Which First: Primary Residence Or Investment Property
I'm struggling with a predicament I hope someone can help me with. I currently live in the SF bay area. I pay 1000/mo. rent and make over 120k per year. I don't know how long I'll be staying in the area, as I anticipate a "life changing event" (mariage or job change) with the next 3-5 years. Home prices are 400k and up. I've been looking at investment property in Las Vegas, or Phoenix. Not sure if it makes more sense for me to continue to rent and buy investment property or buy my primary residence here first, then buy rental property. Any advice would be greatly appreciated. Thanks
Hello,
I am in the same boat.. Live in Foster City, CA (Bay area) pay $1300 a month in rent, and make about $110k a year. I have no debt, and have a small cash reserve to play with. My credit scores are pretty darn good from what they tell me.
The following were my options:
Buy a Condo for $300k in San Jose.. and THEN have no more money left to invest.
Or
Stay in apartment I have here in Foster city and Pay Rent, Start buying Out of State where the low prices STILL boggle my mind.
Well I am choosing the latter... People kept telling me "BUY IN YOUR AREA" ... and yes that would be nice... but to be quite honest, the neighborhoods that those $300k condos are in aren't all that great.
My outcome was to buy a Vacation home in Las Vegas. I am currently scouring the area to see what comes up. But for $300k in VEGAS I could possibly buy 2 houses. Doesnt seem like much of a decision to me.
The argument I seem to get is "BUT WHAT IF SOMETHING GOES WRONG, youll be out of the STATE"
Well, my career is computer grafx, I have NO desire to fix leaky toilets and broken windows. However, I have NO problem with researching companies that do. Call my crazy, but I dont see how that wouldnt work.
If you want, Search my profile and take a look at my posts... you might find that I am asking the same questions you are.
Good luck to ya![ Edited by John1212 on Date 05/30/2004 ]
here in santa clara cty, I think property values have up something like 7%/yr.
Will they continue this? good guess I sure hope so.
I would look at the tax considerations as well. All the gain on the investment property (if you want cash) would be taxed. Also, where are you going to find a market as expensive (LOL) or hot.
Absentee ownership is not something I'm comfortable with. I'm only getting comfortable w/ commercial absent owner if to a large tenant (starbuck, gap, baskin robbins, etc)
My question is this. Who is going to be a better renter, you or someone else? You have to either pay rent or a mortgage to live just about anywhere right? I know the Bay Area is difficult to buy in (I bought a house in Livermore in 1999), but since you have to pay either rent or a mortgage, why give that money to another person?
If you can find a property to live in that you can manage the payments on, then that will be a great investment. Even after http://www.the.com bust, property values in the Bay Area haven't been hurt that much. Don't you wish you had bought some of the cheap buildings in the SOMA (South of Market) district prior to http://www.the.coms?
Like I say, I bought in 1999, and due to a my business relocating, sold my house a year later for $40K profit, a 12% increase. I would buy something, just so you aren't throwing your rent portion of your investment money away. Then let the equity you gain in that property become additional seed money in the future when you move.
HTH,
Robert
[addsig]
Here's an article on the subject
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=508
The key to financial independence:
Spend less than you earn
Invest the difference.
Reinvest the profits
UNTIL you can live off the interest alone
More specifically I advise to live as cheaply as possible. If you can buy a place where you can live for less than rent, do that. Work on your investments until you can generate enough to buy what you want.
I think you have to calculate and compare estimated ROI on your personal residence and your investment properties. What brings you more money?
Buy low, sell high - isn't it?
Can you buy low now in Bay Area? - NO. This is seller's market right now!
Will you be able to buy low in a year? -Possible. When interest rates go up the ARM holders will default.
I might be speculating, but perefer to rent and step aside allowing crowds to bid.
Rental property in Arizona:
Arizona is seasonal state. Find out what is the vacancy rate in the area you are looking to buy.
Know nothing about Las Vegas, but when I hear "Nevada" I think of toxic waste.
Of course, most people will blindly say you need to own rather than rent, but I've done better renting in 2 situations...
