Investment properties are great, but let's get PERSONAL.

96 Replies

According to the classic Rich Dad Poor Dad, Robert Kiyosaki says your home is not an asset. This makes sense considering your home is not making you money but demanding repayment from the get-go. Appreciation is no guarantee and the tax write-offs are not great compared to investment properties.

However, a primary home is an essential part of life (no offense to my van-dwelling vagabond friends). But why not plan and approach this very large purchase from an investment-minded approach? 

As our family grows, we are about a year or two away from out-growing our current house, inciting us to start planning for the next homestead. I would love to hear how some investors approach purchasing their primary homes? Do you utilize the low down payment options? Do you put 20% down to keep your monthly payments lower? Is renting a better strategy for you? 

**We do not want to house-hack unless it's a detached mother-in-law suite type of situation, so chances are that will not be the strategy that is best for us.

Forrest Faulconer

@Forrest Faulconer

A couple of strategies that I am thinking of personally are:

1. Purchase distressed single family home as primary, renovate, live in it for a year, refinance, repeat?

2. Rent where you live and use the rest of your money on investment properties (out of state if returns are good). Sometimes areas with really good school districts have high home prices and ROI may not be good.

@Forrest Faulconer

We went from a house hack duplex, to a live in rehab, into a finished flip done by another investor. Part of the reason was timing, but it was nice to have a finished product for only 5% down conventional. Sadly, I think FHA is the only way to go that low nowadays.

@Forrest Faulconer

Haha.  You're bringing me back to the good old days of stress!  The real "story" is super long, but the short version is that it was 2012, prices were cheap but obviously rebounding, and I knew I was taking a chance on my "forever" home at a price I'd most likely never see again (but I also knew I might not be able to actually afford). 

Like a moth to a flame, I couldn't resist. 20% down, accidentally overdrew my Roth IRA costing me over 20k of taxes and fees (which sucked because this house needed a TON of work and I was REALLY counting on that money! haha), had to keep my original home as a rental because I was 70k upside down on it, etc.

My wife kind of lets me run the finances, but I remember her asking me if I thought we could actually afford it.  I was like, "Look.  If it turns out we can, it's gonna be great.  If it turns out we can't, we're gonna have to work the rest of our lives anyway, so what difference does it really make?"  haha.  I love that she trusts me so much!

Anyway, one of the best decisions I've ever made.  Obviously, nobody has a crystal ball, but I definitely wouldn't be shocked if you find yourself in "once-in-a-lifetime" territory in a year or two if the government chills out from pumping trillions into the economy long enough to see where we're at. 

Either way, good luck and thanks for taking me down memory lane with your question!

@Forrest Faulconer

Reading between the lines, Forrest, you keep on trying to flip Kiyosaki's dictum right around. I could be wrong, but it sounds like you and wife are caught in the classic American trap of wanting to live in a "NICE" place.

Your family is "outgrowing your current house," you say. I have a friend who live in a 5,200 ft2 place with four kids. He grew up on foodstamps right along with me, but found his ticket to the middle class through his job as a software guy and his decidedly middle-class-minded wife. He's concerned his McMansion just isn't big enough. He's actually pumping $50K into the place to turn his house's greatroom (yes, his place has a two-story greatroom) into a two-story addition that adds three more bedrooms and two more bathrooms, 1000ft2 of living space.

"A primary house is an essential part of life," you say. Is it? There are billions who don't have one. Ah, you mean an essential part of the life YOU want to lead. That's a whole different story. A centerpiece of your dreams. Not a fact of life. It points to a mindset where "THE FAMILY HOME" looms large, a mindset which millions of Americans share (or some might say have been brainwashed into). I can understand this, and the people who make their money off this dream can also understand it, and THE FAMILY HOME you seek will be priced accordingly.

So I really think you're trying to convince yourself that, despite what Kiyosaki points out, a big opulent personal residence is the right fit for you and won't drain your finances too bad. I'm sorry, but this is invariably not true. The numbers NEVER work out. 

@Forrest Faulconer  

Hey Forrest,  I think this is somewhat area specific but I’ve purchased two new builds in the past which created great equity. I would put 5% down with a reputable builder and wait up to 18 months for my home to be ready. This comes with some logistical and timing headaches with moving and selling of your other home but when it’s all done it’s worth the equity. Buying on the fringe of a hot area is also a awesome way to build equity. Of course the  fixer upper with very good bones is alway great. The trick is to combine the two. Fixer upper or new build on the fridge of a great area, that’s money in the bank!!!! 
Lastly your home can be an asset. I'm purchasing and rehabbing a 4 unit rental property now with a HELOC loan from primary residence. I'll refi out when it's done and do it all over again. Good luck!

