Showdown of the Century (Round 5) Buying a Primary Residence vs. an Investment Property
In this episode Tom and Michael go head to head yet again with a hot debate on what is best; buying your primary or an investment property first. --- Transcript Emil: Hey everybody welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co hosts, Tom: Tom Schneider. Michael: and Michael Albaum. Emil: And on today's episode, we're gonn a be doing another showdown of the century talking about buying your first rental property before you have your primary residence or buying your primary residence before you buy a rental property. So Tom and Michael are going to be going head to head and I'm going to be officiating this one. So let's take out the gloves and start the show down. Michael: Tom, did you drink your um cheat juice this morning? aka coffee? Tom: I did I did. We were talking about this yesterday. The espresso nap. Michael: Oh boy. So did you espresso nap before we record this? Tom: I did an espresso sleep. I what I did is like, I put the espresso in time release capsules. So I could you know start my sleep early. And then it dissolved at around you know four o'clock I got a solid 45 minutes asleep. I just watched elf pretty recently so I got a solid 45 minutes of sleep eating the the four main food groups. There's sugar bear, Michael: candy corn, candy canes, Emil: Maple syrup. Is it the last one? Yeah, we've all watched elf way too many times. Clearly. Tom: There's like, within movies, there's like funny quotes that just like stick with you that are like not like super obvious. Yeah, my favorite elf quote is when elf is offering the spaghetti to like, what's his face? The dad and the dad's like, he's like, Oh, yeah, of course. Of course. We don't want that. Yes. My wife has an inside joke. Like when someone says like, No, I don't want that to go. Oh, yeah, of course. Of course. Michael: That's really good. That's really good. All right, enough of the friendly gestures, the friendly pleasantries. Let's get down to it. Tom. Emil: Why don’t you guys get your corners here. Michael: Weighing in at 150 pounds! Emil: All right. So, Tom, Which side are you taking? To start this round off, Tom I'm gonna start with the buying the house that you live in for Michael: Easy one, 1st round knockout. Emil: Alright, so Tom, you'll start this round, Michael gets the rebuttal and you get the final word. All right, I want you guys to meet in the middle touch gloves and fight. Tom: Okay, so within this battle, the reason that you should buy your house first, before you buy a rental property is a simple question of math, that's going to be my number one argument. And it's a simple number of math because you need to think about your investing in your life holistically. So there's money in money out when you are buying a house that you are going to be living in not only are you getting on the old appreciation train of buying a house that you're living in, but you are drastically decreasing your costs. So when you buy a house that you are going to be living in good news, you're not paying rent anymore, you're paying a mortgage. So those that fun that you're using to pay that mortgage, you would still need to be paying rent if you were to buy an investment property elsewhere. So, huge difference that is a Crossing the Chasm if you will of no longer paying rent number two which is I think more straightforward is you are learning the ropes if you want to get into specifically remote investing, what better way to learn the mechanics of a transaction and lending and all that stuff by boots on the floor doing the transaction where you are going to be living? Right makes sense. So learning the that transaction process the financing process and lastly, is we do this investing as a way to you know, get to a point to financial freedom, we do it for ourselves and what better way to do it for yourself then to get into a place that you can call home especially in these times of being you know, in a pandemic you might want to do a house project can you do that if you're renting Nope, can't do that. You could do that but it's not ultimately now yours so pay yourself first you know that's how you buy buying a house that you're going to live in you are paying yourself first smoking mirrors, smoking mirrors, okay. Okay done. Michael: Well Tom, those are all really great points. I'm so glad that you brought up so many of them. And I just took kind of your first point I love the fact that you brought up paying a mortgage now instead of paying rent because there is no faster way to be unsure about how much your housing expense is going to be then with paying a mortgage and the utilities and the extra expenses you have with owning a home so if I'm renting a home for 1000 bucks I know month in and month out I'm paying 100 bucks a month the end Bodie Bodie. Tom: What!? That is not Bodie. Did you just through my dog under the bus? Michael: I through my dog under the busg Tom: You’re dog is named Bodie too?! Michael: Yeah. Tom: Shut up. Michael: I’ve told you so many times? Emil: Way to pay attention Tom. Michael: but he's squeaking his toy right in the middle of my home run here, Tom: Smoking and Mirrors, Michael: Smoke and mirrors. That's right. So there is no better way to be uncertain about your monthly housing expense than by owning your own home. So up, we have a leak in the roof, that's $2,000 got to fix that up the stove broke, got to go get a new one that's in there. $600. So when you're renting, you know, month in and month out exactly how much your housing expense is going to run you. And I would argue that as you're saving up to start investing, that's one of the most important things is knowing what your savings rate