Buying Rentals While Still Renting Myself? Yes or No?

8 Replies

Hello BP.  I recently moved to the Chicagoland area and have been looking at getting into the rental market for some time now.  Since I'm confident that I will be here somewhat more long term than where I previously lived I would like to start to accrue rental properties.

The question is that since I was moving here I did not immediately buy a place so I'm wondering if it wouldn't be the worst thing to go ahead and start to accrue some rental properties while I'm still renting an apartment myself.  The way i see it is that it would be far easier to live in the place that I'm renting out (duplex/triplex/multiplex), but that it also shouldn't really make much of a difference in the scheme of things since cash flow is cash flow and I can throw the profits at my current rent payments and still technically manage to live for free/reduced cost.  Then, if a vacancy comes about around the time that my current lease expires move in or look to buy another property around that time that has at least one vacancy.  I don't want to miss out on the opportunity cost of just saving up money for another year (Realistically 6-7 months since I'm not buying something today).

What would you recommend that I do in this situation?

@John Barkow

Hi John. If you are buying a Multi-Family under 5 units, you can take advantage of residential loans if you plan on moving into the unit as owner occupied.

If you don't plan on being owner occupied, the rates and terms may be worse from my experience.

Please call a bunch of Mortgage Banks and Brokers, shop around for both Owner Occupied and non-Owner Occupied Investment Mortgages, compare the results so that you have a full picture.

Keep in mind that if you are planning on keeping the Investment long term, then you will do quite well with an owner occupied residential mortgage.

With Residential Owner Occupied Mortgages, you don't have to live in the property forever. In most cases, you can live in it for 1 year and fulfill the promise you will make in order to get it.

Here is a Spreadsheet which makes the assumption that a Owner Occupied Mortgage is at 4% and a non-Owner Occupied is at 5% fixed rate Mortgages:

You will see if the above scenario was the case, you will save $42,773 over a 30 year period.

Just remember, you don't have to live in one of the units forever. I believe the 1st year is good enough. I'm sure a Mortgage person on BP can answer the question.

Hope this helps.

100% up to you. I have a client who refuses to rationalize buying his own home because he hates property taxes so much. He figures that at least if his property is a rental, the income covers the property taxes there. 

I think this is where you add your "why". 9 times out of 10, your investing purchases do not impact your personal residence unless you're house hacking. There's really no wrong way to go about things. It's all going to be dependent on what you want. 

If I were in your shoes, I might look at both properties that I would utilize as a personal residence and income property. If you see great income properties, go for it. If you see great personal residences, go for those. There's really no wrong way to go about things.

robert Kiyosaki says that your personal residence is not an asset.  Unless you are financially ready to buy non assets you may want to continue to rent.  Once you start thinking about a wife and kids priorities do change.  It would also depend on where you live and where you are in a market cycle.  Buying a house at the bottom of the marketand living in it for a couple of years in an appreciating market, could be a good investment.

Hi @John Barkow

This is similar to my situation. I plan to move to Rhode Island in a few months and I plan to be there long term so I am trying to figure out if it is smarter to buy a multi-family house or if I am better off just renting.

This is why I believe buying the house is the smarter plan: The Owner Occupied rates a great and you only have to put down 3.5%! That's amazing compared to the 20% you need to put down to buy a non-owner occupied property.  If you do not have a ton of Capital (like me) this is your best bet. If you happen to have the 20%, I'd just do some math like you seem to have done and see if the property will cash flow to help assist your rent payment. 

If you break even with you living in a unit, you're golden and you can live for free! This is exactly what I am working towards. So I totally agree with @Llewelyn A.

It all comes down to YOUR goal though. While I am looking to cut my living expenses and possibly live in something for free, your goal might be totally different. So please keep your goal in mind as you receive more responses, study more, and analyze deals. Keeping the goal in mind will save you from a lot of headaches!