Originally posted by @Forrest Faulconer :

According to the classic Rich Dad Poor Dad, Robert Kiyosaki says your home is not an asset. This makes sense considering your home is not making you money but demanding repayment from the get-go. Appreciation is no guarantee and the tax write-offs are not great compared to investment properties.

However, a primary home is an essential part of life (no offense to my van-dwelling vagabond friends). But why not plan and approach this very large purchase from an investment-minded approach? 

As our family grows, we are about a year or two away from out-growing our current house, inciting us to start planning for the next homestead. I would love to hear how some investors approach purchasing their primary homes? Do you utilize the low down payment options? Do you put 20% down to keep your monthly payments lower? Is renting a better strategy for you? 

**We do not want to house-hack unless it's a detached mother-in-law suite type of situation, so chances are that will not be the strategy that is best for us.

Forrest Faulconer

 Anyone who thinks your personal home isn't an asset is a full blown idiot.

@Forrest Faulconer   Ah.  Let's talk about YOUR personal residence.  Thought WE were getting personal. 

So it sounds like you guys have endured a couple live-in rehabs.  That's more than most and puts you above princess wants to keep up with the Joneses status in my book. 

How far depends on your balance sheet.  I don't think we all need to go the FI way and live in a POS our whole life, eating beans and rice and clipping coupons.  But... I also don't want your home to be your largest asset. Or even a large part of your world. 

We live in a 'luxury househack' and have for 13 years.  We could definitely move up but are content.  I know we could move up because our house is a rounding error on our balance sheet.  Oh yeah, that.  

For permission to move up, I would make myself put 20% down. Avoid PMI and make yourself feel it. 20% down or no deal.

@Jim K.

Thanks for your comment and you couldn’t be more wrong about me or my thought process. A lot to unpack there, but what a narrative you have created from my simple task of asking investors how they strategically approach buying a primary home. Perhaps I should not have said a primary home is an essential part of life, because there are starving kids in Africa, right? Or perhaps I was simply referring to a place we can call home. But maybe I shouldn’t have said that and instead should just live in a perpetual state of self-loathing because the world is unfair.

All sarcasm aside, my wife and I grew up poor, live very modestly and strongly dislike over-consumption of consumerism. Which is why we have no debt and was able to move across country in a 5x8 trailer. The house we are outgrowing isn’t small, I admit, 1,200 sq ft. I lived in a trailer with my two siblings for several years growing up. But for us it would be nice to have an area where I can telework and/or have family stay when they visit their grandchildren. Not huge, WELL below our means, but appropriate considering the hard work and patience we have dedicated to setting ourselves up for such a thing.

Happy thanksgiving as we are very thankful for what we have,

Forrest

@James Wise

Haha it’s definitely counter intuitive! It is and it isn’t I suppose, it appreciates and as you pay it off equity is being built. I believe those who preach that are highlighting that owning a primary home doesn’t make you money in the present, as a cash-flowing property would, but instead it’s a debt that must be paid or you lose it. So I guess it’s both?

Thoughts:

1. I think the better view is your primary home shouldn't be viewed as an investment. It is most certainly an asset. An investment is something you pump resources into expecting those resources to be returned to you in multiples. Most people should not expect that from their primary home. The exception might be the person who does live-in flips of wrecks or rents out their home by the room. For most people, a primary home is first and foremost a place to live, secondary a hedge against inflation, and tertiary a (hopeful) nominal return. Kind of like a savings bank.

2. If you're going to George Jefferson it (google the Jeffersons if you are too young to get the reference!), you should first do this exercise: ask yourself/spouse if you were to add a monthly payment to your bills right now - forget about what it's for - how much payment would make you uncomfortable? Would $25/month make you uncomfortable? What about $250/month? Keep going until you figure out what extra payment makes you uncomfortable. Now add that to your monthly payment and there's your maximum comfort zone. Most people who do that exercise, where the extra payment isn't attached to anything specific, are going to start getting uncomfortable at $100 or so per month additional. When you calculate the new mortgage, including closing costs and (usually, since it's a more expensive/bigger house) taxes/insurance, the added amount puts you essentially right where you are now.

