An Investor Answers: “Should I Buy a House for Myself or Purchase an Investment Property?”

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“I’ve got some nice savings stashed up neatly in the bank, so should I use that money to go buy a new house for myself or should I go out to find an investment property?”

This, ladies and gentlemen, has got to be one of the most common questions in real estate investing history.

“Well?” you ask, clearly waiting for the answer.

Well, I am here to tell you that the answer is never going to be a crystal clear one. However, I will offer my point of view on the matter.

While I am a firm believer of Robert Kiyosaki and fully agree with his theory that owning a property for the sole purpose of investing is the only way you can turn a house from a liability to an asset, for those of you who are still a little undecided on the matter, I am definitely going to explore this a bit more. Please keep in mind that I am definitely not trying to indicate that purchasing a home for your own personal use is a terrible investment, the likelihood of you being able to purchase a property at the right time, in the right neighborhood, and during a market that will allow you to make a nice profit is rather slim.

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Related: Why the House You Live in is Probably a Liability, Not an Asset

Now, “Why is this so?” you might ask.

Because…

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Purchasing a Property For Your Own Personal Use Isn’t All That Profitable

A lot of people are unfortunately anchored deeply into the misconception believing that when they buy a property, it will appreciate by $XXX each year. So by the time they plan on selling it, bam — they have made a profit. However, in all honesty, this is actually what happens:

Expenses Add Up

When you buy a property for yourself to stay in, the expenses do not stop the moment you buy the house, but will continue on for as long as you stay in it. These expenses include things such as the closing costs, the interest on the mortgage, property taxes, repairs and improvements, and of course, the insurance needed to cover the house.

Appreciation Isn’t As Good As You Think

While it is a nice thought to have and is rather comforting, unfortunately, appreciation doesn’t occur quite as nicely as one would hope. Sure, appreciation does happen on the occasion (give a round of applause for inflation), however, more often than not, appreciation only keeps track with inflation, so in all honesty, it doesn’t really help you reap a lot of benefits. 

Inflation

This two-faced devil acts as both your ally and your foe. For one of the pluses, a great aspect about real estate is that it is one of the few things that acts as a hedge against inflation, i.e. if inflation does occur, then the prices of houses also go up.

However, this can turn into a nasty tailspin for you too, because remember, if the price of your house increases, it is likely that the value of all the other houses out there on the market have increased as well. Hence, if you were living in this property and you sold it, it is likely you would need to buy a new place to live in, causing you to buy a house at the peak of the market, and so you will no doubt have to bid adieu to any profits you originally made.

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Related: 3 Factors to Study in Your Market BEFORE Buying an Investment Property

How About Investment Properties?

While I can never promise that investment properties will always shield you from financial distress, it is true that investment properties do avoid a lot of the risks surrounding the ownership of a property. After all, the tenants cover majority of expenses, and both appreciation and inflation will work in your favor when you are planning to sell a property. I personally buy and hold for cash flow versus relying heavily on appreciation, which can be beneficial during a downturn.  

In conclusion, while it definitely comes down to a case by case basis, I do still strongly agree with Robert Kiyosaki’s belief and strongly encourage the purchase of a property as an investment rather than simply a live-in. After all, a little passive income every week does sound amazing, doesn’t it now?

What do YOU think? Is an investment property always the best use of your money?

Let me know with a comment!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record

42 Comments

  1. James R.

    Sterling, great article!

    In my opinion, do BOTH, i.e. buy a place for yourself AND an investment property. Buy a duplex and live in half of it for a couple of years and then move to your next investment when you’re ready.

  2. Engelo Rumora

    Hi Sterling,

    I always advise investors to put their “green soldiers” to work in investment properties rather than owning their own home.

    When you tie up your “green soldiers” into a mortgage, they are stuck in a bunker and not doing anything.

    You want them fighting for you everyday, taking over new territory and adding more soldiers to the army hehe

    Thanks and much success.

