1st step, Primary Residence or Rental Property

16 Replies

Hey BP community! Cant express how impressed I am by the BP community! 

So I posted before about being a newbie real estate investor, Im very excited and cant stop thinking about my options. As of now, I am renting with my wife but we are at the point where we are ready to buy. My dilemma is, do I use my capital I've saved to buy a primary residence, or continue renting and start buying rental properties. I live in Oceanside, which is a small city in North County San Diego where property values just keep going up. Im worried that if I don't buy now / soon, I will have to keep chasing the market. 

My question to all of you is, did you start investing while you were still renting or did you buy a primary residence first before starting your investment journey? Is it a smarter decision to build equity in my own home then pull out the equity in a year or two and start investing then? or start investing now, continue renting and buy once I've built a small portfolio. 

Any comments or suggestions would be greatly appreciated!

@Jeremy Leech - Like everything else it depends. My vote would be to kill two birds with one stone and get a primary residence and rental at the same time....Duplex. If you dont have enough for the down payment you can always do a FHA 3.5% down since its a primary.

If you didn't want to do that right off the bat, I would say do a live and flip.  Find a fixer upper and live in it, fix it up forcing appreciation, then maybe HELCO and eventually sell it after two years to avoid all capital gains tax.

Best of Luck!

@Jeremy Leech I kinda feel like I'll be ostracized for not being a good real estate cheerleader on BP, but...

"I'm worried that if I don't buy now / soon, I will have to keep chasing the market."  It terrifies me to hear this.  Do NOT make decisions based on this fear - it's literally verbatim what people (including myself) have thought and said in the previous two cycles.  Instead, be sure your personal growth (your current career, your earning potential, your network, your knowledge) is growing faster than the market ... so long as it is, you won't chase the market indefinitely.

That said, I concur with Jonathan - consider a live-in flip or a duplex. If your personal situation rules those two out, or if you're not willing to sacrifice for the lifestyle that entails, you're in a tough spot.

Without knowing more about your financial situation and plans for the future, I'm hesitant to suggest anything else.

Side note: I wish I still had the spreadsheet I used in 2004 to buy my first kinda-a-primary-kinda-an-investment property.  I'm thankful I made the mistake of including market trajectory in my decision at that point - with less capital at the time, my mistakes had limits to the pain they could cause.

Originally posted by @Jeremy Leech :

Hey BP community! Cant express how impressed I am by the BP community! 

So I posted before about being a newbie real estate investor, Im very excited and cant stop thinking about my options. As of now, I am renting with my wife but we are at the point where we are ready to buy. My dilemma is, do I use my capital I've saved to buy a primary residence, or continue renting and start buying rental properties. I live in Oceanside, which is a small city in North County San Diego where property values just keep going up. Im worried that if I don't buy now / soon, I will have to keep chasing the market. 

My question to all of you is, did you start investing while you were still renting or did you buy a primary residence first before starting your investment journey? Is it a smarter decision to build equity in my own home then pull out the equity in a year or two and start investing then? or start investing now, continue renting and buy once I've built a small portfolio. 

Any comments or suggestions would be greatly appreciated!

Welcome Jeremy,

I was on the same boat in April of this year so I can provide a little bit of insight as to what steps I took. I couldn't decide whether it was right to buy a SFH for my primary residence, or start my rental portfolio while still renting. Believe it or not, a majority of the people I spoke to were telling me to buy a SFH for myself which would have been a huge mistake (for me at least). My question to you would be, Why not do both?? As both of these gentlemen said, Multifamily homes are one of the best investments a new investor can make, i stand by it, I swear by it, and no one can convince me otherwise. House hacking is easily the best way to build equity while essentially living for free (or very little) while also getting landlord experience and saving cash. Here's a little bit about how I started with my first investment.

I bought a two unit property in a popular area of Baltimore City (Unit A: 1BR 1 BA - Unit B: 3BR- 2BA). I purchased this property for 260,000 with zero down (VA loan). My mortgage, to include all of my expenses (minus electric) is $2,000 a month. I occupy Unit A, the 1BR APT. The upstairs unit is renting for $1850, which only leaves $150 a month for me and my girlfriend to cover. Both of us have fulltime jobs and are able to work a lot of overtime to save extra cash. This by FAR has been the best building block for me to start my investment portfolio because not only am I saving a ton of money to re-invest, when I decide to move on to another multifamily property, I believe this will cashflow a total of $1000-$1100 a month when I rent out the unit i'm living in. This is all because I started house hacking instead of buying a single family. Not every deal works for every person but I find it very hard to argue against buying a multifamily for your first property.

Hope that helps, best of luck.

Eric 

@Jonathan Klemm thanks for the response. The duplex idea seems ideal and has been on my mind for a while... Now the hard part. Finding one where the money makes sense. 

@Justin R. Good advice. It makes sense, I don't plan on being stagnant in my career and I have intentions of growing more and more each year... Hence, why I'm here looking to get into real estate. I'd like to chat via PM if you don't mind as you know about our SD market.

