What Would You Do First: Rental Property or Primary Residence?

23 Replies

Picture it: Washington DC, 2020...

•$20K in cash allotted for real estate

•Excellent credit

•One rental property that cash flows $300

•W2 Salary $90K/yr

•Renting primary residence at $2200/mo

My question is do you think it’s more important to focus on adding doors to this portfolio or to purchase a primary residence to eliminate the rental expense?

@Account Closed Multi family units are not common here unfortunately, at least not 2 - 4 units that would qualify for 3% down. House hacking is always an option, just a bit more challenging for families because of the security logistics involved. Great points though on your part.

@Da Shiek Woodard I am in a very similar situation as the one you are describing. I have an investment property bringing 400$ month cashflow in Denver and I live in the DMV area.

I am getting ready to buy and house hack in franconia/southAlexandria/northspringfield area.

It is really hard to find something close enough to the city in a decent neighborhood that you can be cashflow neutral. I am on the look and supply is super low. I am looking for a sfh and the prices won’t stop going up.

With that said, I rather live rent free than have an investment property out of state. My wife and I are getting ready together. If you are on your own, no wife, no partner and you want to stay close to the city. Right now south of DC and North east may have some places that work for you it won’t be A-B neighborhoods but it is almost the only way to make it work unless you make a lot more money.

Check future developments in the area and try to get something it might become A-B neighborhood in the upcoming years.

I live in Northern Virginia and we have to stay in this area for wife work. Prices are...

That is my thinking.

Purchase primary residence without question.

You have a monthly housing cost regardless of whether you own or rent....the question is would you rather spend that money helping to build your own wealth, or spend it to build your landlords wealth?

All good advice here already. You are in a perfect position to do both- house hack. Buy a house for yourself and get the benefits of owner occupant financing. Live there for a bit, fix it up, save a few bucks and buy another one, repeat and when you are done with that, repeat again. In ten years you'll have a solid net worth, cash flowing properties and the freedom to control your destiny. 

Originally posted by @Da Shiek Woodard :

@Eric C. Multi family units are not common here unfortunately, at least not 2 - 4 units that would qualify for 3% down. House hacking is always an option, just a bit more challenging for families because of the security logistics involved. Great points though on your part.

 There’s a million options for wealth generation.  I agree with Buying versus renting.  Might as well pay your own mortgage versus someone else’s.

Where there is a will there is a way, just need enough motivation to get out of the rat race and into the wealth generation game.   

I always recommend purchasing a primary residence esepecailly if you are paying $2,200/month in rent.  

If you can find a way to purchase a property and house hack, that will significantly reduce your monthly living expenses while also starting to pay yourself.  Once you have this primary residence you can reevaluate and start acquiring cash flowing properties in lower purchase price areas if that is what you want to do.  BUT, at least you have this valuable asset in Washington DC that you purchased with 3-5% down.  

My best advice, make sure you are evaluating the primary residence as an "investment property" from the get go.  If your mortgage will not be covered by the current rental comps, don't buy it.  IF it does, then I say you are now looking at a asset that could be a potentially good long term investment. 

Best of luck.

These responses have been great. I tend to agree with those that say I should find a primary residence first. As long as I shop with the mindset of making the primary into a rental after the obligatory one year of residency, I can acquire cash flowing properties while I continue to learn about teal estate investing. This would become my second rental property and I could do this for the next few years until I generate enough equity to seek out a nice multi unit property to house hack.

I think this is a good solution because I have to live somewhere so I need to pay myself to do that. It also keeps me walking toward my goals until I can sprint toward them.

@Da Shiek Woodard I live in an expensive market as well, not as expensive as $2200 a month in rent but at least assume you live in a pretty good place. I grabbed 2 out of state rentals first as 20% down conventionals but recently close on a 3 unit multi family as my primary residence. From what I’m starting to learn it’s all about the equity and cash flow. The more cash flow and equity you can build through real estate the better the wealthier you become.

Originally posted by Account Closed why not both?   Can you purchase and rent the rooms out?  Or possibly a multi family and rent out the other units.  Don’t know the cost of the DC area.  

This is the correct answer. 

No offense to others but if they are not providing the same advice as Eric here then you should ignore them. In an expenisve market? Figure it out. Housing is the biggest line item in our annual expenses, utilize the power of real estate to significantly reduce, if not eliminate, this expense. Doing so will be life altering and a BIG boost in helping you get more financially fit. 

The additional benefits you get?

- landlord experience (seasoning helps with future banks loans)

- loan amortization (paid by the tenants, hmmm, isn't it better when others pay your debt for you?)