    • Steve Moody

      Engelo, where do your investors live? In someone else’s investment property? You either pay down your own mortgage, or someone else’s (x2 to cover their mortgage, expenses, and cashflow profit). The only way I can see investing in your 1st property is with a small multi, then at least you’re paying into your own mortgage, while someone else is also helping pay it down.

  3. Frank Jiang

    For this sort of article, I was expecting something far more fleshed out. This sort of decision should be based on numbers. What is your current rent? What would your mortgage be on the primary be? How much of this mortgage is interest vs principal? How much money do you save buying vs renting or vice versa? What is your IRR on the down payment for the cashflow difference that you receive if you buy?

    Compare that to the investment property. What is your rent and total expense profile? What is your total cashflow stream? What is the IRR on this cash stream if you put your cash into a deposit for an investment property instead?

    Remember that you can lever your primary to 96.5% while investment loans from the bank primarily only cover 25%.

    What about the tax break that you get on capital gains for living in your primary for 2 years?

    Not saying I disagree with your conclusions, but I think that far more thought and logic should be applied in this sort of decision than simply agreeing with a self-help author.

  4. Chin May

    How can this be even a valid question? if renting to a stranger makes financial sense how can renting to oneself be any worse?
    All the expenses that can turn ones home into a liability can turn a rental into a liability too. in fact there are many more risks that can turn a rental into a much worse liability than ones home. And whdn u rent u are not only covering all the expenses of ur landlord but also paying off HIS mortgage and a PROFIT
    Finally follow Robert Kiyosakis advice at ur own risk. not only it is useless it could potentially land you in jail.

    • Cody L.

      I can answer that. In some markets, it’s better to rent than buy. For example, I have a few inexpensive homes in Houston (let’s just say ~$100k) that rent for $1000/month. Those are better to buy than to rent since the costs of ownership (mortage/taxes/etc.) is less than rent.

      Those same factors make it a smart home to buy as an investment property.

      In San Diego, where I live, it’s often better to rent than buy. Why? For the same reason its a bad idea to buy property here as an investment: They don’t cash flow. Here a $1m house might rent for $6k. In that case, your cost of ownership would be HIGHER than rent.

      Those same factors make it a bad property to buy as an investment.

      So best is to buy in areas that are good to invest, and use that cash flow to rent in areas that are bad to buy as investments.

      (Which is why my investment properties are in Houston, where as my home is in SD. Though I do own my home — I bought it a while back before I started investing. And new (upgraded) Home I get will be rented for sure)

      In regards to Kiyosaki and jail, I have no idea what you’re talking about.

  5. Kent Clothier

    One consideration that I thought of while reading this article…

    When is the person asking this question? If they’re young and are trying to figure out whether to buy their FIRST home or not, then I love the duplex idea — buy a duplex, live in one side and rent out the other. That’s very powerful. But if it’s happening a bit later in your adulthood, perhaps when you’re in a relationship and have a child or two, then owning a home might be a better option, depending on the neighborhood you want your children to live in.

  6. Jerry W.

    I don’t see how buying then renting is any different than buying and living in it. The cash flow versus cost savings will be exactly the same with a few differences. Interest is deductible on both. You get depreciation from a rental but you get tax free income from selling your primary home after 2 years. You pay no taxes on your savings from buying versus renting.
    If you can buy then rent for $1,000 and clear $200 per month after PITI and repairs and capex, why rent for yourself for $1,000 when you can buy and pay $200 less?

    • Bill Briscoe

      Good points Jerry. It seems to me that most people who make the rent living space and buy investment property argument are either living in a high land cost market, where rent is less that 0.5% of purchase price because there is no land available to build new homes OR they are comparing a cheap rental like an apartment to buying and living in a nice 3+ bed SFH with a garage and a yard.

    • Cody L.

      See my answer to Chin. If you buy/rent in the same market, it’s a wash. You’re right. But if you rent a home to live in (vs. buy) in a market that’s better to rent, and then use that money to buy a property that’s better to buy (as an investment), then rent, you come out ahead.

