Would you buy first Primary Residence or Investment and why ?

41 Replies

Hi everyone,

Been a long time observer but this is my first post so please excuse me for going back to basics

I’m trying to figure out what’s the best strategy to start and if in your opinion you should buy your first property as your primary (and do some type of house hacking) or buy an investment property first.

Second part of the question is for your first loan is FHA always the best option and which route would you go. Borrow as little as possible or as much as possible and why ?

If you made it until then thank you, much appreciated

Some of this is going to be determined by your financial situation anyway. If you are going to buy strictly an investment property that you do not plan to live in, do you have 20%-25% cash to use as a downpayment? If not, then an owner-occupied loan (loans with smaller down payments that require you to live in the home) will be your best option. Also, just because a property is your primary residence does not mean it isn't an investment if you are using it to make money. Buy a two or three family, live in one unit and rent the others. This is your primary residence and also a long term investment. When borrowing as much or as little as possible, if you have the ability to put down 20%, it will come down to your investing preference. Some investors prefer to put more money down as it gives you more cushion in the event of your property value dropping and other life events occurring that would require you to sell. It is deemed a safer move. On the other side of the coin, many investors think it would be foolish to not borrow as much as you can while locking in a historically low interest rate. That will be personal preference.

Hey @Olivier H. welcome! 

If I could do it all over again I would have house hacked with a 2-4 unit and lived in one. It checks the box as an investment, low down payment needed, and you get to learn to be a landlord.

I bought my first as a long term live in flip(many years ago) and then made my money when selling. I used an FHA loan with 3.5% down.

I would go FHA all day. Make sure the numbers work and the PMI is calculated but why put more money down if you don't need to on your first. Bank it for emergencies and/or your next investment.

Good luck either way!

@Sean T. Thank you so much Sean ! I totally agree with your method. I definitely think that a 2-4 units is a good way to go and leverage the terms on an FHA loan. Regarding this strategy, would you go the route of renting per room in order to increase the cash flow, or the potential issues of having more tenants could bring more downsides ?

@Olivier H. how I so wish I had discovered BP three years ago. Doing a house hack sort / primary purchase move would be my go to.  Why? 

A) You can go in with lower money down, and not tie down your savings/money.

B) If you get a chance to get a multi family - you can work on getting other people to pay your mortgage.

C) You can quite frankly mess up in the process of remodeling, rehab, finding contractors etc and it makes you better for future projects. (I had a NIGHTMARE of the disappearing contractor on my first unit I tried to do some work on.)

D) If you do a 3.5 % down FHA loan, and you are able to, you can rent the property out after a year and then go do it again.

E) If you bought right, this property could be BRRRed out and then you can take out money to buy the next one.

 Best of luck and go for it!

@Olivier H. Hey, I personally would just rent the units as regular rentals BUT this is just me.  I would research and go with your gut or comfort level.  Room rentals are really popular now days but I don't operate that way.  That said, if you do and it works, let me know!

@Kuriakos Mellos Thank you so much Kuriakos ! According to all the researchers I have done these past years, this is indeed the way to go. Also sorry for your nightmare experience. I’ll be honest this is the type of stories that keeps me and newbies in general from taking actions (also suffering from a mild case of analysis paralysis:). But I guess with the rewards comes the risks or with the risks comes the rewards as they say ! I love the Brrr strategy in theory, it’s just the practice that is daunting. The choosing the deal and the rehab part imo

@Sean T. Thanks Sean ! Not quite there yet :) but will definitely let you know. I tend to be more like you. Just rent the whole unit. But to be honest, the potential cashflow as well as the trends regarding renting per room sounds appealing. Just don't want it to become a nightmare. Specially as you have to live there too ! :) Also there is question regarding the FHA, I hear people say you live in the unit and repeat the process. Do they actually mean that you can apply for another FHA after having lived in the previous one for a year ?

