Prioritizing your first real estate purchase can be a difficult decision with investment property ambitions bubbling. Which one should I do first, buy a home to live in or an investment property?
This is a question that many beginners face, particularly when investing in real estate in your 20s and 30s. We bet you all can answer this question without our help, because….it depends! Seriously, the stage you are at in life, including age, financial, employment, relationship status, etc. can really influence what the right choice is for you. We’re going to focus our discussion on beginners and intermediate individuals for first real estate purchase, so purchasing commercial property will be at a later date. For the purposes of this article, we will also assume that you will be using conventional or Federal Housing Administration (FHA) financing for residential housing.
First time home single family for you and family
There’s no place like home. Before purchasing a rental house you may want to establish your family home to start. This is a more traditional approach and allows you to approach real estate with lens of owner occupants. If you’re in a relationship, your partner and you should be on the same page about this decision. Some people really want the proverbial white picket fence, 2.5 children and a dog. You never want to limit your or your spouse’s expectations with a financial investment. Homeownership is a large part of the American dream for most people. Sometimes it’s about enjoying the experience and undertaking before focusing on profits and investment prospects. The process of buying your first home to live in can be an exciting and a wonderful event. For a quick taste, tune into HGTV for examples of excited couples and individuals searching for a home to fit and meet their wants and needs.
The key to this path is keeping your end goal in mind. If you do decide to purchase a single family home for your family, keep the costs low so that you can easily afford additional property and/or mortgages. The bank will typically qualify you for up to 4X your income. The lower you can keep your cash outlay and monthly payment the better. We would encourage you to think objectively about the size, location and amenities of the home that you really have to have. Do you really need 3000 sqft? Is it really necessary to have that pool (and the associate maintenance)? Do you have to be in the A+ rated school district? These are all valid concerns to consider!
Single family home for you and housemates
One of our favorites! Another approach for purchasing real estate when you are just beginning could be buying a home with the intention of renting out spare bedrooms. This is the strategy Ms. LLP (Richelle) used when she bought her first property. When you’re single and interested in getting a taste of what it’s like to be a landlord, this plan can be awesome. It’s the best type of roommate situation. You get to reduce expenses, save money, own a home AND have a slumber party every night. (sounds creepy) No? Maybe that’s just us! We know that having a roommate (or 2, or 3…) can suck. Trust us, the suckiness is way less when you own the place. For starters, you have the final say on everything. Period. And if they don’t like it they can just get out!
Depending on the layout, the roommates really won’t be that big of a deal. Having roommates is an excellent way to accelerate your savings with relatively little effort. We think it’s worth the awkward conversations, flushing toilets while you’re in the shower, “disappearing” cheesecake…deep breath…we’re one step closer to financial freedom….we’re one step closer to financial freedom…what were we saying about roommates again? All jokes aside, we think it’s worth the PITA.
Duplex or double, living on one side and renting the other
Not interested in sharing your house space with others but still want to own a home and be a landlord? No problem! A two family dwelling, often called a duplex or double, can be an excellent choice for families or those that want and enjoy their privacy. Living on one side can give you the privacy you need while providing the rental income you want. The best part is that the property would still quality for a residential mortgage, unless you’re buying with cash of course. If the numbers work out correctly, you could be in a position where the rental income covers the mortgage and expense. You would be living the dream, banking the excess and essentially living for free!
Triplex or Four-family apartment building, living in one unit and renting the other three or four
You’ve decided you definitely want to become a landlord and live on site. Three and four-unit buildings make great investments. These properties truly provide cash flow over and above expenses required to maintain the property. One of the major drawbacks of investing in a multi family and living on side is a lack of privacy. The residents will most likely will know you are the landlord unless you chose to hire a property management company to do the leasing and tenant relations. For the person that wants to try their hand at managing, this presents an excellent opportunity to learn how to screen tenants and establish boundaries between yourself and your clients. Living in a multifamily property gives the beginner landlord a low-risk training ground while boosting his or her personal net worth.
In each of the shared housing options mentioned above, we suggest that you be mindful of the ebbs and flows of being a landlord. We recommend having reserves to cover unexpected expenses. It is best to be able to cover all your housing expenses on your own and allow tenant payments to boost your reserves.
Investment property alone and you continue renting
The alternative to buying residential property to get started is buying an investment property before a primary residence. Mr. LLP (John) did this when he bought his first property before the age of 21. I was able to purchase a rental property while still living at home with my family. Although the property was a double, I did not have to live at the property making the income from both sides available for cash flow. It was a great experience that got me hooked on passive income! Ms. LLP also did this later when she moved to Columbus, OH. While renting an apartment, she purchased 2 rentals homes before buying a home for herself. This just goes to show that there are no hard and fast rules. You can try one strategy then try another at a different point in life.