Hello,

I live in the San Francisco bay area and my question is if you have the capital would you buy your home first or would you buy a rental property first in the bay area?  Our goal is eventually have several rental properties but starting out should we buy our first home outright or use the money and buy a duplex and continue to pay rent and build our little empire that way?

@Shanna Warren

I don't live in your area but to me it doesn't matter to me if you live NYC, LA, or ATL buy a rental first. I wish I had known about BP and the benefits of owning a rental property when I was younger. Then I wouldn't have strived to get my primary residence first and NOW try to build my portfolio at this point. 

Buy yourself a duplex and house-hack. Rinse and repeat until you feel like you have a decent portfolio and are ready to settle down in your own home. 

Don't do a fool-hearty mistake like me and couple of newbies on BP did. Start investing now. California is only going to get more expensive where you may not even have enough to get a good skin in the game. 

I pesonally want to invest in a rental before I own my personal home. I think it all depends upon your current situation. I currently do not pay rent and do not need to move out for any reason, so a rental is ideal for me. If I had a wife and kids, I would purchase out home first.

You mentioned continuing renting and building up your empire... I  think it depends upon rent vs mortgae payment. If you could purchase a similar home for yourself and pay around the same that you are currently renting- no brainer. Just going to need to shell out the down payment- which of course will set you back on your future deals. 

I personally believe that building equity in your own home would be better then throwing money away on rent. Of course unless your rent is not near as much as what your mortgage could be. 

House hack!

This is your opportunity to buy a multi family, with low down and low interest rate.

Plus, later in life you and your family may not be in the “house hacking” stage.

@Shanna Warren definitely rentals first. I rented in Alameda and Oakland for 9+ years, and started piling up rentals in 2014. I kept renting myself because rents were low (until a few years ago at least).  

I kept adding cash flowing properties to my portfolio, and got to a point where the cash flow would pay for a primary mortgage. So last year we rewarded ourselves and finally bought our primary, and now we’re living for free.

Instead of buying a toy, buy an asset that will provide cash flow to pay for that toy. Have your cake and eat it too. 

House hacking is the way to go if your comfortable doing it. Find a place with an in-law unit for yourself and then rent out the rest of the house. Worst case you have a tenant subsidized mortgage payment, and best case you get to live there for free/make a bit of extra cash. 

@Shanna Warren

In my 2 decades of experience buying and living in NYC, I see there is a really GREAT difference what you should do depending on where you want to live in the long term.

I have a friend, let's call him Bob, that decided to buy out of State versus owning his primary residence in NYC about 14 years ago.

Bob bought in Bristol, CT and was making about $1k in cash flow.

HOWEVER, what Bob didn't realize was that the NYC Rental that he lived in was going to move up from $2k per month to $4,600 per month, an increase of $2,600 per month and $1,600 per month more than the rentals he purchased Out of State 14 years ago. Unfortunately, those Bristol Rentals never appreciated the same way as Bob's NYC apt that he rented.

Furthermore, Bob's NYC Apt could have been bought somewhere around $1 Million. Had he actually bought the apt, he would have locked into a long term fixed rate mortgage, where he could have protected his monthly payments versus having his rent more than doubled after the 14 years. To add insult to injury, If Bob wanted to buy his apt today, it is worth much more than the $1 Million, probably more than $2 Million. Bob is priced out of buying anything in the location that he rented in NYC.

Eventually, Bob had to move because he couldn't afford the rent which is always going up. Bob, having a taste of the good life, would never move to the location where he bought his own cash flowing rental. He still lives in an expensive area and still has to work to afford his life style.

What is funny is that I offered Bob to buy a multi-family building 14 years ago in the year 2000. He declined it to buy the cash flowing properties in Bristol, CT. While I wasn't making cash flow 14 years ago from the building I bought, today, the cash flow for that building is around $4k per month because of the huge increase in rents here in NYC.

The above is a very true story.

While I don't tell people to what they should do, I feel it's important to have a contrast from the majority. There are risks that people don't necessarily know until they start looking at the long term nature of living in these highly appreciating Cities like SF and NYC. I'm not sure where you want to live in the long term, but I would also research how rents and prices appreciate over at least 10 years. Then say to yourself, what would have happened to you had you only rented for the last 10 years in that area you really want to live.

After that, then you can decide if you should buy your own residence, house hack it, or rent and buy a cash flowing place somewhere else.

Just food for thought!

You need to consider the financing for primary homes is 3-5% down and investments are 20-25% down.  

The cost of rent in Walnut Creek vs the cost of owning should be carefully reviewed.  I live at the beach in Jacksonville and for around 4k you can rent a $1m home.  You could not get close to that as a purchase.  High end RE is generally a lousy cashflow investment for the owner.  Turing that around, it is a good deal for the renter, YOU!

@Shanna Warren Welcome to BP! :) 

What about having both? Best of both worlds? A scenario in which you own your home and get rent from it as well? Buying Multifamily is a really good way to start your journey into the real estate investing realm. 

Also, you can invest somewhere else in the country where your capital can work harder for you, but I normally won't encourage unless it is a stabilized asset, meaning it has good paying tenants, and for small multifamily assets, the occupancy is 100%. 

Another approach is to find a market in which you can leave in and start by buying there with the intent of leaving in that city some point in the nearest future. Yes, Real Estate investing requires sacrifices too. 

In any case, you do have a couple of options. 

