Silly to Buy a Rental Before Owning Own Home?

23 Replies

First, thank you to the BP community for all the helpful knowledge and insight. I just discovered this amazing resource last week and have already learned so much!

I am hoping to purchase my first rental property in the Sacramento, CA area within the next year and am wondering if it would be foolish to purchase a rental property prior to owning my own home. Currently, I live in a home that has been in my family for decades; it was inherited by my parents when my grandfather passed away. The home has been paid off for years and I pay my parents a very affordable rent to live there. I love the house and am happy living there for the time being.

I would like to begin investing in real estate (buy and hold), but am curious as to the pros and cons of buying a rental property as my first real estate purchase. Are there benefits to owning my own home before purchasing a rental property? Any downsides to buying a rental property prior to owning my own home?

Any and all advice is appreciated! Thanks!

Afternoon,

I'd stay in the home your in now and go buy rentals.  If it makes more sense to rent then you should do that while you build your portfolio, whether it's one or several.  The money you are saving on rent or a mortgage for your primary home  can go towards your other homes.

Good luck,

David

Welcome to BP @Julie Inderkum !

I totally agree with @David Hutson . If you are comfortable with your living situation right now and happy with the rent you are paying, you should absolutely just continue doing that. Good for you!

Regarding the pros and cons of buying a rental home before you actually purchase your own home, there may be more (and David's are great as well) but here are a few that come to mind:

Pros:

- All expenses, etc are tax write offs on a rental property, this is not the case with a property you live in (however there are other tax benefits to owning a home, so consider that)

- It may be easier to purchase a rental property via loan if you don't already have another loan out on your own primary residence

- Rentals are awesome and when you find the right one with the right process/tenants, they can be a great way to earn cash flow and/or appreciation :D!

Cons:

- Depending on how much work you are doing in your own home now (it sounds like your rental situation is a little bit unique), you may or may not have much experience with the ins and outs of maintaining a home. You can always hire someone, but that could be seen as a con.

Good luck with your investing and let me know if there's ever any way I can help :)

Thanks so much @David Hutson and @Chris Kirk! Chris, I appreciate you laying out the pros and cons. All good things for me to consider.

Id suggest purchasing your own home before buying a rental property.

No its not! Purchase a multi family via FHA loan and move in.

Or don't and just buy one anyway. Its an excellent idea. Its what I did.

@Julie Inderkum if I were in your situation , I would buy a house via owner occupied FHA financing . Better rates , lower down payment . I would buy it below value then keep it for two years and sell it at a profit . You can email me for more details because there is not enough room to explain it at length

Hi Julie,  Adding another item to think about, what benefits are currently available to first-time homebuyers?  States and municipalities may have incentives for you to buy a home that are limited to first-time homebuyers.  Here we joke that Baltimore will give you $5 if you just say you'll think about looking at a property.  While incentives come and go, once you flip the switch and buy your investment those type of incentives are gone.  Best, Teresa

My 2 cents owning real estate especially your first investment is a huge expense learning curve. Have your own home is the best practice hands on a buy and hold investor could have.

@Julie Inderkum Hi Julie; Yes BP is great isn't it? You can absolutely feel just fine with buying a rental property first, without owning your own home. Make sure and do your homework first. If you're on BP go to Education Tab, (in the drop-downs you'll see podcast & guides, start there and watch as many as pertain to your goals). In the guides you'll see "How to Analyze Deals" it's really important to know your numbers so that you cash-flow. Hop on Brandon's weekly webinars too if you can. I would stay away from a condo unless it's a great deal below market value. Condos can have high HOA's in Sac and you never know if they might hit you with special assessments & you need to look into how solvent they are etc. I do know someone who just flipped a condo though & it can work if you know what you're doing and can sell quickly. If you want to buy and hold I think it's just fine if you don't own your own first. Just my opinion but what works for some, may not work for others. I always tell me clients to remember to stay in your comfort zone and stick to as close to your goal numbers as possible. Once you get in the swing of things you'll be able to know what's a good deal & what's not. Best of Luck !

