Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
Soooo…here is my dilemma…should I stay living in an apartment while I accumulate rental properties so that I free up my debt ratio…for even more income properties?…or should I buy a home to live in and just accumulate properties as I can?…or maybe live there for 2 years with the ultimate goal of using it as an income property?…I have debated this for over 1 year…any help would be great…thanks !!!!
I take a contrarian view on this. I have thought about this extensively and have chosen to rent while I accumulate investment properties. I have a 4-plex and have debated living in one unit, but ultimately decided against it. First of all, it's not in a great area (not warzone, just not a great place to live imo). 2nd and most importantly is that I rented that unit out for 595. It costs me less to rent right now (I am living with a roommate). However, even if I decided to get a 1 bedroom or something, I'd only pay maybe 1-200 more than what it'd cost to rent that unit out. Plus you don't have to live in a less desirable area, don't have to live next to your tenants, and can live closer to work. Are those intangible benefits worth 1-200 per month? Only you can answer that.
Of course if you don't have the cash to put 20% down and FHA is your only option, then none of the above applies. (I am anti-FHA since they changed the PMI restrictions) I just believe that the benefits of home ownership are grossly overrated. I'll buy a home when I'm ready to live in it for at least 10-15 years.
What are your living standards compared to your rental property standards? Do you want a nicer apartment/house than what you're currently considering for buy-and-hold?
I'm a big fan of 3-4 unit owner-occupied properties. You can get into one with about 5% down if your credit is sufficient. You can live there for very cheap or even free, and you can move out and rent out your unit whenever you're ready to move on to something else. I think that's the best of both worlds in a situation like yours.
Yeah you could do what Michael said and live in a multiunit and rent the other units out. Or you could buy a single family home and rent 1 or 2 bedrooms out (but only buy assuming your own income for that scenario, not rental income).
I found myself in a similar dilemma recently. Even rented an extra year because I couldn't make up my mind.
When I did decide to purchase, I was still on the edge about my strategy. I kept flip flopping between SFH and small multi-unit. Luckily my realtor was also a real estate investor and understood what I really wanted was to be able to invest in real estate in the long term. We discussed the pros and cons of each strategy and ultimately settled on a duplex. Honestly it's been a great learning experience so far, and I believe it's beneficial to be getting my feet wet while I actually live right onsite. I just closed in June of this year, so I don't have a ton of experience under my belt, but so far so good. I do still plan to buy or build a SFH for myself within 5 years.
Of course my situation isn't the same as yours, but I'm loving the duplex as of right now. My only regret is not finding an affordable tri or quad :).
Hey James, there are definitely pros and cons to living in the same building as your tenants. Here are a few of each from my experience, though I'm sure there are others:
Pros
-Tenant screening seemed much easier to me. When I told prospective tenants I live in the building and am constantly working on it, not only did it attract anybody that might be on the fence, but also weeded out anybody who might be into excessive partying or illicit activity as these people usually like places where the landlord may only drive by 1x per year.
-Rent collection tends to be easier. Usually I'd get cash or check in person the day it was due or before the due date. Was a lot easier than going to the post office and nagging people if their check isn't there.
Cons
-It's hard to keep a personal separation since you have an obligation to the tenants. I tended to end up in long, drawn out conversations a lot more than I really should have with a tenant (part of the learning process for me).
-Tenants likely will not consider you a serious landlord and may treat you differently than an offsite landlord.
I am a real big fan of buying a 2 family and then occupying one unit while renting out the other.
Great way to get exposure to multi family investing and creating extra cashflow to help pay down your mortgage and then ultimately moving out and turning it into a full rental.
I think a lot of it depends on your investment philosophy like mentioned above. Would you normally invest in the house (or 2-4 multi) if you weren't going to live in it? If not then analyze why it makes sense to buy a property as an owner occ. I am a huge believer that owning your own "HOME" is not an investment. It depends where you live, the affordability index, buy vs. rent comparison etc. However, generally at best a home becomes a piggy bank/savings account. Obviously people want to own their own home for many other reasons than an investment i.e. starting a family, having a place they call their own etc etc. Most home owners (even investors) are emotionally tied to their own home and make financial decisions that are not always best for the property. Maybe that is over spending on a renovation or finishing a basement in an area that doesn't warrant the upgrade.
With that being said I do think having an owner occ 2-4 unit can be lucrative (depending on area) because of the availability of financing and it's an income property (hybrid). @Michael Seeker also brings up some great points on the pros/cons list.
@James Mudd that's the same question I asked myself. I live in NYC but invest in emerging markets. There are so many variables but two of the most important are:
1. What's it cost to buy in your market and can you make better cash flow by putting that money in other markets?
2. Can you get a duplex in your market and rent out the other side so it cash flows?
I decided to rent in NYC because a studio apt doesn't cash flow unless I put down a big down payment. I'd rather put that down payment money on multiple properties that cash flow.
Multi-unit is a great way to go if you can live in the smaller space. I would recommend as a much better route than getting a SFH and renting rooms because you have your own space, which makes a HUGE difference. As mentioned above, it also helps to be on site w/ learning the small lessons on being a landlord.
Thank you for the responses...my main goal is to accumulate properties...so I want to move towards that goal...not emotionally attached to where I live...I am thinking a multi-family is exciting...what is the best way to find out what areas are best to invest in..?...I'm in the Dallas market.
