Big Decision. Need Your Opinion.

11 Replies

I could really use an experienced real estate investors opinion here. I'm not a complete newbie. I have 1 rental property right now from 2007 that barely breaks even (obviously not the best time to buy.. ha). I feel like, if I could get advice from my 5 year older self after knowing much more about real estate, I'd know what to do here. I'd really appreciate any help.

I'm kind of torn on what to do. I have a full time job, my wife is a stay at home mom and getting her MBA (4.0 right now;). She's willing to focus on real estate and do all the leg work, while I bring in money from my current job to fund it.

We plan on getting a new house in the next year or 2. It would be around the 450k to 650k price range (coming from a $1600/month home). I have very good credit and I easily make the income to support that. I feel like houses are about to start really appreciating.

My question is, should I buy a home w/ 5% down, get a larger amount of real estate for my money and hope for appreciation which would hurt my monthly cash flow a little, monthly maintenance would cost more, it would cost prob $15k-30k cash to furnish it. It would probably set us back 6 to 9 months on putting $30k down on a rental property and we'd also lose the investing experience.. starting 6 to 9 months later.

Or.. should I just use the money at 20% down to acquire our first buy and hold since 2007? This would increase cash flow and we'd get experience, but I may not capitalize on the appreciation that's set to come in the next few years.

I'm having a hard time finding deals where I can buy the home at 70 or even 80% ARV - rehab costs, so it would be the full 20% investment to acquire a cash flowing property. Maybe the answer lies here..

Anyway, I've been going back and forth on this for a few days. Hopefully someone can help me out here. It would definitely be appreciated. Thanks!

1. You believe that houses are about to start appreciating. That tells you to get as much property under your ownership as possible with the cash you have.

2. You want to significantly upgrade your personal housing situation.

To the extent that these conflict, you have to find the balance point that makes you the most comfortable. I know you asked about specific down payment amounts, delays in buying another rental, etc. I think it's more helpful to be able to articulate your high-level choice first, and only then worry about the specific implementation decisions of that plan.

More thoughts. When you buy rental property, you're helping someone else upgrade their living situation and taking an income stream from that service. This is production.

When you buy personal housing, you're helping your own situation and you might benefit from appreciation, but this is fundamentally an act of consumption, not production. 

You need to balance the two; too much consumption and you grow slower and/or go broke. Too much production and your heirs enjoy the fruits of your labor but you and your wife don't. Just because you can get approved for a huge loan to upgrade your personal house doesn't mean that you have to max that out. :)

There's real estate investing, where you invest your money expecting to produce a return. Down payments for bank loans for investment properties are going to start at 20%. Maybe 15%, but that incurs PMI.

Then, there's buying a house to live in for your own enjoyment. That's not an investment, no matter what NAR commercials say. That's a liability. Its just an expensive doo-dad like a car or boat. If you get lucky, there may be appreciation over time. If you get unlucky, like many people who bought 10 years ago, you get stuck with an underwater albatross. A few folks have been very lucky and bought in the right place at the right time and saw a bunch of appreciation and made a lot of money.

But in general you should treat a residence like a big, expensive toy.  Buy the cheapest one that fits your needs.  If your question comes down should we buy an expensive residence that will hurt our ability to save or buy a cheap one and then save and invest as much as we can, I would advise you to buy the cheapest one that fits your needs and focus on saving and investing.

Your primary residence should be the your best investment.  There is no reason to buy a crappy investment just because you plan to live in it.  Plenty of very successful real estate investors buy personal residences to take advantage of all the benefits of owner occupied financing knowing that they are purchasing an eventual investment property.  People that so this are not "lucky", they're smart.

I would put the minimum down as long as you don't overleverage.  I would also look for a house that is not a maintenance drain and do you really NEED to spend $30,000 NOW to furnish? 

@Chris S.  

  I have a little different perspective... of course its a west coast perspective were primary homes over the years have treated me very well.  So I think this is somewhat of a regional question like Jon alludes to.

However I always look at personal residence separate from business and I buy purely on emotion. Quality of life.. in my younger days schools ( IE spent half my income to live in the Palo Alto School system).. ease of commuting to work.. shopping.  When you take those into consideration it will also dictate what you spend on a home..

Once you have your home life covered and everyone is happy and comfortable it helps you succeed in your other endeavors  RE investing or what ever.

@Chris S.

I have buddies buying SFR from the PA County tax repository sales for $500-2,500 each. These had been mortgaged for 80-90K


I am personally a Robert Shiller acolyte.   He did a study where went back to 1890.  Not 1990...1890 and discovered the inflation rate of return on a personal residence.

Guess what it was?   ZERO!  

Of course, forced appreciation of fix and flip is a horse of a different hue!  So for me, two strategies make alot of sense:  forced appreciation and cash flow.  

@Chris S.  

Will your primary residence you live in now cash flow?  If so, why not rent it out and buy another property and move into that one?  Then, move in a couple years and do it again.  I tend to be a conservative investor, so I never look at appreciation.  I strictly look at what total cash flow do I want and how many properties do I need with paid off mortgages (in the future) to achieve that.   Not sure if that helps your decision or not.  20% down is probably the least riskiest way to do whatever you want if your plan is to rent that next property as well.  

Wow, thanks everyone for the number of responses. Seems like it would make more sense to buy and hold a few properties. If I got good w/ finding the right deals, I may even be able to apply it to my future residence and save 50k-100k.

Our current residence is a little tight, but I think we could live with it for 2 or 3 buy and hold acquisitions, which should be around 1 year..

@Jim Sokoloff - Thanks for sharing. It's a great way to look at it.

@Jon Holdman - Thanks for chiming in. I have a feeling I'll have your mindset once I become more seasoned. It's def what I was looking for from this thread.

@Bob Bowling - Thanks for the advice. I would only buy it if it were a good investment. I would be looking to purchase and already have equity in the home based on the appraisal. The $15k-$30k would prob be over 6 months. I'd lean more towards 15k. Personally, when I lived alone, I didn't have one picture on the wall.. ha. It's more something my that wife is pretty adamant about.

@Jay Hinrichs - Thanks for the advice. I def understand that perspective too. I'd say we could get by for around a year w/ our current house. It's a little tight, but not horrible and location is nice.

@Paul Timmins - I'd love to hear more about that.. Any idea which county? Either way, I'll check it out.. Thanks..

@Douglas Dowell - That's news to me. I'll check it out. Thanks.

@Bryan Neal - my current residence wouldn't cash flow.. bought this one 2008.. ha. Bad timing on both my first buy and hold 2007 and my primary residence 2008.  It's part of what I should consider w/ this decision.

Thanks for the advice everyone. I really appreciate it!

@Chris S. ,

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