There are two issues here

  1. Personal concerns
  2. Investment/Financial concerns.

1) Personal concerns; Buying a home to live in can be a great investment itself. However it is not just an investment it is you home. A place to enjoy and share with friends and family. This is a value that needs to be considered. This had value to me in the past, today it is not so important. 

Whether to buy a home you need to consider the transaction costs. It costs a lot of money to buy and or sell  a home. If you are only going to live in a home 1-3 years, even if the value goes up it may cost you money.

2) Investment/financial issues. The only way to answer this is do the calculation. What would the return on investment of a home be; given your down payment (your investment), the expenses of owning the home and the anticipated appreciation. Compare that to the return on investment of a rental property minus you cost to remain where you are.

Remember you will get better rates for financing on a home you live in vs a rental property. If you buy a 2-4 unit and live in one of the units you still qualify for those owner occupied rates.

I'm a firm believer of renting where you live and owning where you rent. Taking out a loan (liability) on something that doesn't produce any income doesn't make sense. Whereas if you took out that same loan on a small multifamily, now you have something that produces monthly cash flow, making it an asset. Despite what many people may say, a SFR which you live in is NOT an asset. It's a liability. 

it's not silly at all. My wife and I bought a duplex for our first home, living in one half and renting out the other half. The tenant paid the mortgage, freeing up money for further investing.   A friend of mine did this five times in a row while he was a young man, and the10 rental units he accumulated paid enough to pay for his mortgage and then some, in an expensive market.

 Another family friend and his wife went even further. After they immigrated to the US, before they bought their first house for themselves, they bought a small apartment complex.  It has been paid off for at least the last 15 years, and is probably throwing off $3000-$4000 a month and cash flow. This is not their only investment  but is indicative of how they prioritize investing in assets over accumulating liabilities. They did so well that they were able to buy a Mercedes S Class for themselves while all three of their kids were in medical school! 

There was a recommendation noted below which is on the same line of what would recommend to those who would like to invest and currently have not purchased a home. If a person purchases a multi-family and it will be their primary residence for most this option would be to their advantage. One an FHA mortgage can be obtained with only 3.5% down versus the 10-20% needed if buying only as investment property. Once a person is bringing in income they can utilize those funds to purchase another investment property whether it be cash or finance (and if financing will have the means to accommodate a larger down-payment requirement).

If there are good small multifamilies in the area you want to live I would house hack(owner occupy with FHA mortgage). If there are not any good oppertunities in the area you would like to live I would stay where you are and find a good rental differnt neighborhood.

Some people house hack for the sake of house hacking and they would be better off renting them selfs and buying rental that cashflows super good!

@Julie Inderkum Pros and cons for either way. I bought a rental house first. I have no regrets about it, as I make money on it. I rent and pay very little for my under market rent that allows me more saving power.

Originally posted by @Julie Inderkum :

First, thank you to the BP community for all the helpful knowledge and insight. I just discovered this amazing resource last week and have already learned so much!

I am hoping to purchase my first rental property in the Sacramento, CA area within the next year and am wondering if it would be foolish to purchase a rental property prior to owning my own home. Currently, I live in a home that has been in my family for decades; it was inherited by my parents when my grandfather passed away. The home has been paid off for years and I pay my parents a very affordable rent to live there. I love the house and am happy living there for the time being.

I would like to begin investing in real estate (buy and hold), but am curious as to the pros and cons of buying a rental property as my first real estate purchase. Are there benefits to owning my own home before purchasing a rental property? Any downsides to buying a rental property prior to owning my own home?

Any and all advice is appreciated! Thanks!

Your answer is to developer a specific investment goal andfocus on achieving your investment goal however possible. If that means, because buying in your local market is expensive and it's a better use of your money to generate cash flow by investing out-if-state, do that.  All that matter is achieving your investment goal, lifestyle, etc so start by developing that and be very specific.  Without a specific goal, you'll waste your time aimlessly.  