A few years back, I found a junker and worked out a deal with the landlord. I did some work (mainly I just oversaw and worked with contractors which I paid for but got back in missed rent). We made a checklist... If I do this, landlord does that... on down the list. After 6 months, I was living in a gorgeous place with refinished hardwood floors, a new bathroom, and a private sun-deck for $400/mo locked in for 5 years with an option to renew for two more.
For the same house, you'd pay twice as much in mortgage interest. In that case, you can press the keys on a calculator 'till you're blue in the face. I came out ahead renting.
Also, in college, I found a property surrounded by multimillion dollar homes on a private beach. the house was broken-down, though... sagging, lots of rotten wood, etc. The owner bought it to raze and build his retirement home on... but he was at least 10 years away from doing that. I got together a few friends and we moved in agreeing to pay for everything ourselves and cover his property taxes for the right to stay there.
I paid $175/month for a 17-23 foot room with a 23 foot wall of sliding glass doors opening up to a private beach... and the sailboat came with! By the way... I went back a little while ago... it's listed AS IS at $2.3M. If I were doing that deal now, I'd have done it where I paid nothing.
By the way, in both cases, I'd never even seen any RE contracts before, and wouldn't have known an option from a mortgage... but I did know that the "Landlord" in both cases had a problem... and I found a new solution they hadn't thought of. Not only did I get great deals, but they both loved me for it. One of them even tried to set me up with his daughter. :8-):
What's my point? Just that it's all about the deal. I've never owned a house because I've never wanted to be tied down to one place. There's creative renting just like there's creative buying. Ultimately, it's a dollars and sense issue.
How useful is the equity really going to be considering the ill-liquidity factor and the time factors involved, and what is the cash-flow situation. If you can rent your personal residence for less than the interest portion of the mortgage on a similar house (averaged for the length of time you will live there), and you're not planning on being there long-term, then you're probably better off renting. A lot of people will tell you different just like a lot of people have $ in CD's. You may miss out if there's a big spike, but it all has to be weighed against other factors.
Everyone has their own take. I used to work with a guy that bought lots in new developments going up. He got to know some of the developers, etc. He was always one of the first in and always got sweet deals. I don't know all the details, but he got some sort of construction loans, and built nice houses which he then lived in for 2 yrs, and sold before moving onto the next (bigger) one. Each time, he cashed out and paid no taxes.
Last I checked, he was earning about $50k at his job and living in a $1.5M house. Try telling him to rent. It depends... it's all in the deal and what you're looking for, and what you'll put up with.
In the meantime, if you come across a great investment situation that does not suit your personal requirements, why pass it up? Learning what you will undoubtedly learn in REI, you will surely be able to get a great deal on your personal residence when you find a match that also meets your investment criteria.
[ Edited by thestudentisready on Date 05/31/2004 ][ Edited by thestudentisready on Date 05/31/2004 ]
Enough of AZ being a seasonal state. Hogwash!!
There's a reason that Phoenix is the second fastest growing metropolitan area in the country. (second in growth rate to LV, and second in population growth to LA) It's not because of the snow birds, which are a smaller percentage every year. Besides the new job growth, most of the former winter visitors are now year round residents. It's also those of you in the land of California that have pulled up stakes and moved out because it's too expensive to live. I welcome you to Arizona, You guys keep my property appreciating in value.
Enough of my vent, sorry!
My opinion only, When the real estate market there in California gets so top heavy that it collapses in upon itself, It's gonna get ugly for those that have high mortgage balances.
Jeff
Many years ago I lived and worked in the SF Bay Area.
House prices were pretty high. More or less the same ratio for income to prices that you are seeing.
Interest rates were over 10%.
I was renting a bedroom in a house with other coworkers. Then I learned how to think more creatively and bought a house where I filled the other two bedrooms with renters. Between the tax savings and the rental income I was paying less to own then I was renting. The house I bought was in San Jose if that matters.
John
[addsig]
Well I have one other bit of advice. When you go out of town to buy you need to be very careful that what you are using for comparables, are LOCAL comparables. Its easy, when coming from a high-priced market to a low priced one to say, "this $50,000 house would be $500,000 in SF therefore it must be a real bargain".
