... any way you slice it, the truth of the matter is that somewhere, somehow, compromises & sacrifices will need to be made in order to get you where you want to go, and only you can decide where and which sacrifices to make.
Be wary of any person that tells you or method that looks like it requires no sacrifices ... that usually means you are missing some crucial information and/or there is some serious risk you are not seeing; there is no such thing as a free lunch, if it seems too good to be true, and so on and so forth. Good luck and best wishes to you, whichever route you choose ...
Bronx, NY · Member since 2016 · 115 posts · 21 votes
10y
I totally get you. I have a 1 year old and this is definitely going to be a factor in where we decide to reside, when it is time for him to begin going to school. I was just throwing ideas of what is was thinking since were looking to both get out of the world or rent (never looking back)
and into the world of ownership and investment.
Good luck in your future journeys, i believe that it will all work out.
Renting is far less expensive than home ownership which is why there are so many tenants. My son purchased his first rental income property last year, a duplex, and has it fully rented. He continues to rent a nice home that he could not otherwise afford at the same time as owning a income property. His goal is to continue living inexpensively as a tenant himself and save up to purchase more income properties.
Home ownership is a lifestyle purchase that is expensive and can slow down your investment growth plans.
My son will purchase his own home when his investments are sufficient enough to support the luxury of home ownership. Investment growth first, luxuries can wait.
@Mike Hanneman, yes, that would have been ideal for where we want to be. But duplexes are hard to come by, I will try to look harder but I also want to have a few backup option if duplexes do not come through. Good to hear it won't be too difficult to qualify for a loan if it's just rental, thanks!
@David Faulkner, I hear ya, in fact for the last couple of years, I was so focused on saving up and buying our first residential property. Until one day, someone told me, well, if you could buy and rent out a more affordable house, you could at least start recovering back some of the rent you are paying. That was like an aha! moment for me. I could actually "lose" less money each month on my rent. Looking at it another way, it's me trying to earn more income as well.
@Thomas S., yes, exactly that. I calculated that it was actually cheaper to rent than buy where we wanted. If we bought, after property taxes, etc, we could potentially be paying more than our rent right now. Definitely encouraging to hear that it had worked for your son. Were there any tax deductions or benefits that he was missing out by not have a primary residence first? Thanks!
Investor · Fairview, PA · Member since 2015 · 3 posts · 0 votes
10y
Find a duplex and live in half. Banks will finance that as a residence and the other half can pay your mortgage. I'm a banker by trade and avid investor. It's a great way to get started and rates are crazy low still. Good luck!
There are no tax disadvantages to not owning your own home first.
My son will have the down payment for a second positive cash flow multi plex property by the end of this year.
Assuming he continues without a business partner he expects to increase his investments to a minimum 2 purchases per year for the next ten years. At some point he intends to flip everything into a large apartment building purchase.
The actual cost of owning your own home is at a minimum twice the cost of renting and since it generates no income it is barley more than forced savings. I do not see home ownership as an asset for investors simply a personal life style decision.
Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
10y
Investment loans are harder to get simply because the risk to the lender is higher.
I believe there are tax advantages to owning your own home - I believe the mortgage interest is still deductible. If you are going to be running your investment business from home there is also the home office deduction.
You are in Pittsburgh where housing is very affordable - with the medium home price being 125K. There is opportunity everywhere here. I you plan on living in the area more than 2-3 years I'd buy, and buy now. Interest rates can only go up from this point. People who live in CA and are commenting on this are looking through the lens of their market - which will not prove to be good advice for our particular market. Just my 2 cents
@Jerry Kisasonak, unfortunately we are looking at Squirrel Hill (mainly for the school), where prices are 2-3x the median. Which is why I would really like to get into the more affordable market without compromising on the kids' education.
Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
10y
Yes, there are certain pockets that aren't as affordable to buy in and you happen to be in one of them. Tough choice for you, but may be best to continue to rent (uggg) and invest elsewhere.
Investor · Pittsburgh, PA · Member since 2016 · 12 posts · 4 votes
10y
Have you considered Mt. Lebanon at all? There always tend to be a couple duplex available around the 200k price and it is potentially the best school district around. Living in squirrel hill I assume you enjoy the convenience of a more urban setting which Mt. Lebonan offers. If you want a top notch and convenient area that has duplexes to live in and rent the other it's a great area. It's also an area that duplex are not uncommon but prices seem to stay very stable.
Have you considered moving to the suburbs? North Allegheny, Upper St. Clair, Mt. Lebanon, Hampton, Quaker Valley, Fox Chapel, and Pine Richland are all outstanding school districts and while the homes are still a bit pricey, they aren't nearly as bad as Squirrel Hill.
Hi @Casey LaValle, I just started looking at Mount Lebanon. Houses look really nice there for the price. But seems like there are a lot of houses for sale compared to Squirrel Hill and Fox Chapel. Does that seem to be signs of oversupply in Mt Lebanon area and potentially could affect the price appreciation and rental market over the years?
Queens, NY · Member since 2016 · 58 posts · 7 votes
10y
I'm in the same boat. NYC is so darn expensive. I wish house hacking was an option. My fiancé & I have been saving for a while to put down the 20% and have our credit in tip top shape. She's ready to move to the suburbs but ever since I ran into this site I just want to invest that money.
Investor · Pittsburgh, PA · Member since 2016 · 12 posts · 4 votes
10y
@Chui O. i would have a hard time believing that mount lebanon would ever be a place people wouldn't want to live or rent. The convenience to everything, transportation, school district, and quality houses help make it desirable. It is an easy A area in my books and if you are near the mount lebo strip on Washington road and T I'd call it a high A. There is a decent amount of availability, but I see a lot get sold. Especially when a seller lists a place for a reasonable amount.
I will admit this is based on my intuition and just what I see around me. I am not a realtor, but any realtors that are reading do you have any market analysis or trends that would tell a more clear picture of the area?
Residential Real Estate Agent · Grand Rapids, MI · Member since 2013 · 803 posts · 689 votes
10y
@Chui O. I live with my girlfriend who owns the house we live in and as far as my lender is concerned I live rent free with her. Rent can count against you when getting increasing your debt to income ratio (DTI). This along with a second job has allowed me to acquire 4 rental properties with 20-25% down payments in the last 12 months. So technically I invest without owning a primary residence and plan on keeping it that way for a while.
Phoenix, AZ · Member since 2016 · 10 posts · 2 votes
10y
@Chui Ong I am in the same predicament as you are. Difference being, I recently got married and moved in with my wife who rents out a HUD apartment only paying $50 a month. So we are faced with having to move somewhere else with more rent we'd have to pay (my name being on lease raises rent) or owning our own primary residence. The house we want and know is ours is $475k. We are learning that buying a multifamily property first and gaining that extra income while living in it for a year is probably the better idea. We can use an FHA Loan, save more money and have an extra income other than our full time jobs we both now have.