@Julie Inderkum I am in a similar situation myself. Essentially comfortable living at home and saving a ton for investing in real estate. I have found rental analysis to be difficult for many reasons (i.e. inexperience, my market, and money down) and BP has always been here to help, it's great!

Just be very sure to do a thorough analysis and even when you think it is the right one, ask BP, or someone else you may know that has experience. I went under contract a few times only to back out because the deal wasn't what I thought it was. It was tough to admit I was wrong but at the end of the day you chalk it up as a lesson learned and grow from it. 

In purchasing a multi-family and living in one said to rent the other, as many have mentioned, can be great because you get the benefits of 3.5% down being an owner occupant for a year AND the other unit paying your mortgage. Then, you move out and fill your side to begin the cash flow process. Once you move out, you find another and so you're on your way.

I write it like it's so easy... it's definitely a challenge but that's the beauty of finally finding the best opportunity.

For now, I agree with @Jon S. , develop of plan of action where you determine actionable tasks that you can do to get to where you want to go. Good luck!

Stay home save money and buy rentals.

Good luck

Hi @Julie Inderkum you've gotten lots of advice already. If your parents are providing the house to you at good rent then why not just stay put. Yes there are benefits to owning a property you live in (e.g. mortgage interest deduction) but there are also costs (e.g. maintenance and upkeep) and restrictions. You could buy the house you're living in with owner financing from your folks (even though that is more complicated given Dodd Frank since you would be an owner occupant) or go through traditional financing like FHA or get a Conventional mortgage but you've ultimately got to do what you think is the best option for you given your plans and goals. Good luck and let us know what you decide!

Originally posted by @Julie Inderkum :

First, thank you to the BP community for all the helpful knowledge and insight. I just discovered this amazing resource last week and have already learned so much!

I am hoping to purchase my first rental property in the Sacramento, CA area within the next year and am wondering if it would be foolish to purchase a rental property prior to owning my own home. Currently, I live in a home that has been in my family for decades; it was inherited by my parents when my grandfather passed away. The home has been paid off for years and I pay my parents a very affordable rent to live there. I love the house and am happy living there for the time being.

I would like to begin investing in real estate (buy and hold), but am curious as to the pros and cons of buying a rental property as my first real estate purchase. Are there benefits to owning my own home before purchasing a rental property? Any downsides to buying a rental property prior to owning my own home?

Any and all advice is appreciated! Thanks!

HI Julie,

There are benefits of owning a home but like many have said it depends on how or what the pro's and con's mean to you personally.

A primary home can offer emotional and psychological benefits but I presume you're asking for the financial pro's and con's. It can provide 2 year tax free options if you have a gain in your home value or equity in the property and it can provide tax benefits for interest and property tax write offs. 

As a rental property you can get even more benefits especially if it was a fourplex where you live in one unit. You'd get a hybrid of benefits of primary residence for 1/4 of the property and the other 3/4ths of the property you can depreciate, and write off expenses as if you're running a business so it provides a tax shelter for your business related activities while simultaneously still providing you that tax free primary residence exemption (IRC 121) on 1/4th of the sqft of your home so 1/4th of 250k single or 500k married means you can get 1/4th of that tax free of the gain potentially. I would consult your account for specific advice, not tax advice.

I am a believer in the house hacking concept of the FHA live in fourplex so I may be a bit biased but I understand its not for everyone because not every one has the lifestyle preferences to live in one and rent out 3 other units.

I have successful house hacking clients who are doing well managing themselves and some have outsourced the management of the other 3 units (personality and time preference).

Thank you to everyone for the advice, recommendations and sharing of first-hand experience! 

In regards to FHA loans, is there a requirement to live in the home/property for a certain duration of time? If so, for how long?

Thanks!

You need to live there for at least a year. But you can get a loan for as little as 3.5% down letting you potentially get started much faster. There are some insurance premiums if you use a low down payment. And you can buy up to a fourplex. Five units plus doesn't fit the program.

Think like a banker reading your application;

  • low debit and great DTI OR
  • Hi front-end ratio for residence an low liquidity

To whom to you give the loan?

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