Today’s question comes from Colin in Iowa…
“Hi, Matt and Joel, I’m seeking your advice on a decision my wife and I are grappling with…
Currently, we reside in a condo owned by her father, where we cover all associated expenses totaling approximately $1k per month with our diligent savings.
We’ve amassed $50k in savings, earmarked for a down payment on our future home.
However, as a realtor with firsthand experience in property management and home repairs, I find myself contemplating an alternative path.
Given our low housing expenses and my familiarity with the real estate market, I wonder if it might be wiser to invest our capital in a rental property instead of purchasing our own residence right away.
My wife’s remote work setup provides us with flexibility to manage additional properties, and my skill set complements this endeavor.
We’re at a crossroads and would greatly value your insights on whether to prioritize homeownership or seize the opportunity to enter the real estate investment market. Your perspective would be immensely helpful as we navigate this decision. Look forward to hearing from you, guys!”
Matt & Joel’s response: I absolutely love this question. Basically, should Colin and his wife buy a primary or rental home!?
These decisions, most of the time, are close to being opposites. It’s like asking, “should I invest money, or spend it!?
What are your goals?
Honestly, much of this decision comes down to your personal goals.
If buying a home and living in a space you both own is super important, maybe that’s what you should prioritize. Getting out of your wife’s parents place might be worth it.
But, understand that you’d be giving up a pretty sweet low cost living situation. Paying a low amount in rent is clutch. It allowed you to save up a $50k downpayment, didn’t it!? And you could do it again, too, if you stay in the same place.
One day you will probably want to live in your own place. But, kicking the can down the road on a personal/lifestyle purchase like this can really help you invest more and experience more rapid financial progress.
So, think about your goals as a couple and family. Both short term and long term.
If you are happy living where you are, you have a really good opportunity to get ahead financially if you continue to rent there. In that case, the best decision would be to invest your cash in a rental.
Buying a rental property
Colin, it sounds like you have the tools to be a great real estate investor.
You’ll save money on realtor fees, and probably know about available properties before normal folks are even aware. Being a realtor has major perks.
Plus it sounds like you’re willing to self-manage and perform repairs and maintenance. AND your wife can help manage those props thanks to her flexible schedule!
Investors who are more hands on, especially in those early years, have the ability to maximize returns and boost that financial independence timeline.
Those extra tools in your belt make this an even better decision in our book.
Buying a primary residence
We’re talking about apples and broccoli in many ways.
Buying a primary residence is rarely a “great” investment.
I’d talk it over with your wife because no matter how good the financial deal is, at some point that desire to own a home can outweigh the savings you’re currently enjoying.
How long are you going to stay in a home if you purchase one? If you’re a young couple and don’t have kids yet, maybe it’s too soon to make that decision?
At least when you buy a house it’s something that appreciates in value. It’s not a horrible investment. It’s just likely not the most financially stellar one you could choose.
Just the fact that you’re asking this question, that you’re keen to put your money to work in a way that would generate returns instead of maximizing your lifestyle, is a good thing. Honestly, it sounds like you’re leaning towards a rental prop. And so are we.
If y’all can agree to postpone a primary home purchase for a couple of years, buying a rental property before buying a primary can offer you more financial flexibility in the future.
Why not do both?
One last option… split the baby!
What if you attempted to buy both a rental property and home in one fell swoop!?
We call it house hacking. Basically you would live in the new home and rent a part of it out.
You could buy maybe a duplex or triplex, or a single family home with an ADU or basement apartment… You don’t need to share the main house with strangers – there are other ways to keep tenants separate.
I’d at least consider looking at properties like that if you have the desire for more space and a place of your own but also want to scratch the rental property itch.
This strategy would keep your housing costs low, and let you own the place you live in.
Or, maybe you buy a strict rental duplex now and look for an income-producing property when the two of you are ready to get out of that condo.
The Bottom Line:
You obviously have a pretty sweet deal at the current moment. Part of the reason a rental property makes sense instead of your own new fancy house is because you have what is essentially a subsidized rental rate.
If you were paying full market price for rent then it might be more of a reason to consider other options.
I like the idea of keeping that bird in your hand and using the cash you’ve built up to buy a rental instead.
On the other hand, if your life goals are to become homeowners, then that’s not a bad route. Owners and investors are looking at different factors when buying a home.
You’re essentially buying a small business as an investor. But the considerations and financial realities of home ownership are often more about buying family goals that fits into your budget. Maximizing returns and generating cash flow are far from your mind.
All in all, leaning towards a rental is probably more financially beneficial. This sacrifice you’re making and the prioritization of investing before buying will pay dividends for decades.
Let us know what route you end up taking, Colin!
For the full version of this discussion, check out Podcast Episode #817 (it’s the 1st question in the episode)
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