@Eric G. Thank you, I like hearing from people that are in similar points in their life. Also, thank you for providing specific details to your decision. I have been looking at multi-family type homes near me but they are so freaking expensive. for example. I recently looked at a duplex, which I wouldn't have minded buying as a short term house hack. My issue was the location. this duplex was priced at $480,000 and comparable rents were approx $1300-$1500. obviously I wouldn't have been hacking as good as you as I would have had to basically pay half of the mortgage which I felt I could live with... better then paying rent to someone else. Like I said though, The location was less then ideal as it was in a rough part of town... Anything that is in better parts of town are 600k+!

@Jeremy Leech I agree with everyone.  House hack in a duplex.  Look at every one that you can find and start making offers.

I think you've gotten some great feedback on this thread with those caveats that each person has to make the right decision for themselves and for their goals. For some perspective, I bought out of state rental properties for my first deal this year. It would have been very helpful to have house hacked in my local market before doing that. However, now I'm established with out of state investing and I'm happy to rent in Southern California. As I'm sure you are aware, California is an appreciation market and the BP rules of thumb don't apply like they do in other markets. Oceanside probably has a decent way to go in terms of appreciation over the next 10-20 years. Short term who knows what will happen. Long term I think Oceanside property values west of the 5 are going up. Good luck and keep us posted! 

Originally posted by @Jeremy Leech :

@Jonathan Klemm thanks for the response. The duplex idea seems ideal and has been on my mind for a while... Now the hard part. Finding one where the money makes sense. 

@Justin R. Good advice. It makes sense, I don't plan on being stagnant in my career and I have intentions of growing more and more each year... Hence, why I'm here looking to get into real estate. I'd like to chat via PM if you don't mind as you know about our SD market.

@Eric G. Thank you, I like hearing from people that are in similar points in their life. Also, thank you for providing specific details to your decision. I have been looking at multi-family type homes near me but they are so freaking expensive. for example. I recently looked at a duplex, which I wouldn't have minded buying as a short term house hack. My issue was the location. this duplex was priced at $480,000 and comparable rents were approx $1300-$1500. obviously I wouldn't have been hacking as good as you as I would have had to basically pay half of the mortgage which I felt I could live with... better then paying rent to someone else. Like I said though, The location was less then ideal as it was in a rough part of town... Anything that is in better parts of town are 600k+!

 No Problem, Jeremy. You can send me a PM if you have any specific questions about my process and how it can help you. Best of luck.

Hey @Jeremy Leech

You can tally my vote in the “house hack” column.  

As others have said, an owner occupied multi family property really is killing two birds with one stone. 

Now,  there is some personal/social trade off (living next door to tenants/not having the cookie cutter house with white picket fence) with this strategy -  in my opinion,  though, that is far outweighed by the the financial advantages.

I’d be more than happy to walk you through a few examples to help compare the two paths and ensure you’re making the best decision for you and your family.

So, feel free to reach out at any time!

Amen @Jeremy Leech!

My approach is almost exactly as you described, but AirB&B will be a part of the strategy.

(you wrote "HELCO" - did you mean "HELOC" a.k.a. "Home Equity Line Of Credit"?)

Own first. Best day to day experience you can get.

Hello Jeremy!

As common theme with above posts, i personally started out with my rental property first, then my 2nd duplex is now my primary/rental since i'm house hacking.

Very easy to begin with both steps. And again knocking out your third question too, as there are no rules against pulling out equity against a rental buy and hold after some time while paying down the note w/rents.

Study your market before doing anything.

Again, thank all of you for your responses. Every person has helped and given me confidence in each owns way. If there is anyway that I can help any of you please don't hesitate to ask. Love this place!

Add me to the list advocating a house hack of a duplex but I add 2 recommendations to that suggestion 1) find a detached duplex 2) self manage but refer to yourself as the property managers.  Advantages include lower down payment, lower interest rates, knowledge gain from owning and managing the property.  

Retail SFR do not cash flow in San Diego. You should only consider a live-in SFR if you can either add equity (fix and flip) or if you can get it significantly below retail. If you purchase at retail it is cheaper to rent the same SFR. This is different for small multiplex (duplex to quad) which in certain areas can be purchased at retail and cash flow.

I have performed calculations on rent to purchase price that cash flow but my calculations are based on investor down payment amount (typically 20% or 25%).  At investor down payment and conventionally financed a buy n hold can cash flow in San Diego (aided by our higher rents) at 0.7%.  With less down payment the rent to price percentage would have to increase a small amount to have positive cash flow.  

Good luck

I started out with a rental property first. My thinking was that the more liabilities I have the harder it would be to invest. I don't make 6 figures so I had to make a tuff decision. I am happy I did getting started as an investor it is a great feeling and it opens your mind in a lot of ways to more investing opportunities and I  happy I did it. Happy Holidays and best of luck!

@Jeremy Leech Add me to the list of agreeing to buy an owner-occupied duplex. Or triplex. Or even Fourplex! This is my specific niche in San Diego and I would love to chat more with you. My dad has been a local investor/broker in San Diego County for over 35 years and has lots of great knowledge to share. Shoot me a PM and lets get this conversation started! Hope you're having a great holiday!

Tiffany 

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