Hope this helps. Good luck. Thanks! - Ola 

@Shanna Warren , welcome to BP. Your post reads as if you do have the choice of buying your primary, in your desired area, now. Turning @Lesley Resnick 's point about renting vs owning around the other way, remember this: Someone wisely bought that property being rented by Lesley - probably as their primary - many years ago, before it was worth anywhere near $1M. 

They've moved on now, but are still grossing a tidy $48k per year out of it (and appreciation)!

I agree with those who suggest you should look for the best value/location you can find/afford for your primary, first (especially for the lowest interest rate / longest fixed terms)! My 2c...

Knowing what I know now, I definitely would've house hacked for my first home.  It was just my wife and I, no kids yet, no need for extra space or a yard.  I would've bought something with 2-4 units and let them pay my mortgage while continuing to save for another deal.  Or at minimum, something that could easily transition into something you could Airbnb.  In my area, if the location is right, you can make nearly as much doing that as you can from renting.

Don't get me wrong, having your own place and own yard is great, but the wise decision for the financial future is to sacrifice a little comfort to keep yourself out of debt and picking up your first cash flow property.

Originally posted by @Shanna Warren :

Hello,

I live in the San Francisco bay area and my question is if you have the capital would you buy your home first or would you buy a rental property first in the bay area?  Our goal is eventually have several rental properties but starting out should we buy our first home outright or use the money and buy a duplex and continue to pay rent and build our little empire that way?

 Rental. If you follow your goals, you actually answered your own question.I couldn't convince my wife of this but if it were solely up to me, rental first, rental again, rental again....until your rentals pay for your primary. Good luck! 

Originally posted by @Shanna Warren :

Hello,

I live in the San Francisco bay area and my question is if you have the capital would you buy your home first or would you buy a rental property first in the bay area?  Our goal is eventually have several rental properties but starting out should we buy our first home outright or use the money and buy a duplex and continue to pay rent and build our little empire that way?

 Shanna-

Buy some rentals outside of your MSA, get your cash flow and be a renter in the meantime, build your wealth - 

A Simple Guide for Buying Out of State Turnkey Investment Property

Buying outright does not put your money to work for you

Originally posted by @Ola Dantis :

@Shanna Warren Welcome to BP! :) 

What about having both? Best of both worlds? A scenario in which you own your home and get rent from it as well? Buying Multifamily is a really good way to start your journey into the real estate investing realm. 

Also, you can invest somewhere else in the country where your capital can work harder for you, but I normally won't encourage unless it is a stabilized asset, meaning it has good paying tenants, and for small multifamily assets, the occupancy is 100%. 

Another approach is to find a market in which you can leave in and start by buying there with the intent of leaving in that city some point in the nearest future. Yes, Real Estate investing requires sacrifices too. 

In any case, you do have a couple of options. 

Hope this helps. Good luck. Thanks! - Ola 

What Ola says is spot on! The new term for this type of multifamily purchase is "house hacking". That's because any dwelling of 4 or fewer units is considered residential so when you apply for the mortgage you can take advantage of the FHA and other favorable programs along with owner-occupied interest, property tax savings and reduced insurance costs to "hack" (beat the system in some creative way) the rental ownership starter problem.

Either way, if you decide to use payments from renters in other units of your own dwelling, get a family member to spilt costs with you or just buy it outright, personal home ownership is the single most important investment you will ever make.  This is even more important if your home is in the San Francisco Bay area where personal home prices continue to spiral out of sanity away from the rest of the nation.  If you live and work there and you have the advantage of being able to afford a home there, someday you will find this advice to be quite sage indeed.  The price of an ordinary home in that area can easily buy two or more, ordinary homes in a less expensive market.  There are only 8 markets in the world more expensive than San Francisco (only 3 in the USA) so your viewpoint may be a little bit askew if you have never lived anywhere else.

The value and the basis of your first home is the thing that will carry you into your retirement years safely.  It's available for equity dollars for other investments or simply to raise the money to buy your next home so that your retirement dwelling has no mortgage and provides you the safety that your home is supposed to do. DON'T SKIP IT!  Mom and Dad won't be here forever and someday may want you and your new bride out of their home.  

Another thing to consider is that rental income is never a guarantee.  Real Estate is a risky investment!  That's why we make the big dollars.  We are willing to take the risks that others won't.  While they rent, we own and count on them to pay.  If you own your own home, you reduce your risk by having a stable cost of living while you build your fortune.

If you start with a 1-4 unit you will get all the advantages of personal home ownership along with the bonus opportunity to have others pay your costs.  In any given month that they don't, all you have to pay are your own expenses which you would have had to pay anyway (the bank will see to it you can afford the mortgage with your own resources).  You will also get the opportunity to learn property management close to home without additional expense and keep an eye on your investment.  

One other advantage that is rarely mentioned is that when you rent space in the residential dwelling you also occupy as a primary residence, Equal Housing Opportunity restrictions do not apply.  This will allow you to rent only to those people you feel comfortable with rather than just any qualified applicant.  So if you are uncomfortable with confrontation or, ethnic customs or you just prefer to rent to people your own age, you may choose your tenant on any criteria you like.  The example they talk about in real estate license classes to explain this is, suppose an elderly woman wanted to rent her own place but was afraid of potential confrontation with young men, she could choose to rent only to young women to satisfy her safety concerns.

I hope this helps!  Holler if you need me.

Best regards,

Mark 

Thank you everyone for your prompt response.