I take a contrarian view on this. I have thought about this extensively and have chosen to rent while I accumulate investment properties. I have a 4-plex and have debated living in one unit, but ultimately decided against it. First of all, it's not in a great area (not warzone, just not a great place to live imo). 2nd and most importantly is that I rented that unit out for 595. It costs me less to rent right now (I am living with a roommate). However, even if I decided to get a 1 bedroom or something, I'd only pay maybe 1-200 more than what it'd cost to rent that unit out. Plus you don't have to live in a less desirable area, don't have to live next to your tenants, and can live closer to work. Are those intangible benefits worth 1-200 per month? Only you can answer that.
Of course if you don't have the cash to put 20% down and FHA is your only option, then none of the above applies. (I am anti-FHA since they changed the PMI restrictions) I just believe that the benefits of home ownership are grossly overrated. I'll buy a home when I'm ready to live in it for at least 10-15 years.
If you can afford to make payments to someone else why wouldn't you get into a multi family home and live in one unit? If you're not in Manhattan then chances are you can find a place to do this and get to where you want to be in the long term much faster. I built everything I had by starting off in a duplex. When the other side was completely paying for the mortgage, taxes and insurance it sure made investing in other opportunities much easier. Get out of that apartment @James Mudd !
Thank you for all the replies !!!….and I like the way you think Darren !!!…How much (or what % down) is required for multi-unit properties that you plan to occupy…??
If you do have kids, you may prefer to live in a more up scaled community as long as you can afford it. This is not just for their education, but also for your kids to make friends in a higher level of social circle.
Thank you for all the replies !!!….and I like the way you think Darren !!!…How much (or what % down) is required for multi-unit properties that you plan to occupy…??
With good credit, you can get a conventional loan with 5% down and pay PMI. I sold a property to an owner occupant that did this and it was a heck of a deal for her. She came to closing with around 8K on a 200K property (due to rent credits, tax credits etc).
I also don't think FHA is the way to go anymore. Though it's advertised as 3.5% down, they charge a 1% mortgage insurance fee up front, so you're really looking at 4.5% down, but only 3.5% of it goes to your equity.
Thank you for the responses...my main goal is to accumulate properties...so I want to move towards that goal...not emotionally attached to where I live...I am thinking a multi-family is exciting...what is the best way to find out what areas are best to invest in..?...I'm in the Dallas market.
I am always of the stance that you should keep renting.
When I was out of college I was determined I should buy my own house and my grandfather, huge inventor/entrepreneur/investor, had always said he would financially support any of the grandkids with an investment. So I went running to him and told him about my home buy fully expecting him to help. He gruffly said no way that it wasn't an investment. I tried to convince him that of course it was, everyone says it is, it has to be. He said nope, not happening. Then my dad started explaining it wasn't an investment either. I ignored both of them, bought the house, and then a few years later ended up in real estate myself. Turns out, after my experience in this field and with a lot of research on the topic, they were both right. Buying a house for yourself is not an investment. If you actually tally up the costs of owning a home, it is unbelievable.
Robert Kiyosaki also preaches that buying a house for yourself is a liability and not an asset. His stance is that you buy enough investment properties and/or build a business that provides enough income to fund having a "toy" like your own home.
Sorry for the rant, but I have to say I agree with all 3 of them after years of looking deeper into it. I say buy as many investments as you can, then buy yourself a house. Especially now with prices on the uprise, the investment returns won't be what they are today even a year from now, much less years from now. Grab them up while you can. Then worry about your own home later.
Thank you Ali…I am thinking the same thing…if I bought a house for myself, it just seems like it would slow me down…I will be paying into something that will not be a return on investment for a very long time.
I'm a numbers guy. Lets say mythical duplex that meets 50% and 2% rule.
100k For duplex @ 5% down @ 5% @ 30 years
Rents 1k each side total 2k
614$ monthly mortgage
40$ PMI
So if you rent both sides you earn 2,000* 50%(50% rule) - 654 (mortgage) Total profit per month 336$
Now you have both sides rented so you must rent an apartment. What does that cost? We will say 736$ Total renting and household cost to you then is -400$
Now if you live in one side, Making big assumptions here total income:
1000$ total rent but you apply the 50% rule to the total possible income
2000 possible income *50% -1000(your side) - mortgage 654$
Total renting and household cost to you then is -654$
I am not saying to go one way or the other! Your situation is independent of mine. This is how I look at things, the numbers are important. There are a lot of factors I have over looked I am sure. Make the best decision on your situation! Plus a lot of good advice was presented here.
Now if you live in one side, Making big assumptions here total income:
1000$ total rent but you apply the 50% rule to the total possible income
2000 possible income *50% -1000(your side) - mortgage 654$
Total renting and household cost to you then is -654$
This is not entirely correct. Since you are occupying one side you will not have vacancy, management, and repairs/maintenance will be minimal since you are presumably not going to trash your own place or have to evict yourself. So it brings it closer to a wash. But I do agree with the premise of your argument. The biggest factor imo wasn't mentioned. A house that makes a good rental (ie 2% rule) in most cases will not be the most desirable place to live.
Thank you Ali…yes, I am leaning towards staying in an apartment and start building my rental portfolio…that could change if I get house fever though :-/...and I feel a slight tinge of it coming now.