@Olivier H. do not let BRRR scare you. I messed up a great BRRR opp because I was scared of the work that had to be done and someone walked in right behind me and did exactly what I could of done. It might be daunting but ( I hate to sound like a broken record) but it is OK to mess up and along this game you will make mistakes.

Analysis Paralysis is common. I still have it and I am working on renting out a fifth unit.  It does get easier. 

Deals are hard, but let people know what you are doing and getting into. If you find a listing you like, call the agent directly and introduce yourself. I have done that and while I still have not bought a unit from this particular agent he now calls me when he has units coming that are not on market yet. You have to advertise YOURSELF as a real estate investor. Also rehabs - don't go overboard - yes, we all love nice units, and we want to make them marketable but make any rehab work affordable (restore hardware resller shops, online, craigslist free, ask contractors if they have spare floors/tiles you can buy) youi would be amazed.

@Olivier H. I am not an expert at all on FHA. I think you are asking, if you live in the house hack for a year, would you be eligible to buy another "live in" house hack and get an FHA loan again. I think the answer is yes but you can only have one FHA loan at a time which means you may need to refi out of the original.

If anyone can add color please do as I may be incorrect on the logistics here.

@Kuriakos Mellos Thank you ! These are all great advices and congrats. 5 units sounds like sci-fi to me now :) I would be very happy to start with my first. It is daunting but I’m convinced that going against those fears would make you wonder later why not having started earlier. The rehab part is stressful because honestly I’m not handy. I have other skills but this I just don’t know. So you have to trust your guts and the contractors and it’s definitely a step I will need to take. It’s just about that first step for me. Do you invest around your area ? I would like to do a distant brrr, but as a newbie I just see more room for errors right now

@Olivier H. .  I can barely hammer a nail in the wall - I am getting better - and I try to watch every time a contractor does something but the MOST CRUCIAL thing in finding a contractor is  A) Making sure they are licesned and B ) ask for references.  If they are a true and legit contractor that stuff should be readily available.  One of the nightmares I had was that a contractor told me he was licensed and insured but it was under his brothers name - and he went over the timeline of the project we had agreed upon by over two months.  And almost a year later, I am still having to have people come by and clean up issues and messes he made.  I am currently invesitng and buying in my area (northern IL - Chicago metro area mostly) Where are you?

@Sean T. Oh Thank you Sean ! Yes that was exactly my question ! I always missed the part where you actually have to refinance the first loan in order to get the second one. Sorry having a aha moment :)

Also according to you what is a reasonable debt to ratio ? That’s a question I’m asking myself, what is allowed and what is safe, and if taking on too much debt to start would minimise my chances to investing in a second property for instance

@Olivier H.  great question! People presume you need to ALWAYS own your own home before investing in rentals. This is not true and not a well thought-out argument. Run the numbers and see which situation would generate a larger Asset column on your balance sheet 5-10years from now and then make a decision on that.

If you're acquainted with corporate finance, think about a simple IRR calculation (internal rate of return). The problem executives/everyone has with IRR in finance is that it presumes you're able to reinvest each dollar of profit back into the investment as soon as it's in your hand. That's obviously not possible. By lowering the threshold of investments means you are holding onto cash for less time and have what I might refer to as a more "realized" internal rate of return. For your first property, this isn't a huge consideration, but it does still mean that if you have the opportunity to invest cash earlier than later, you have the ability to begin making returns.

If you have a good DTI and cash to spend but not interested in house hacking or moving your family, it can offer a lower barrier of entry to buy a rental first. I'm originally form Los Angeles, CA so this is the way most younger investors have to get started.

