Investment properties are great, but let's get PERSONAL.
Real Estate Agent · Oklahoma City, OK · Member since 2020 · 471 posts · 462 votes
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
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 I loved the book Rich Dad Poor Dad but I think RK is dead wrong about a primary home not being an asset for many reasons. Unless you are homeless you either pay rent or you pay down a mortgage. Being homeless or paying rent does not build wealth, owning a home certainly does. Also I would never buy without 20% or more down. If you can't put 20% down you really should stay in the home you currently have. You could Heloc your current home for the 20% and then turn it into a rental after you find your next house. You seem very savvy in your post so I'm sure you have it figured out anyway. My best advice is to stay clear of too much debt. I not of the mindset that having 10 rentals and 1.5 million of debt is owning assets.
@Chip Marce @forrest Faulkner
Exactly! As an investment buying a primary residence is not a good investment. The main thing people say with a personal home is the appreciation. Unless you live in an appreciating market you can throw that out the window. When people talk about appreciation they are leaving out some critical numbers. If I buy a personal home for $375k put down 3.5% , w/ 3% int for 30yrs, 1.25% taxes, $1000 insurance that’s a $2,007.58 monthly payment. If we take out $500 for principal reduction that’s $1,500/mo or $18,000/yr I am paying for this “great” investment w/o including maintenance, upgrades, any home projects. So without including closing costs for selling I would need the appreciation to be ~$20,000/yr to break even (abt 5.3%). I would also need to see that every year for it to continue to be a good investment.
If I buy an investment property that has a positive Cash Flow that’s a better investment. On a monthly basis money comes in pays for all my expenses and puts money in my pocket. So I actually will get to keep the appreciation my building makes instead of using it to try and break even. I will also get way better tax benefits being a landlord. If I am making a positive CF on the property I will also be able to whether the storm of any type of down market.
For my personal residence, I will rent the same house cheaper than it is to buy and can use the +CF to “lower” my payment
*Disclaimer have to pick the right property and to buy an investment you are going to need more money down than purchasing a home.*
@Forrest Faulconer
Firm believer in this tying to the goals you and your family have. Ultimately, all the strategies and ideas presented could make sense, but can you achieve both?
Like you said, can you find a house with a detached unit? Or is that something you’d be willing to forgo. Investing is both what you’re able to earn from an appreciate and cash flow perspective, but also living within your means with a budget and saving $1K a month is a simple way to increase wealth.
That said, it sounds like you’re approaching this with the right perspective, and are not indicating you’re going to go buy a 5k sq ft house.
For me, it all goes back to GOALS.
@Forrest Faulconer
Why not sell your personal home and use the money to buy investments. A house is a liability because you always have to pay for it. If you buy an investment you get more write offs, make money instead of paying money, and your not locked into the property.
And if you buy liquid investments such as ETFs or shares in publicly traded REITs, you can sell them at any time. A few clicks of a mouse and it's done with nearly zero transaction costs. Contrast that to a home sale during a down market when you might not be able to sell for awhile. And you're likely paying 6% sales commission and part of the closing costs.
My first home was a double, with a 1600 sq foot two bedroom next to a 450 sq foot one bedroom. It worked great for me to live in the small unit and have everything paid for entirely by the larger unit. You said you don't want to househack so does that rule out a multi-family. Sometimes I think the terms are used interchangeably. Anyway, it's just absurdly easy to manage a property when you live right next door. I own a bunch of rentals now and proximity is a key consideration for me.
There are also levels of rehabs. You can move into a pretty nice place and still make it a lot nicer, which is what I did on my home. I bought it 5 years ago and I'm about to refinance it and get almost all of my equity out, in no small part because of the improvements I made. My point being that the word "rehab" sometimes sounds scarier than it actually is.
My first home was a double, with a 1600 sq foot two bedroom next to a 450 sq foot one bedroom. It worked great for me to live in the small unit and have everything paid for entirely by the larger unit. You said you don't want to househack so does that rule out a multi-family. Sometimes I think the terms are used interchangeably. Anyway, it's just absurdly easy to manage a property when you live right next door. I own a bunch of rentals now and proximity is a key consideration for me.