People tend to justify the newer amount when they tie it to something of value in their mind and find it discomforting when they can't do the mental gymnastics of a bigger/nicer home. Then they get into the bigger place and find the added cost really does make them uncomfortable, and they therefore either need to earn more money or eliminate some current expenses. Instead of cutting to where they are uncomfortable cutting any more, and then doing the cost exercise.

I'm not saying don't move up to a bigger/nicer place. But the prudent move is usually to be so wealthy when you do that the added cost before moving wouldn't have mattered anyway, so you don't need to ask the question. 

@Jim K.

I apologize if I came across as snarky or insensitive, You judged me too quickly and I judged you too quickly. I also grew up on food stamps and every other sort of government cheese, but my parents always instilled in me to work hard and appreciate what I have. So it is a balance that I hope to conquer of not going beyond our means and putting my family in jeopardy, but also being able to self reward from years of hard work. All within reason, thanks again for your post.

@Forrest Faulconer

It really depends on strategy. Finding a home that you could rehab prior to moving in and build some equity into the deal, then 20% down doesn't make sense because you'll probably refi anyways. But if you are looking to get into a home at retail value with little need for rehab then 20% down might be the way to go. I'm not sure of your current financial position but I would recommend that if you are intending to live in this future home for the next 20-30 years that it would probably be beneficial to throw down 20%. It gets rid of PMI. I was able to also get down to 2.6% APR for throwing down 20% on a house I just put under contract. Granted, you also want cash reserves to get through whatever economic uncertainty COVID might cause for the next year.

In an ideal world, finding something off-market, needing to be rehabbed, doing the flip quick enough to take advantage of the low rates and high appraisals is the way to go. If you are able to walk into a home with equity from the get go, then a home becomes an asset.

Originally posted by @Forrest Faulconer :

@Jim K.

I apologize if I came across as snarky or insensitive, You judged me too quickly and I judged you too quickly. I also grew up on food stamps and every other sort of government cheese, but my parents always instilled in me to work hard and appreciate what I have. So it is a balance that I hope to conquer of not going beyond our means and putting my family in jeopardy, but also being able to self reward from years of hard work. All within reason, thanks again for your post.

Forrest, it's fine. I made guesses that oniy a crazy person woud be certain were all correct. Usually when I write about this sort of thing, I prefer to be wrong rather than right.

I just wanted to highlight the fact that a disturbing majority of people with good-sized incomes cut themselves offf from the wealth-building potential that comes with intentionally choosing to live below their means.

 

Originally posted by @Forrest Faulconer :

@James Wise

Haha it’s definitely counter intuitive! It is and it isn’t I suppose, it appreciates and as you pay it off equity is being built. I believe those who preach that are highlighting that owning a primary home doesn’t make you money in the present, as a cash-flowing property would, but instead it’s a debt that must be paid or you lose it. So I guess it’s both?

 No. Not both. There are two kinds of people in this world. Those who are right and those who aren't.

Purchasing your own home tends to be the end of banks willing to give you mortgages lol as usually the place that you want to live with your family (or future family with kids) is going to be a nice one and costly but will save you the efforts and having to move again when you have kids  and can be more of a forever home.

Of course being able to buy something that is nice enough for you to be happy in and not extravagant or lavish is ideal since it is money and leverage that wont be working to generate any income and is essentially a liability for you barring appreciation value. Many people make the mistake of buying way too nice of a place thinking their house is an asset so why not splurge and they end up paying a ton in property taxes / maintenance.

I dont think renting outweights the benefits of ownership unless you're able to have an investment strategy in mind with strong enough returns to cover your rent cost (ie. you can easily generate income for downpayments of cashflowing rentals. Then you can quickly build your portfolio before saving up for your primary residence). But if after buying a rental property, it is going to take you many years to save up another downpayment for another rental or home then its likely not worth it.

One strategy you could deploy to give you a bit of best of both worlds is to buy a home with the ability to rent out the top or bottom so you can have a tenant providing you income in your primary residence.

@Forrest Faulconer

I suspect your current home is “big” enough now. American incessant marketing says otherwise. I’m a Kiyosaki/Dave Ramsey cyborg. If you’re going to buy a house, Insure that you can pay that house off in 15 years or less preferably with income derived from your investment properties. Any other home is too much.

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