@Kuriakos Mellos Thank you ! I am the same, can do very basic tasks but wouldn't trust myself yet with drywall and all that (far from it :) . Licensed and references! I get that. I read stories all the time where the contractors weren't pros and left the job undone or messed up or even damaged something! So definitely a big question for me as to work with the right team. I'm currently in California and as much as I like the weather, I don't see myself starting my investment journey here. It's expensive. I was thinking of completely moving to another state and start there. I do a lot of research on MLS like Zillow but I just can't shake the feeling that I have to go and be there, at least for a start

@Aaron Caddel Thank you so much Aaron ! Very detailed answer and I'm afraid I'm not so familiar with IRR and therefore I probably don't completely understand to be honest. My DTI is good, but even though I'm also in California and even if I'm sure there's deals everywhere, I also feel like the entry ticket to start is a bit too high and I'd rather move and start in another state to get acquainted and feel more confident than investing here and be overwhelmed and scared. Your answer is simply very interesting I will have to do more research on this specific topic, I have the feeling that I'm missing something important here. On this regard I also wonder in which way the fact that you collect rent as an investor could potentially make you reach another threshold or tax bracket. Therefore does the profits still outweighs the potential tax increase ?

I think it's always wise to first buy your primary residence, because you never get your rent money back. My thinking about buying your own home, even if it's in an area where there is zero appreciation, is that worst case scenario, you should at least get your "rent" money back. Like a rent savings account. That's just money lost that could have been invested in your primary home "savings account," if you see what I mean. Plus, you get a lot of tax write offs (or at least you used to, not sure if that's changed over time) as a homeowner.

You can have more than one FHA loan at a time, without having to refinance it, unless the rules have changed over the past few years. My daughter did just this. In her case, FHA let her keep the first home she bought with FHA financing and buy a new one with FHA financing, because she'd gotten a job far enough away that it would be too far to commute to her new job. They even let her refinance it to a better rate with the streamline FHA refinance, knowing she was going to use it as a rental and was going to be buying her second home closer to her new job.

She'd lived in the first home for a few years, so I am not sure if you absolutely have to live in the first one for a certain amount of time, but I had heard that it was one year. The first lender she approached for the 2nd FHA home told her she couldn't do it. We (I was helping her) showed the lender a print out of the FHA rules that said she could do it, and the bank hemmed and hawed and then finally gave her the loan for the 2nd house. So, don't necessarily believe the first lender who tells you you can't do something.

I'd also say you don't have to buy properties that need major renovations.  Look for some that are just dirty and just need paint or new flooring - something that's not a major job to get done.

I know a great general contractor who is just getting started in the Oceanside area.  Not sure where you are, but a friend of mine has been using a guy who is just starting his business and is awesome.  If you need a reference for that area, let me know and I'll get his contact info for you.

There are poorer/cheaper areas in California that are affordable.  The trick is being able to afford to live while investing in those markets and understanding perhaps a different culture than you're used to - different types of tenants/buyers, etc.

I research a lot because I'm a researchaholic, and the thing I'd caution you about investing out of state is to really look at the property tax and how often your property can be reassessed and by how much.  Some places are crazy and can destroy your income.  Someone was just complaining about a city doing that to him, I want to say Cleveland, OH (might be wrong).  Anyway, be sure and check the taxes.  Sometimes the selling price is amazing and then you learn you can't afford the taxes.

Best of luck.  Dang, sometimes I just go on and on.... :-)

@Olivier H.

Knowing what I know now I would've bought an investment property first actually I probably would've bought 2 to 5 investment properties first and stayed living in an apartment until those were able to pay for not only the leverage but pay for my personal home.

@Sue K. Thank you very much Sue ! I really appreciate the developped answer. I think the advice regarding not taking for granted whatever first lender says is invaluable ! As I would probably myself believe that he’s the expert and knows what he’s doing. Obviously it’s not always the case. That’s why I’m so grateful for experienced owners and investors for their advices and for sharing their knowledge and experiences. I’m in Los Angeles by the way, so I agree there’s deals out there, I just feel like I would need to venture way out of my neighborhood in order to find a deal that could financially make sense. But once again it could also simply a limitating belief. Thank you for the recommandation, I would definitely contact him, if I decide to invest in Cali. Sorry, I can also go on forever :) I just love the topic of real estate in general and pretty much everything related to it. I just need to get rid of some old beliefs systems and take action !

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