There are also levels of rehabs. You can move into a pretty nice place and still make it a lot nicer, which is what I did on my home. I bought it 5 years ago and I'm about to refinance it and get almost all of my equity out, in no small part because of the improvements I made. My point being that the word "rehab" sometimes sounds scarier than it actually is.
Certainly open to a house with a detached ADU, that would IDEAL, but harder to find. My dad is finishing up an ADU next to his house which will net him $1000/month. We have time on our side luckily!
You know what, I am going to start looking into lots and build my own dang house. I can do 50-75% of the work myself (depending on my work schedule), can take my time, have some cash saved, and should have some solid equity moving in. After two years we can sell and deduct capital gains, or refinance, or rent. I got to witness my dad build a four-story home for us by himself without ever doing anything like that before, it's that sort of hard work and willingness to learn that has taught me anything can done!!!!
*Our home was four stories because it was cheaper to build up rather than excavate more of the hill he was building on. We lived in a trailer for years while my dad built the home, which took him about 18 months. I think this is one of the reasons we never felt as poor as we were, because my dad worked his tail off day and night to provide for us. It wasn't until my later years that I learned to appreciate everything he did for us growing up.
I think this thread is interesting in that it shows the old saying "all real estate is local". I'm not necessarily saying that buying your home is a great investment (because I think you can probably find better ones and you can point to the opportunity cost).
Having said that, where I live, rents are definitely more expensive than the mortgages if you put 20% down. At 3.5% down and a higher rate, it's roughly similar numbers. And that's only because house prices have jumped since the pandemic. Owning was clearly cheaper on monthly payments before that. And that's if, and this is a gigantic "if", you could even find someone to rent you a home. It's so competitive out here it's crazy.
If you chose to rent instead of own out here in 2009, you're now paying $1800-2000/mo in rent instead of a house payment of $400.
@Jim K. I'm definitely NOT trying to argue with you as I think you make a lot of good points about consumerism. Heck, my daily driver is a 1990 Chevy truck that I bought in 1994 and I'm teased mercilessly about it. But, it didn't take marketers to convince me that I didn't want to raise my family in a neighborhood where seeing passed out drug abusers sleeping in business landscaping was a normal thing. I didn't grow up in the city, but the city grew into us...
Wow, what a fascinating thread to read through.
So, standard disclaimers before I wade in - YMMV, IANA (Lawyer, Expert, CPA, Professional, yadda, yadda, yadda)
First the idea that a primary residence isn't an asset is just mind-blowingly off base to me. Granted, it's a great contrarian take that helps RK, DR, and others stand out from the crowd, but believe it or not there often is a lot of collective wisdom in the standard operating procedures (and some major mistakes which is why no one should just blindly follow the herd - but you all should probably wear a mask).
For many people a primary home is the major asset in their portfolio, and the only one they can leverage in interesting ways prior to retirement. Some people have already touched on some of the things people can do with primary residences: force appreciation through smart reno, house hack, room rent, HELOC, tax exemptions and mortgage interest write-offs. A renter, while they may have slightly more cash on hand to invest in the short term, often loses out on the massive wealth building tools afforded by home ownership in our society.
Over the years my wife and I have added major gains to our asset portfolio through the cap gains exemption alone. In 2014 we made $75k on the sale of our the first home we bought (2br apt in NYC). And we are about to close on the sale of our previous apartment (3br/2ba NYC apt) which we did a major reno to and will take home about $250k. That's $325k in profit, all tax free, in 6 years. We've moved to NC recently, and are looking at doing some major value add renovations to our house here, which we think should add about another $200k in equity value once we are done, and the appreciation here will likely add even more. Chances are we will stay here for at least 5 years, but regardless of when we decide to move, we know we will have another large chunk of tax free profit to reinvest should we decide to sell our current home again.