Not neccesarily. Remember your tenant in that market doesn't make SF salary and doesnt have to pay SF prices for his other housing options.
I currently rent an apatment @ 780pm. Which is VERY cheap in my area. I was on pace to make about 60k last year until the market shifted. It's difficult to forecast my income on an all comisson basis. I'm switching employers in the next 30 days to a salary plus commission pay scale.
I wholesale( assign contracts) and short sell properties to build capital. It's working out good so far. I have associates to tell me to buy a home of my own ASAP. I resisted the idea because of my inconsistant income. Then someone told me to look at it in a different perspective... he said that even though it will be your primary resisdence, it's still an investment property. Meaning that I'm eventually going to use the equity as leverage to buy other properties. In addition to that, I wouldn't live in the home for more than 3 years, and at that point I would hold it for rent.
Bottom line is the first home that I buy will be my primary residence but more importantly my first investment property.
It's a good idea to buy while you're renting. This streamlines the loan process because your debt-to-income ratio will/should be low provided you don't have alot of other debts (assuming you will use full doc loan programs). You can even scale down to a cheap apt (I'm assuming you're single w/no kids) to reduce your monthly expenses. If you can finance your investments in corp name that would be great (not sure if you're still a 1st time homebuyer if you've bot/sold investments in personal name then transferred to corp name).
On the other hand, if you find a primary w/equity, you can purchase, pull the equity out & move forward w/your biz plan. Take advantage of 100% financing, no doc, 1st time homebuyer programs to lock in the lowest rate possible on the primary & buy investments.
I usually start w/the end when tussling w/a decision. Talk to loan officers/mtg brokers to give you some insight (financing gone good & bad because ??)). The #'s, process and scenarios will help you make the final decision.
Have you considered doing both?
Buy up a 3 bedroom place and get a couple of roommates. You'll have a place to live, they'll help pay your mortgage. You'll have extra money to buy more RE.
First property I bought was an apartment complex. Just my 2 bits.
I would suggest that all of you look into the following scenario.
If your area permits you and you will be livingin it, buy 4 units with FHA financing. You basically get 3% down, where can you get that and still get a 6-6.3755% fixed. Then after living in the units for a minimum of 6 months to a year (this is so you don't violate the owner occupied requirement of the lender), then you go and purchase a duplex or a single family residence with a conventional loan.
Believe me, If I could do it, again, I would do so. This will maximize your money.
Ps I have hear that Las Vegas is doing great on rental and you can rent them on section 8 and max out the rents.
Good Luck
Hey, I have to throw my two cents in. Been mostly lurking around to learn as much as I can.
Two years ago I moved from the Boston area to Tucson. Took the profit I made off of the house I inherited from my mom after she passed away, and bought a house here. Well, back then it seemed like a terrific idea. Wow, I sold that house with a zillion times profit from what my parents had paid way back in the dark ages... got a lovely home, furniture ... ah, life was good.
Well, (my apologies to those living here) I hate it here. Hate the heat, the strip malls, the giant-nuclear bugs, and the dirt. Yes, the R.E. market in the Boston area is through the roof - but with good reason. Boston, like CA, has SO much to offer, including a better chance at finding a decent job (even in this economy) ... and it took my leaving to realize it.
I know nothing about Phoenix, (besides the fact that it has more of what Tucson has), but one thing I now realize is that because of my lack of knowledge of this R.E. market, I ended up buying in an area where I will not make much profit on my home. (I am trying to sell now, and will go back to New England.) You may decide to invest in AZ without living here - but whatever you do, make sure you do as much research as you can on R.E. values in whatever area you intend to invest, and find out the locations of the expected growth areas.
I estimate that I lost about $100,000 in this move - but I haven't sold this house yet, so it may be more. (That about equals the profit I made on my house in MA after I did some repairs and lots of cosmetics.)
I goal is to make that back - and more - in R.E. somewhere in N.E., in the next two to five years.
You may be able to make plenty $$ here; others have. My advice is just to be careful, and above all, do your research.
By the way, like I said, I don't know about the Phoenix area, but Tucson IS still Snowbird Land. My kids (young adults) have had an impossible time finding work here in the summer.