Buying a large primary residence vs. investment property

21 Replies

Hi BP, Joined 6 months ago and learning quickly as I go. I'm at a crossroads and looking for advice. I'm in Northern California and have been looking at purchasing a 4 plex for the past 6 months. Going to an open house for a primary residence, discovered that a friend was selling their house. Their list was $1,575,000 on a 5br/3.5 ba. They would sell it to me for $1,525,000. They declined an offer of $1,650,000 that was asking for a quick close. They need to stay in their home for 2 extra months after closing rent free. After those 2 months, they would pay $6k/month for rent. HOA is $85/mo. PITI would be ~$7400/mo.

I am approved for a 4.375% loan for 30 years with 20% down. I can make the monthly payments, but it would limited the money I set aside for investment savings. For an investment property I can get 5.125% on 30 years with 25% down on a $400k investment property like a triplex or 4-plex.

Should I pass on the primary residence and invest logically? Emotionally, I love the home. Great place for my kids to grow up and the neighbors are great. Or should I put the money and invest it and have it grow, per Richest Man in Babylon, Millionaire Real Estate investor, Grant Cardone, and perhaps even what our beloved podcast hosts Mindy Jensen, Scott Trench, Brandon Turner and Josh Dorkin have done.

I currently have a primary residence that I plan to rent if I were to purchase this new primary residence. I could rent for $3500-$4000/ mo. PITI on my current primary is $3500. When I started on this journey, I was looking at putting down $100k on a 4 plex and perhaps buying others as they become available in the year. With this primary residence purchase, putting down $305k zaps my savings, and I would have to start from scratch.

The questions boils down to whether I want financial independence or if I want to be house rich and cash poor. I think I've answered my question.

Also depends on how the market moves. If there is softness in the coming 2-5 years, I would need to be ok with having a mortgage under water. If the market continues to rise in the bay area, I would be missing out on those gains. Major FOMO.

Pretty personal post. Looking for some guidance. Thanks!

I do plan on staying in the bay area, as my family is here and I don't intend to move from the weather, activities, and economic opportunities.

$1.5M is $20,000+ a month in rental income in many markets.

I've heard the term before and there's no such thing as "house rich"...there's just rich and that's based on invested net worth.

Figure out what you want in life and you will have clarity.  For some, that is the nice house...which is totally fine...and, for others, it's financial independence.  We are all different and what Arkad and Grant Cardone want are not relevant.

You buy 1,525,000 and resell for 1,650,000.  What you waiting for??

Originally posted by @Michael P. :

You buy 1,525,000 and resell for 1,650,000.  What you waiting for??

 Yeah but you are forgetting the carrying costs, closing costs, real estate commissions, and tax penalties.

I would take that down payment money and invest outside of California. I would buy a property that could get me 10-15% cash on cash return annually and appreciation in a fast growing, but reasonably priced market. It would probably be a value-add multifamily. That way I could get cash flow and appreciation gains.

I would not buy some overpriced and absolutely ridiculous money pit. That is unless of course you are already independently wealthy. That may be the case, after all that sort of house would require someone who is quite wealthy to be able to afford it.

Your asking for advice in making a decision between investing to generate income and making a personal decision on life style. One is counter productive to the other. The opinions of others should be irrelevant to you making a decision on which direction to take in your own personal life.

Pretty obvious what the opinion of investors should be......

Thanks for the replies. Guess I will need to do both. 

@Anwar Mai A lot of this (for me) would depend on how long you think you’d want to stay in the home. A ton of people move every 4-5 years. Do that three times at 10% (realtor fees, holding costs, closing costs) and it’s a huge amount of money. Or, shrinking it down, it’s about 2%-2.5% annually. $1.5M * 2.25% = $33K. So that “average” person that “moves up” is burning $33K per year for the privilege. If this house is so groovy that you can stay there for 15 years you “save” that annually.