But, this is all simply one strategy we've used to build up wealth, and highlights only one area of our overall asset portfolio. The smartest investors I know of think more carefully about spreading out their risk, building safety nets, and never over-extending themselves too far on any single risk. For us, that means that home ownership is one tool we've used to build an ever increasing wealth portfolio. For example, I've worked almost 20 years in a union job and have build up some great retirement benefits, that has taken a huge amount of pressure off us as we think about how to use the resources we have today to maximize our returns. My wife has a very well paid position at this time, and we've been maxing out her retirement contributions, and then looking to save even more in various stock and bond options. We also make sure the only debt we carry long term is related to real estate and we never take on more debt than we have the assets to pay off in case of emergency. Credit cards a tool we use to spend efficiently and build credit scores up. We do not carry balances on high interest cards (we may do that on zero interest cards for short time periods to smooth out cash flow (like when we bought new appliances for our house) if we have the savings to pay off the balance).
We're not rolling in it Scrooge McDuck style by any means, but we are at a place now in our 40's where we are beginning to enjoy the fruits of our labor and sacrifices made in our 30's. And I also know that our circumstances can be illustrative (and hopefully encouraging) to others, but we're just one example and our situation is not directly applicable to anyone else. There is no one size fits all strategy that will guarantee a stress free, FIRE lifestyle of ease and luxury. But there are definitely way everyone can leverage what they have at this moment and build smartly for the long term. A primary home is one tool that can be used really effectively, but it should never been your only tool. That's like a carpenter who only comes to the job with a wrench in his pocket.
@Forrest Faulconer I have been house hacking since 2016 and have not looked back! I used an FHA for my first househack and conventional at 15% for the subsequent. Now since I live far enough away from my first househack, I am about to use another FHA to purchase my next one! While I agree with you, that living right by your tenants can be a hard sell for a significant other. Once you look at the financial benefit together, these things tend to become minor in the big picture!
My homes have definitely been investments, in fact they have spring-boarded my career in real estate investing.
My first home was purchased in an up-and coming area at the right time during the great recession. It produced an annual 30% increase in value upon sale (150% annual CoC return) that I paid no taxes on due to the principal residence exemption.
My next home was on a property that I subdivided and built a second home on. The first home produced an annual 5% increase in value upon on sale (24% annual CoC return). The second home (on the new lot) produced an infinite return (no cash down due to a dirt equity construction loan). Overall the entire project produced about a 40% annual CoC return which I paid no taxes on due to utilizing the principal residence exemption (twice).
While I likely won't ever be able to replicate either of these projects, you have to be willing to put a lot of thought and energy into finding value before anyone else can see it or in ways other people tell you isn't possible. I love it when experts tell me I can't do something.
@Forrest Faulconer
Do what fits your greatest investment, your family. If it doesn’t break the bank you can have a nice house. I am a low maintenance dude married to a high maintenance gal (she is fine with the term). She wanted me to build a house and financially it made a lot of sense for us.
The only word of caution is when you try to have a lifestyle where everything is the best. We have a nice house, but we don’t eat out, have car payments, credit cards or any of that stuff. We also have it set up with investments where our house does not financially burden us. I don’t say, “I can’t buy a place because my personal monthly mortgage is too high”. It’s really about balance.
Do whatever makes you and your family happy.
@Nicholas Alexander
That’s awesome, very much wanting to look into building a home, will also look into subdividing down the road!
Wow - such a great thread with So many concepts and angles to approach. I like the thought of looking at the primary residence being an expense not so much a liability.
Renting through your LLC, does this actually prove to have tax advantages?
We rent in Santa Barbara, like many others that have posted it’s an area that is just so highly priced that it makes more sense for us to invest out of state and rent here.
We run two separate companies from the residence and needed a bigger place so recently moved to a larger size to keep the companies operating. Tax write offs make sense for now but we do eventually want to buy here.