Its a decision that you are in the driver's seat on.  If the numbers work out and you are essentially living for free either way, it doesn't really make a difference.  My personal opinion would be to physically live in one of my properties, but that preference is solely an emotional preference backed by no data.  If you look at this analytically enough, there is not difference, and your preference is to rent temporarily, then go for it.  You are actively acquiring assets and building wealth in either scenario.  I have a PM client who is also on BP that is currently doing this and it is working out well for him.  

There are several reasons why it makes more sense to buy than to rent. One, its absolutely cheaper. If you're buying houses right, its far cheaper to own than it is to rent here in Illinois. I guess I should check that.

It likely depends on what area you're going to live in and what area you're going to buy rentals in. Typically areas you'd buy rentals in are in the 130k to 180k range here in Illinois. Thats kind of the sweet spot in terms of price to rent ratios.

But if you're wanting to live in a 400k neighborhood, then it might actually make sense to rent instead of buy because the higher you go up in price point, the less money you save by owning and in fact, it ends up being cheaper to rent than to buy.

But assuming you're in that 130k to 180k range (and i'm guessing more like 180k), then here is why I would suggest you buy:

1) You're financing is easier/cheaper to gain rentals via the BRRR strategy. 3% down versus 25% for investment properties. Owner occupant rates are also much lower.

Buy, live there for 6 months to a year, then turn into a rental and do it again. Cheap money. Will preserve your capital.

2) Its cheaper assuming you're buying right. Buying right is roughly 70 to 75% of the ARV. So on a 160k house, you should be all in (purchase plus rehab) at 112k to 120k. To rent that type of house, you'd be looking at paying 1400 to 1600/mo depending on the area here in Illinois. To own that home using owner occupant conventional financing, your mortgage would be about 550 and taxes about 400/mo (also very dependent on the area).

Thats 950 a month in PITI versus 1500/mo for rent. Plus you get to write off your taxes and mortgage interest. 9k or so writeoff gets you 2500 back on your return or 200/mo. So you're paying 750/mo to own versus 1500/mo to rent. You will have to take care of your own repairs but still Renting is cheaper in that price range.

3) If you buy your primary residence right, you can use the equity to invest in more real estate. Renting gives you no equity. So lets say you buy that 180k for 140k. You can get heloc's up to 90% of the ARV so in this example, it would be 22k in a heloc. Heloc's are the cheapest money you will get.

4) Equity growth. In 10 years, your principal paydown and appreciation will help you gain a nice size chunk of net worth. Renting gets you zip. On a 180k house that you have a 140k loan on, your principal paydown will likely be about 200/mo or so. If the house appreciates 3% to 5% a year which is what it typically does here in the midwest, you're looking at 7200 a year or 600/mo in appreciation. And that goes up over time as your basis grows

So thats an additional 800/mo in net worth you're gaining by owning a home. Now appreciation is unpredictable for sure. But if you take out this crazy crash, houses have historically doubled every 20 years or so here in Illinois.  And thats over a 100-some year period.

So those are the reasons I'd strongly recommend owning versus renting.  I don't care what robert kiyosaki says. He may have wrote a solid book to read. But that doesn't mean I believe everything anybody out there says.  

The numbers don't lie. Not in this area anyway. But again, you have to run your own numbers based on the price point of homes you'd be looking to live in versus the ones you'd be looking to rent in.

But think for yourself and trust your numbers. 

Thanks for all of the replies everyone.  The area that I'm currently renting in would not meet any of the x% rules.  Even the apartment that I'm renting (if sold at its current appreciated value and then rented) would cause the rent to need to more than double to meet 1%.  People buy in this area buy for a totally different reason unless they find a major gut job rehab.

All that said I don't really mind moving so that sounds like a better option especially with the better interest rate, potentially shorter commute, tax benefits, and better awareness of what my tenants are doing.

With regard to buying a place and living there so that I only have to put down like 5% of the purchase price is that really beneficial if I'm going to have to pay the extra PMI cost? Of course that can be calculated, but I would assume that the ROI would be minimal at best.

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