    • Sterling White

      The main theory by Robert Kiyosaki from my understanding is people are led to believe their house is an asset. However in his theory states it is a liability, because you are coming out of pocket for expenses for upkeep, property taxes, insurance etc. versus investment property puts cash in your pocket even after expenses(if you bought right).

  7. Keith Bitely

    I’m glad to see in an article like this because I often see the exact opposite. I think there are certain situations that definitely make sense to buy investment properties instead of owning your own home. Take, for example, someone who lives in a high property value area like Boston. I could, I suppose, put a 20% down payment on a half a million dollar one bedroom condo, that will also involve me paying condo fees, and have well over $2k a month in housing expenses and an ability to save. Or, I could rent for less money, buy something out of state and see decent cash flow, while saving at the same time. It’s never black and white, really.

  8. Bill Briscoe

    This article asks the wrong question. I’ve read RK’s book and understand that a home in not the same type of investment, but you still have to have a place to live (unless you are still crashing at your parents!)

    So the question should be whether to buy and live in a home or to rent your home and make another investor rich? To answer that question from a financial perspective you have to compare two similar properties. Yes, it would be a financially poor decision to stop renting a studio apartment so you could build a new 5 bedroom 4000 sq ft home with a pool. But that right there is a LIFESTYLE decision, not a rent vs buy financial decision.

    If your living needs are a studio or 1 bedroom apartment, then your comparative “buy” option should be a condo of similar size and quality, not a 5 bed SFH. If you “need” a 5 bedroom home to fit your family, then compare to the cost of renting a comparable property. In my part of the country, renting a 5 bedroom costs 3x per month what I pay in mortgage, tax and insurance for my 5 bed home.

    Part of this is because of all the tax and economical benefits that exist to encourage home ownership. OO interest rates are lower than investment rates. Down payments are much smaller. Insurance can also be lower. Property tax-wise you can get a homestead exemption. Interest is an income tax deduction whether you own a home or an investment property. OTOH, Paying Rent is not a tax deduction, and when renting you will usually be paying all the investor’s costs, plus his profit margin. Rents can and do go up over time, while fixed principal and interest payments don’t.

    There are plenty of rent vs buy calculators out there, but keep in mind that the key point is starting with an apples to apples comparison. High cost areas like NYC or SF can certainly be exceptions, but in many parts of the country buying your living space easily becomes the best decision if you plan to live there very many years.

    • Bill Briscoe

      A good hybrid strategy that takes advantage of the Owner Occupied down payment/interest rate is to buy a home or condo to live in with the idea that it would make a good investment property. Live there for one year, then buy a new property to live in and rent out the first one.

      Buy doing this and moving every year or so, you can get OO interest rates and potentially smaller down payments on investment properties.

  9. kara haney

    agree – first choice is a 2-4 multii for the tax advantages in most states etc – you also have better control if you live in the property – more (4) units distribute risks better than 2 .

    but if you calculate the costs of renting vs the costs of owning and the latter are in your favor then buying a home has economic value too. you may not live in an area that has a good return – in which case you can move to an area with better return and test the waters and wait to find a really good property while buying a house to live in there.

    basically – a home to live in is a loser only when people buy it without doing a business analysis on it – and while assuming future conditions which may not occur – like appreciation – buying a house like buying art – has the advantage that even if it doesnt appreciate – it serves a purpose for you – if you have extra cash – art makes sense – if not – doing a business analysis can tell you if buying a home makes sense. dont forget the tx forgiveness of capital gains if you live in a property for two years.

  10. Cody L.

    I don’t comment much, but this one stuck out at me as I’m facing something similar.

    I’m self employed and own about 1000 units (mostly multifamily, but about 10 or so single family). I don’t qualify for a traditional loan (hell, I can’t even refinance the house I’ve owed for 12 years, where the loan is about 50% of the value, because I don’t qualify for a NEW loan. So I have this 5.8% home loan with BofA. Oh well).