Of course, this is a crazy over simplification of the numbers, it’s hard to forecast 15 years into the future, etc. But what I’m trying to say is that there is a monetary benefit to “buy big now” instead of “upgrading over time”. 🤷🏻‍♂️

@Anwar Mai most people should buy a home to live in because they can seem to hold on to their money. But I have Dont the spreadsheets and if you can grow your money consistently at 12% or more a year it’s a no brained. Invest in rental property and be a renter yourself.

@Andrew Johnson Thanks for your feedback. I've been in my current primary residence for 11 years. I expect to stay in this house for the next 10-15 years until my kids are out of the house. My in-laws are also aging and we expect to have them move in with us and then rent their home in San Francisco.

I know I'm buying at a peak, and need to account for a correction. Since it would be my primary residence, I think I can weather the storm. For example, purchased my home in 2007 for $699k in a short sale, saw the neighbor buy their home in a short sale a few years later for $450k. Now I'm close to $1M. It will rent for $4k/mo. But it could be a multifamily...  

I do think I'm missing out on buying a cashflow multifamily somewhere else in the country, which gives me pause. I have a SFH off market deal that I'm working on closing now. It is cashflowing nicely and hope to use that money in 3-4 years to buy another multifamily, out of state. My opportunity cost is 3-4 years, potentially $300-400k. Ouch. Now I need to go find some $1.5M $20k+ mo rentals that @Mike Dymski references. Maybe that will snap me to my senses ;-)

@Anwar Mai You keep mentioning your kids. So I'm assuming there's a wife in the picture. Have you discussed the topic with her?! Does she agree it makes sense to invest or absolutely want that $1.5K house? Maybe she's not the one making the financial decisions, which is fine. However, a healthy discussion to ensure that both spouses agree on the course of action never hurts!

Best of luck!

@Anwar Mai It's always tough to think about these things because if you're "moving anyway" I always like the idea of "going big" so that you don't get hit with the turnover costs.  But that's my bias because so many people move pretty darn frequently to upgrade, get a bigger home, etc.  And very few people keep the costs of doing that in mind when the market has gone up.  They (in a way) don't even notice the cost because they're focused on the equity growth in their home.  So if you move every 5 years then (to me) it makes sense to "go big".  

But that also presumes that you want/need to move out of your current home.  Maybe you don't?  Or maybe you do because it's too small for the extended family to move into? :-)

Anyway, I don't think it would be too tough to find a $1.5MM apartment that gives gross rents of $15K/month in a decent area.  And you likely won't feel the urge to "upgrade" that apartment complex on the same timeline as any personal residence!

@Alina T. My wife and I have discussed the purchase at length. It seems like a good buy for the family, long term. It goes against investment basics I've read here on BP, but it would allow the kids to spread their wings.

@Andrew Johnson  If I decide to do both, buy the primary, we could sell our current home for a ~$400k gain and invest ~$250k to down for a $1M 10 unit property with commercial terms. 

Thanks to you both for your feedback!

What neighborhoods are these home in? you also need to factor in your potential appreciation. (For instance, if the $1.5 mil home is more expensive than most homes on that block, you may not be getting the best future appreciation. Or if it's in a good SF location, a solid SFH is like gold in the city, as so few go to market each year, and very few get built). If you play this right with the SFH's you can do very well on future appreciation. Also you mentioned an inlaw unit. You can legalize it (if in SF) and increase property value and get a lot more income as well. I'd take a careful look at the micro market dynamics. I'd be weary of investing out of state if you can do so in your back yard. You'll make your real money on good local purchases over the next 10 years, and it looks like you have the capacity to do so.


Don’t have an answer but can share my experience as I was faced with a similar dilemma, I opted for a modest home vs a bigger one and chose to invest rather than live it up. That btw was 8 years back, so in hindsight I had the whole investment cycle and related appreciation luckily ahead of me.

Pros: Built investment property. That was the beginning of the next few ones. Seen appreciation on value and rents. Feel grateful for that.

Cons: My primary Home is relatively modest (albeit top South Bay location) vis a vis friends & relatives who own single but large homes with views and pools.