Do we bite the bullet and put a larger down payment on a house here, meaning missing out on multiple OOS investments over the next few years and maybe try short term rental to generate cash flow? The numbers simply get out of control to think about long term tenants to break even on expenses of a single family home.
Is it possible to try and find a good wholesaler or a person in short sales to work with, then jump at a chance that to do a live in rehab if the numbers work?
Or invest in more OOS and play the waiting game to find that one perfect deal to make your primary residence and go all in?
We constantly have this debate in our house but I believe putting all your eggs in one basket and then having the stress on your shoulders to find the money each month to pay it off isn’t really living to me.
It’s a massive decision but looking at all these posts there’s plenty to think about (and for me to think about)
not trying to hard to keep up with the Jones’s and knowing sometimes that less is more could be the way to go.
I solved this problem. I paid off my house so there is not a mortgage liability. Now it is an asset. And it is an investment for the future. It has gone up in value quite nicely. It is in a Trust so my kids can avoid the capitol gains taxes when I die and they can also avoid the cost of probate. So it is an asset that will not have capitol gains taxes during my lifetime or immediately after my death.
@Liam Mullins you can make a ridiculous amount of money here in Santa Barbara by buying a home and converting a detached garage into an ADU. The capital gains and tax benefits are so good that, I think it's impossible to find a investment out of state that comes even close to the returns you can make here.
@Nicholas Alexander
That’s awesome, very much wanting to look into building a home, will also look into subdividing down the road!
Thanks, my approach is all about finding value or creating value. Finding a house on property that is large enough to subdivide is a great way to create value. You'll probably have to jump through some hoops though like I did, because if it was obvious or easy someone else would do it.
@Nicholas Alexander
That’s awesome, very much wanting to look into building a home, will also look into subdividing down the road!
Thanks, my approach is all about finding value or creating value. Finding a house on property that is large enough to subdivide is a great way to create value. You'll probably have to jump through some hoops though like I did, because if it was obvious or easy someone else would do it.
Exactly, I am always looking for the high hanging fruit. As I have said before, I have little interest in jumping in the ball pit with all the other stinky kids!
My homes have definitely been investments, in fact they have spring-boarded my career in real estate investing.
My first home was purchased in an up-and coming area at the right time during the great recession. It produced an annual 30% increase in value upon sale (150% annual CoC return) that I paid no taxes on due to the principal residence exemption.
My next home was on a property that I subdivided and built a second home on. The first home produced an annual 5% increase in value upon on sale (24% annual CoC return). The second home (on the new lot) produced an infinite return (no cash down due to a dirt equity construction loan). Overall the entire project produced about a 40% annual CoC return which I paid no taxes on due to utilizing the principal residence exemption (twice).
While I likely won't ever be able to replicate either of these projects, you have to be willing to put a lot of thought and energy into finding value before anyone else can see it or in ways other people tell you isn't possible. I love it when experts tell me I can't do something.
Since I am looking at buying a lot and building a new primary, essentially dedicating my cash on hand to invest in that as opposed to a couple long term rentals. I would like to figure out how to compare the two different investment approaches. How did you calculate your CoC for your primary homes? The new build would be for gaining some equity and utilizing capital gains tax exclusion, but I feel like it would actually pay off in comparison to buying some rentals. I'd like to focus on raising more capital and then maybe focus on more expensive, better cash flowing properties down the road.
Technically I think ROI would be the measure for a principal residence, but basically you would look at the projected return on the build project over time v. rental income over time. E.g. high level if you have 100K to invest assuming 80% financing in a build project (200K land + 300K build) in 2 years (the time required to claim principal residence exemption) that is will be worth 600K when you sell you have 33% after-tax annual ROI (assuming 1 year build time). On the other hand, if you invest in 2 rental properties you would compare annual CoC return + potential appreciation in 3 years. Don't forget to include transaction costs in both projects e.g. financing costs, broker commissions etc. I think you just need to walk through each transaction step by step in a spreadsheet to compare. In my case I already owned the land and was living in the house so there was no additional transaction cost other than surveying the subdivision and recording.