    Anyway, since I can’t get a regular loan, and wanted a new house for myself, I have two options. I’ll make up numbers since I don’t want to get too personal:

    1) Spend $1,000,000 cash on a new home for myself (that house would rent for about $6k/month)
    2) Spend $1,000,000 on a downpayment on a $4m property (since I can get commercial loans all day long)

    If I buy an 8 cap property with 5% money, that would be 8% return on my $1m down, and 3% return on my financed amount (8 CAP minus 5% cost of money). So that property should net me $80k + $90k, or $170k/year

    So if I use the $1,000,000 to buy an apartment building, I should make about $14k/month cash flow. Hell, lets say $12k/month to be conservative.

    The $1m house I could buy would rent for maybe $6k/month. So rater than buy that house, I could buy the apartment, rent the house, and have an extra $6k+/month of cash flow. Or I could rent a $2,000,000 house that would cost about $12k/month and use the cash flow from the property to pay for it.

    Could my rent go up in the house? Sure. But so will the rent in my apartment complex. And I’ll have tons of other tax advantages, appreciation advantages (if both my $1m home and $4m apartment appreciate at 2% a year, I make $5k/month more just from the extra appreciation)

    Anyway… Everyone’s situation is different but for me it’s making way more sense to plow the money I was going to use for my own home, into an apartment building and use that income to rent a home.

    • Bill Briscoe

      “The $1m house I could buy would rent for maybe $6k/month. So rater than buy that house, I could buy the apartment, rent the house, and have an extra $6k+/month of cash flow. Or I could rent a $2,000,000 house that would cost about $12k/month and use the cash flow from the property to pay for it.”

      Depends on where you are I guess. Here, that 1M house would rent for closer to $10-12K per month, or more likely, a 6K per month rental would cost 500K to buy, since there aren’t many 1M homes for rent here… Ratios affect the rent vs buy decision heavily.

      • Cody L.

        Yeah, so if you can buy a house for yourself for under 100x rent, buy. Otherwise, buy somewhere where you can rent for under 100x rent, rent it out, and use the cash flow to rent where the cost is more than 100x rent.

    • Dan K.

      I agree. Since you are probably a REI investor and not a W2 earner, and can write off your REI losess (to include depreciation), you get no real advantage to owning your own home.
      I would rent and stay flexible if I were in your shoes. However, if you are married with kids, there is something subjective and emotional about owning and personalizing your residence which you can’t do with a rental.

  11. Travis Juntti

    I like these articles, thanks Sterling. I do agree with what Kent Clothier had mentioned.

    I’m in the the latter part where I have a wife and 2 kids, we doesn’t want to live in a duplex. We would like a SFH with a yard for the kids to play. Our intentions are to think like an investor and purchase a home we can build “sweat equity” into and sell in 2 yrs. This assuming there is some appreciation gains. If not, we can rent this out and move onto the next.
    There’s always other factors we need to consider so that we can still get off the ground with investments like DTI ratios. If one buys too much house, they may have trouble purchasing an investment property with a high DTI.

  12. John Oyedele

    So I definitely think it depends on the situation. My plan to get started is to purchase a primary w/ an investor eye. Meaning I plan to look for a property that needs rehab and I can force appreciation with a rehab (use 203k loan as well). Planning to purchase subsequent investment properties using HELOC from primary + savings.

    Getting married soon and size of family will grow from 3 to 6 overnight, so renting an apartment is not desirable and cost to rent a SFR is not budget friendly. Definitely open to other ideas on how to get into investing sooner without putting the family in a undesirable situation.

  13. Ren Agostini

    Thank you for the informative article Sterling. My question is about “what to do after the fact if you want to turn the home into an investment”?
    For example, I purchased my first property — a new build — a year ago and it closes in late 2017. Originally, I just wanted to move out of my parents and have my own property, not really thinking about investments. Fast forward to the present and I have decided to pursue REI in a more serious manner, as well as saving most of my income. My apartment is a non freehold townhouse which costs $410k and although I plan on living in it for a year (to take advantage of my tax-credit being a first time homeowner) I would like to turn it into a rental for passive income eventually. Unfortunately if I were only to put down 20% as down payment (because “cash is king” and the general advice is to not go over 20%) and chose to rent it afterwards, the monthly mortgage payments would exceed the rent hence I would not get any positive cashflow. Wouldn’t putting a bigger down payment be more feasible so the mortgage payments are reduced and I can then rent for higher and get cashflow?
    Initially I bought to property to live in but now I’m trying to look at it from an investment perspective. Should I still only put down the minimum 20%? Unfortunately, I already bought the property and have to work with what I have! Any suggestions would be greatly appreciated, thanks.