- increased savings rate (capital for new investments)

- cashflow? (Who doesn't like to make money?)

- etc.

Ask me how I know..  

@Da Shiek Woodard - If you can house hack, I'd recommend do both! Purchase a primary residence, rent out the other units (or rooms) and have your tenants pay for your mortgage completely.

If that's out of the question, I would see if you can find a place with an ADU or mother-in-law suite in the basement. Can you rent that out?

If these options are both out of the question.... I actually, contrary to popular belief think it's better to just keep renting (maybe find a cheaper spot?) and add to the rental portfolio. When you purchase your own house, you don't get any cash flow, you need to set aside a huge sum of money, and then also set aside additional amounts for taxes, insurance, maintenance, etc. Not to mention... you are much less flexible when you buy a primary residence. 

If you do buy the primary residence, you need to make sure that other people will want to rent it and that rent will be able to cover your mortgage. 

Hope that makes sense! 

@Da Shiek Woodard

I would suggest that you purchase a multi-family property (as your primary residence) that you would be comfortable living in for one to three years (depending on your mortgage companies rules and regulations). You can do work to it as needed during that time and in-between tenants all while you’re increasing your equity in that property. After you and your family are ready to make your move from the multi-family to your next home, you would then be in a position to purchase another property without having the necessity of a higher down payment. Doing it the opposite way, where you buy your primary residence first, can make it so your mortgage company will require a higher down payment, 20-25%, when you own one home and are buying an investment vs. another primary residence. Good luck with your move.

Originally posted by @Ali Boone :
I'm rarely a voter for going the primary home buying route. For these reasons-
https://www.biggerpockets.com/...
The issue with paying rent is addressed in there. I'm in LA and I rent where I live and only buy rental properties. Way more profitable.

 Not likely.  NeighborhoodScout shows LA RE has appreciated 81.76% over the last 10 years with a median home value of $655.7k (this includes condos).  So just on the property appreciation, you would have made $295k. 

How about cash flow?   The LA average rent rose 65% over the last 10 years to $2527.  So the average LA rent over the last 10 years has risen $996/month (source LA times).  Your cash flow today from a purchase 10 years would far exceed almost every other market.  

I know the city of your OOS property (unless you have added to your initial location). I can state with a lot of confidence you would have been way more profitable having invested in LA especially if you had purchased one property a year at high owner occupied LTV (95% LTV). Your annual ROI would be over 100% (because the annual appreciation has averaged over the 5% of purchase amount invested (assume for simplicity closing cost are wrapped into the loan).

Originally posted by @Dan Heuschele :
Originally posted by @Ali Boone:
I'm rarely a voter for going the primary home buying route. For these reasons-
https://www.biggerpockets.com/...
The issue with paying rent is addressed in there. I'm in LA and I rent where I live and only buy rental properties. Way more profitable.

 Not likely.  NeighborhoodScout shows LA RE has appreciated 81.76% over the last 10 years with a median home value of $655.7k (this includes condos).  So just on the property appreciation, you would have made $295k. 

How about cash flow?   The LA average rent rose 65% over the last 10 years to $2527.  So the average LA rent over the last 10 years has risen $996/month (source LA times).  Your cash flow today from a purchase 10 years would far exceed almost every other market.  

I know the city of your OOS property (unless you have added to your initial location). I can state with a lot of confidence you would have been way more profitable having invested in LA especially if you had purchased one property a year at high owner occupied LTV (95% LTV). Your annual ROI would be over 100% (because the annual appreciation has averaged over the 5% of purchase amount invested (assume for simplicity closing cost are wrapped into the loan).

You definitely can't say I would've been more profitable had I invested in LA because you have no idea of my numbers or the numbers of a property I would've bought in LA. It's certainly possible, no doubt, but there's a lot more variables in all of these equations than you're suggesting. But going to something less debatable... that $295k in appreciation over 10 years... how much would I have paid in total expenses, including mortgage interest, in those 10 years?

 

Originally posted by @Ali Boone :
Originally posted by @Dan Heuschele:
Originally posted by @Ali Boone:
I'm rarely a voter for going the primary home buying route. For these reasons-
https://www.biggerpockets.com/...
The issue with paying rent is addressed in there. I'm in LA and I rent where I live and only buy rental properties. Way more profitable.

 Not likely.  NeighborhoodScout shows LA RE has appreciated 81.76% over the last 10 years with a median home value of $655.7k (this includes condos).  So just on the property appreciation, you would have made $295k. 

