Being a Tenant Landlord

"Renting is just throwing money away" is probably a common phrase heard by many children from their parents at some point in their life. I most certainly did. Despite relying on tenants to make a buy-and-hold strategy work, most investors that I have spoken with would not choose to rent if they had a choice. 

I am currently an active duty military member stationed down in San Diego, CA. Previously, I was stationed out in Pensacola, FL where I decided to purchase a home instead of renting in order to put my "rent" money at least partially into equity. I ended up renting two of the rooms out and own that home to this day. However, upon moving to San Diego, my wife and I decided to continue investing in real estate - just not in San Diego.

Every situation has it's own circumstances but there are 4 main reasons why my wife and I chose to rent an apartment here, while continuing to save and buy houses out of state (we are currently at 2 and plan to add a duplex in the next year).

1. We don't plan on staying in San Diego after the Military

If we were planning on staying in San Diego after the military, it would make a little more financial sense to purchase a home (maybe one that needs some work) so that eventually we could eliminate our housing expense (with a paid off house). That would take anywhere from 15-30 years, which is much past our own personal time horizons in this paradise. 

2. We are buy-and-hold investors currently, and the houses we searched for didn't cash flow

We searched for everything from fixer-upper single family homes to multi-family homes that we could house hack. In order to find something that did cash flow, we would need to live about an hour away from our jobs. We were not willing to sit in traffic for two hours a day total in order to make that work for the short term. If we were to buy something and keep it after we left, it would need to cash flow and we simply were not finding much in areas that we wanted to live in for the time we are stationed here. 

3. On a 30 year note, the equity gain will be eaten up by the transaction costs if we sell when we move

One would argue "Why not just buy it, then sell it when you leave?" The transaction costs (commissions, taxes, insurance and fees) on the back end would eat up any principle pay-down experienced in the first few years. 

4. Banking on appreciation only to make a profit seems a bit too much like gambling

I have always been told to have multiple exit strategies. If we were to purchase, and it did not cash flow as a rental and barely broke even if there was zero appreciation, then our only exit strategy would be banking on appreciation to carry us into the black. Only one thing would have to go wrong to blow up that entire plan. Any sort of price correction, no matter how minor, would put us in a lose-lose situation where we would have to eat a loss no matter how we spun it. Additionally, any sort of "cushion" that we could build in with a down payment would bite us in the rear two-fold. One, it would give us a false sense of security as taking a loss is still taking a loss regardless of whether it is paid for by a down payment up front or bringing cash to the closing table on the back end. Second, it would be idle money not earning us any return while we lived in the property. 

When analyzing our options we did the math. In the few years we will live in San Diego, we will be spending a TON of money in rent. However, we would not be any better off (or arguably worse off) by buying a property here and spending a TON of money on insurance and interest while having whatever equity we build be eaten up by HUGE commissions on the back end. Instead, we purchased our second rental home out of state within the first 3 months of renting here in San Diego and have become the Tenant-Landlords.