First purchase: primary residence (high CoL area) or investment?

Question

Hi all,

I'm debating which order I should approach things.  I currently rent in a high CoL area, which means purchasing homes that will cash flow as an investment isn't really possible.   House-hacking would probably only be possible via a roommate, as multi-families in this area are far and few between, and VERY expensive. (Northern virginia area).  Most rents here are something like 0.6% vs. the ideal 1-2% rule.

I plan to live in this area for 1-3 years, and then attempt to move to the west coast, with the goal to hold and rent the property long term.  The problem with this plan currently is that a primary residence would be a negative cashflow type situation until rent growth catches up, which might take 10 years.

I have no debt, and enough for a down payment, but I'm debating what most people would do in my situation?

1.  Don't buy a primary residence, continue to rent for my primary residence and just look for remote investment properties.

2.  Buy the primary residence, and accept negative cashflow for some time, but get 1-3 years of living out of it in a decent area with hopes of rent growth and appreciation.  (obviously some speculation here).  Would then rent it out for 15-30 years as a long-term play and hope it does well.

Thoughts on what makes sense here?  Interest rates are rising and I'm feeling the pressure to do something.

Russell Brazil · Answer

Owning in the DC area is 30% cheaper than renting. The choice seems obvious to me.

Neil Quinn · Answer

@John Merritt : Thanks for the counter opinion.  I also recently heard Grant's take on this and think it's not a horrible idea either.  While looking at investments though, you do have to take into account the rent as a loss vs. building equity when doing so.  That's the gross downside.

John M. · Answer

@Neil Quinn  Rent to me is an expense yes, but equity isn't guaranteed and that can easily be wiped out with a 10% or even 5% correction in your local housing market which isn't unreasonable.  Even appreciation isn't guaranteed, markets can go flat for years.  In the meantime you still have potential cap ex  that I won't have as a renter (i.e. new roof, new AC, plumbing problems, etc). Then if you want to sell you have broker fees, escrow fees, title fees, etc, that can be tens of thousands of dollars.  In my opinion unless I were planning to own that home for 10 years or more, it doesn't make sense to anchor myself with the debt and the expenses which in totality may not be much of a financial advantage over renting, only to limit my mobility.  Why tie an anchor around my neck and also give myself all that potential financial anxiety and stress?

John M. · Answer

@Neil Quinn  I also live in a high COL area, so I don't own a primary residence, but I own investment properties out of state (Las Vegas).  I live way below my means to save money, meaning I rent an older, dated duplex, even though I could more than afford to live in a luxury bulding if I wanted.  Then the money I save goes into buying more properties out of state.  I personally like Grant Cardone's philosophy, "rent where you live, own what you can rent".  Not everyone agrees and I get it, but if I don't want the burden of the debt that doesn't generate income, plus I prefer the freedom to be mobile and I can move when I want, if I have a new opportunity, if I hate my job, if I hate my boss, if I hate my neighbors (and I do hate one of my neighbors), if the economy tanks, etc.  It's simple, I give my notice and I am out, no stress no headaches, no worries about my primary residence negative cashflowing for years (that's called a burden, a liability and a money pit in my book), and free to move on to bigger and better things.  Since I own rentals I still get all the financial benefits of home ownership including appreciation, interest deduction and depreciation (homeowners can't depreciate) and someone else is paying down my mortgage.

Bottom line, nobody should feel pressured that they "must" own a primary residence, if it doesn't make sense for you (it doesn't for me), then don't do it.

Neil Quinn · Answer

You've quoted this a few times, and it may apply to 1 bedrooms, but from my quick look at 20 or so properties in NoVA, the rent and mortgage payment works out to be very, very similar.  Not 30% lower on the rent side.  If you're aware of places in NoVA that truly do rent at 30% higher I'd love to look at them.  I'm basically seeing 0.5% rule of thumb properties everywhere.

Neil Quinn · Answer

@Sam Shueh  I'm looking in the Northern Virginia area, in the $400-$450k range or so (maybe some upward wiggle room if I can house-hack).

Sam Shueh · Answer

Without specifying where you are and price range, cash flow it is difficult even to give someone meaningful advice.

First purchase: primary residence (high CoL area) or investment?

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