How about cash flow?   The LA average rent rose 65% over the last 10 years to $2527.  So the average LA rent over the last 10 years has risen $996/month (source LA times).  Your cash flow today from a purchase 10 years would far exceed almost every other market.  

I know the city of your OOS property (unless you have added to your initial location). I can state with a lot of confidence you would have been way more profitable having invested in LA especially if you had purchased one property a year at high owner occupied LTV (95% LTV). Your annual ROI would be over 100% (because the annual appreciation has averaged over the 5% of purchase amount invested (assume for simplicity closing cost are wrapped into the loan).

You definitely can't say I would've been more profitable had I invested in LA because you have no idea of my numbers or the numbers of a property I would've bought in LA. It's certainly possible, no doubt, but there's a lot more variables in all of these equations than you're suggesting. But going to something less debatable... that $295k in appreciation over 10 years... how much would I have paid in total expenses, including mortgage interest, in those 10 years?

 

I quoted average appreciation and average rent increase for LA.  I can compare that to averages in KC or any other low appreciating Midwest market.. I think we both know what those calculations would show.  

>how much would I have paid in total expenses, including mortgage interest, in those 10 years?

You would have paid nothing.  With an average $996/month rent increase, the average unit would be very cash flow positive over the holding period after accounting for expenditures.  So your tenants would have paid all those expenses and provided the LL a lot of positive cash flow on top of covering all the expenses. 

I do realize this is being evaluated in hindsight which is easy and possibly unfair.  However, you indicated ”way more profitable” not to have purchased in LA.  That is highly unlikely and I figured I would use actual average numbers from legitimate sources (NeighborhoodScout and LA Times) to show it.  


 

@Ali Boone I’ve probably delivered mail to you, I used to work in Venice many years ago. 😁

You and Dan both have great points, I’m curious of how you weigh the expenses of owning a home against the expenses of renting one? Home ownership provides certain tax relief and major markets like LA tend to appreciate in value. Even if they only appreciate flat with inflation, renting doesn’t appreciate at all. With the theory of “I have to live somewhere” it seems advantageous to have an asset with some liabilities (mortgage) rather than a complete liability (renting). The ideal situation would be house hacking but between the two listed above am I still not looking at the whole picture?

Originally posted by @Dan Heuschele :

I quoted average appreciation and average rent increase for LA.  I can compare that to averages in KC or any other low appreciating Midwest market.. I think we both know what those calculations would show.  

>how much would I have paid in total expenses, including mortgage interest, in those 10 years?

You would have paid nothing.  With an average $996/month rent increase, the average unit would be very cash flow positive over the holding period after accounting for expenditures.  So your tenants would have paid all those expenses and provided the LL a lot of positive cash flow on top of covering all the expenses. 

I do realize this is being evaluated in hindsight which is easy and possibly unfair.  However, you indicated ”way more profitable” not to have purchased in LA.  That is highly unlikely and I figured I would use actual average numbers from legitimate sources (NeighborhoodScout and LA Times) to show it.  


Fair enough. I made too broad of a statement. In general, both sides of this discussion are too broad to be helpful I think. You're speaking on numbers that are very blanketed and it'd be dangerous to assume them to be true for all scenarios. Plus, expenses would've gotten paid prior to the rent increases, and you're also assuming the rent increases would cover all the expenses anyway. You're not necessarily wrong for all scenarios, and what you're saying could've certainly been true for some, but not all. I think broad statements can be dangerous in this industry.

 

Originally posted by @Da Shiek Woodard :

@Ali Boone I’ve probably delivered mail to you, I used to work in Venice many years ago. 😁

You and Dan both have great points, I’m curious of how you weigh the expenses of owning a home against the expenses of renting one? Home ownership provides certain tax relief and major markets like LA tend to appreciate in value. Even if they only appreciate flat with inflation, renting doesn’t appreciate at all. With the theory of “I have to live somewhere” it seems advantageous to have an asset with some liabilities (mortgage) rather than a complete liability (renting). The ideal situation would be house hacking but between the two listed above am I still not looking at the whole picture?

No way... I bet you have delivered mail to me! Haha. (I'd tell you my address to confirm, since you'd know exactly where it is, but that seems dangerous to do on the internet...lol).

It's really as simple as writing out all the numbers. In some cases, certainly buying in a place like LA might be more advantageous... it completely depends on when and what you buy. If you buy at the top of the market and in an area that's already grown up, your appreciation will be dramatically less. The two questions I ask when I'm looking at these types of situations are:

1. How much am I going to be spending  along the way in expenses until I get to a point where I'm break-even or positive? (and compare those numbers to what you'd pay in rent)

2. What's it going to take for me to get to break-even or positive?