A classic question I get when talking to a would-be real estate investor is: “Shouldn’t we buy a home to live in first before buying investment homes?”
The answer is – it depends on where you live.
When considering owning your own residence, there are various layers of reasoning. Some are logic and numbers-based. Some are emotional, traditional and familial.
Owning your own home can be associated with safety, security, having “arrived”, satisfying family members’ aspirations, the stability of having a (hopefully) permanent place to live, and so on.
Of course, everyone has a different set of emotional considerations when it comes to owning a home. These vary from person to person and, needless to say, are hard to quantify.
In this post, I will address the logical, numbers-based approach to the question of whether to buy your own home as your first real estate move, or rent and buy investment homes instead.
The numbers tell the story
If you are considering buying your own home, the price of the home matters, the rent required to rent that same home matters, the local property taxes matter, the mortgage interest rates matter, dwelling insurance rates matter, and even the new 2018 tax law weighs in.
If you live in a market where property taxes are relatively low (say, between 1 and 1.7 percent of the home price per year), and insurance rates are reasonable, then if you are considering buying a home under about $400,000, that should be a “no-brainer” as your first step. Between $400,000 and $500,000 would still be a reasonable range to consider buying the home. In such a market, once you step up to the $500,000 range and above, the math may well start to turn as you climb higher in price, in favor of renting a home in the area in which you live. Following that, owning rental homes in more optimal markets makes sense.
Watch out for high property tax and high insurance rates
In markets where the property taxes are high (like in Texas and Oregon), and insurance rates are high (Texas again, for example), the “no-brainer” number may shrink to $300,000 or so, while the range above which you may consider renting your own home while buying affordable investment homes in other markets, will likely be $400,000 or above. This is because with high expenses for property tax and insurance, (which as a homeowner you would be paying) the overall numbers and logic “turn the corner” faster.
Certainly, in expensive areas like the San Francisco Bay Area, Los Angeles, San Diego, New York City and others such markets, it is usually far more logical to be a renter, while owning rental properties in affordable markets, where rents are actually quite high as a percentage of the home purchase prices.
Our next quarterly expo is December 1st near San Francisco Airport. Email us at email@example.com and add “Read your blog post” in the subject line and come as my guest. We will get back to you with registration information. Learn more about the event at icgre.com/events.
In an article published in the San Francisco Chronicle from February 7th by Christopher Rugaber (AP Economics Writer), called “Why Investors’ Fear of High Inflation is Probably Overblown,” Mr. Rugaber explains inflation by going into the pros and cons of higher and lower inflation. He provides an overall concise glimpse of the situation as it is currently. The Fed’s dilemma with increasing taxes in the face of strong employment and rising wages is certain to bring inflation to the economy. However, he also discusses how inflation assists borrowers.
ICG educates investors
Of course, at ICG, we constantly talk about how inflation erodes the 30-year fixed rate loan. This, in turn, becomes the borrower’s ally in reducing the real buying power of the loans fixed dollar amount. We will talk about this and many other important topics during our ICG Quarterly 1-Day Expo near SFO on Saturday 3/3/2018.
Topics to be covered
Our expert speakers will cover topics including the new tax law and how it pertains to real estate investors, how to buy rental homes out of a self-directed IRA, and how to use insurance as the first line of defense of protecting your assets. There will also be lenders available to discuss what they have available and what you can expect over the next several months. Property management, legal expertise, and one-on-one’s can be found as well. And as always, we offer a lot of question and answer time. Market teams from the most relevant metro areas in the US will be present. Everyone mentioning this blog will receive free entry. Please email us that you read this at firstname.lastname@example.org.