My kids often ask me, why those houses are bigger vs mine when we all went to the same college :), I can’t explain because my kids could care less how much investment property I have or what it’s worth etc.

I won’t change a thing. I do plan to add to my existing home in due course and upgrade. That will get me in a better place with my family :), it’s a trade off.

Thanks @Sam Josh for your perspective. It's very helpful. This property is a "middle of the road" property for the peninsula. My ideal would have been in Millbrae, Burlingame, or San Mateo. This new primary residence is north of those cities. To buy a modest property in those cities with better schools would be $2M+. 

I feel like I'm buying at the top of the cycle, which may be fine since there is never a good time to buy. I thought I was buying at the top 11 years ago and now see $300k appreciation on my current home. If I buy the new home, I have the option to rent it out for a good cash flow, or sell it at what I think is a top and invest in a 10 unit with ~$10k gross income a month in CA ($20k in some parts of the country. I have to find those!)

@Amit M. a house down the block just accepted an offer for $1.6M-$1.7M. In 2 years, there is a lot of new development coming available. There are at least 570 units in South San Francisco planned. San Bruno and Millbrae also have a substantial amount of new developments currently in the planning process and could be coming available in 2 years.

Supply risks are something I'm considering. The new units coming in are condos, townhomes, and SFH. I'm also considering the increased population pressure on the school district where my kids will be attending. If the new developments offer the same size and floor plans, they may lower the value of my home if they are offered at a lower price.

Interest rate risk is also a risk. As interest rates are climbing, I should lock in my primary residence at a lower rate for the long term, albeit, higher price. If there is a price correction (an aggressive 25%) because interest rates are climbing, the monthly payments wouldn't be manageable at another $1.5M property. 

Assuming 2% appreciation in the bay area's peninsula, my $1.525M purchase is $1.586 in 2 years. That's ignoring the increase from $1.525M to $1.65M. If I start with a $1.65M value assumption from the offer the seller already received and the offer a home down the street received, in 2 years, the home could be worth $1.7M.

I think the best course of action is to purchase the "modest" $1.525M house, sell my current property, and buy an investment property with the $400k gains. This would make my family very happy. Kids would be able to have more room to run and play. Neighborhood has many kids the same age as my kids and the parents are friendly.

On the flip side, we are cozy where we are. We are currently saving ~50% of our income. We could live off my wife's income if I choose to devote my time to real estate and quit my job today. I want to keep a W-2 job so I can continue to invest in properties, whose cash flow will equal $10k/mo.

The former will delay my goals, but will make my family happy now, and also make me happy. The latter will make me happy in the future, and fairly invisible to my family. 

Hi Anwar, just out of interest what did you decide to do?

Hi @Paul Luetchford thanks for asking about an update. I bought the SFR in March and did a 60 rent back. I moved in July and I love the home. It's in a great neighborhood with great neighbors and the school district is nice and challenging. I'm still looking to buy a 4plex in the Merced area. I have yet to seriously look out of state. I'm considering house hacking by renting a room on AirBnB or renting monthly until my in-laws are ready to move in. It will be interesting to see how rising rates affect the market as there is still limited supply in my area.

Another update: My county assessed my home for higher than the purchase price. Now I have to wait until July when they open up the appeals process to file an appeal. I'm being assessed $200k over my purchase price, because other people purchased 3-4 other homes in the same neighborhood for $200k more than what we paid for our home. I'm tempted to refi to pull out that $200k and buy another property.

Congrats on the new home. If you are considering a 4-plex, you may want to also consider Sacramento County. Your purchasing power goes up compared to Bay Area markets.

I second Eddie’s post and add that there are better opportunities in and around the Sacramento area than the Bay Area, although the word has been out for quite some time now.  West Sac is growing, Yuba City, Woodland, Placer county, etc.   Lots of folks looking to open their business here so small commercial strip centers seem to be doing good along with industrial (warehouses).

Thanks Eddie and Brian! What part of Sacramento would you recommend? I have been looking at downtown Sac for sometime. Also looking at Fairfield and Merced.

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