    • Sterling White

      Ren I generally use all cash when purchasing properties so do not deal too much with mortgage payments. It is extremely difficult to make a deal work that negative cash flows after expenses. You can work towards doing some form of house hacking such as using AirBNB to produce some income while you are living there.

      I would need some more context to what’s going on to fully offer some suggestions.

  14. Perry Apawu

    I saw a previous comment that made pretty good sense. I think it all depends on the situation. My wife and I are both 35 years old, we just moved to Florida and I’m trying to convince her that we could indeed move into a multi family home with the goal of living in one of the units and renting out the others, but she is a bit on the fence with that particular situation. So my alternative was to search for a single family home as if I was going to rent it out, but live in it for 2 years or so and then move out and move up in house and rent out the original home. Hopefully by that time we would have expanded our real estate investing tool belt and have some more cash saved up and ready to purchase another property. Either way I don’t think you can go wrong investing or purchasing your own home (as long as you analyze the property and buy right). Sometimes I think we over think these things and just don’t live, because at the end of this great life are we really going to be saying to ourselves I wish I invested or purchased a home !!!!

  15. Dan K.

    Nice Post Sterling.
    However, I think your personnel home can be a powerful asset for an REI investor, and I will give you 1 example that is representative of potentially many other investors.
    The specific case involves high wage earners who get paid through W2 income. We are talking about physicians (not in private practice but employees), successful attorneys, judges, corporate executives, etc, who earn more than $300,000- to $500,000 in house household income. These people are probably part time REI investors because the bulk of their time goes to their profession.

    For example lets say such a person buys a house for $1,000,000 and pays 10% down and get a mortgage interest rate of 3.5%. You ask how can they pay so little down with a low interest rate. Its funny but the more a person makes, and the higher your credit score, banks will give you great rates of 3.5% with 5-10% down. See article about facebook founder, Zuckerbook and his mortgage. http://www.csmonitor.com/Business/2012/0717/Zuckerberg-s-1-percent-mortgage-Why-does-a-billionaire-need-a-loan

    Monthly payments on the home (mortgage payment, taxes, insurance) will be about $4000 per month. It would cost about the same to rent this home. However, the difference for the home owner is that most of this $4000 (minus insurance) is tax deductible. This is HUGH! If they live in a high tax state like California or New York, their tax bracket is over 40%. This means they are effectively paying only $2200 (not $4000) to OWN their home.

    You say they should invest this same money in rentals and deduct those expenses right? Unfortunately, a W2 earner who makes over $170,000 cannot deduct “passive” real estate deductions against their “active” W2 income. The IRS says they don’t deserve this benefit because they make too much much. These folks get hit with the AMT and aside from their home interest mortgage and tax payments, its very difficult to offset their income.

    This is only half the story. If they are smart and set up HELOCS, they can deduct even more. Furthermore, they can use the HELOCS with interest rates of 5-6% to fund their Real estate investments. Way better than private lending or hard money. Again, they can deduct this HELOC against their active W2 income, which they couldn’t do if they used Hard Money.

    I think for the “average” person buying a home is not the ideal investment. However, I think Kiyosaki’s adage about your home being a drain and not an asset is over reaching and doesn’t apply to everyone. Hopefully this illustration demonstrates that for certain types of high wage earners, the personnel home is a very good tax shelter vehicle (as good as any investment) , less because of cash flow, but more because of tax deductions. I believe Kiyosaki and others says its not about how much you make but its about what you keep. Saving $100 is better than making $100 because the latter is pre tax.

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