is. Number two, we also talked so often about how and the investment property world you want your tenants to pay your mortgage? Well, that's true for the investment property that you buy, and then rent out, why can't that also not be true for your primary residence. So go buy an investment property first, and then let your tenants pay your mortgage on your primary. Thirdly, depending on where you live, this might be out of the question for you. So Bay Area, California, Seattle, New York, the cost of housing is so expensive. And so if you take that down payment for what you would pay in downpayment and go elsewhere, you can potentially buy properties all cash, you could get into numerous investment properties. But I also think that in order to save up for your down payment for your primary, it's going to take a while. And so if you can go invest and build up cash flow, this cash flow train this cash flow snowball, by buying investment properties, first, your tenants will pay your mortgage and your tenants might even pay your down payment on your primary versus going the other way, it's going to take you a long time to save up for your next down payment if you go buy a primary until you can start investing in rental properties. So I love that you brought up appreciation, Tom, because you're absolutely right, go buy investment properties and have those puppies start appreciating all the while you're waiting to go buy your primary residence. Tom: Alright, so we're going to come to an agreement on a point you made is I think house hacking is kind of the splitting the difference of this argument. And what house hacking is, if those are not familiar, that's buying a duplex living in one unit, renting out the other unit good point there, Michael: It doesn't even have to be a duplex. It's just something bigger than you need for yourself. So if you're one person, you could go buy a three bed house and rent out the other two bedrooms. You could buy a duplex triplex or quad or rent out the other unit. So it can be a really diverse approach doesn't need to be just a duplex. So just to clarify that. Tom: Yep. Like that. So okay, so that to your argument, you're making at me here. So one of them was related to unknown costs. So you're saying, you know, if there's a leak in the roof, great, you're spending money and there's unknown costs on buying your own house? Well, Michael, there's unknown costs are just as likely to occur on your rental property than they as they are on your property. But in fact, I would say you have more control of those unknown costs at your own personal house. So for example, if something say I don't know, some simple plumbing issue or something happens at your personal house, and then also happens at your rental house, you are guaranteed to have to pay pretty much top dollar at that rental property to get that fixed, where at your own house, you know, you kind of make an adventure of it, you know, oh, just cold water? No, it's good for your lymph nodes to get into cold water shower. But on the rental property, you can't control that you're going to you're going to be paying to fix that. So I'd say those costs measures are you have a little more control of your own house, also on the cost factor. So I rented for a couple years and oh my goodness, did I get jammed on rent every year, I think it went up like 25% year over year, where if you're buying your own house, you're getting fixed costs. Sure, there are some issues that can happen with the plumbing, but then you get a really good health treatment where you get a cold water shower for a little bit as long as you don't want a cold water shower. But those costs are fixed versus if you're renting. And if that landlord wants to jam ya for 25% increase, you're just subject to that you just have to take it so I would say that you know your argument that around costs is you definitely have to pay whether things happening to your rental property and for your own personal house. You can make some cheap decisions around health and financial well being of accepting culture. Yeah, I think that's a I'm going to end on the cold shower. Micheal: Emil weigh in man, please. Emil: All right, there's a little bit of thunder left you know a little bit of juice to squeeze out of these two topics. I don't want to steal your guys's thunder and call everything you know what I mean. Yeah, just wait till the end. Michael: All right. Yes. All right. Emil: All right, guys. That was a very fierce round, a little bit less fierce than I've seen you guys in the past like sometimes I see you guys just just going straight for the jugular this time, you know, a little more civil. Michael: It’s the holidays, you know, you got to be Tom: I started the day with a cold shower. My endocrine system is doing awesome. You guys. Emil: Alright, well now that we're switching So Tom, you are taking buying your rental before you buy your primary but we'll let Michael go first. With buying a primary I want you guys to bring a little bit more fight. All right, like throw the haymakers Let's go guys give the people what they want. I'm raising my standard. Yeah, there you go, Tom stand up. It's game over. Let's go. All right. All right, Michael, when you're ready? Michael: Yeah. So it's kind of a no brainer you got to take care of number one first and that's you as an individual get your housing squared away first and foremost before even thinking about going in investing. I mean if you're gonna have your rent payment jacked up like Tom mentioned previously, how could you possibly be forecasting for the future with saving for future investment. So take care number one, get it locked up, get it squared away, first and foremost. Secondly, there is no better financing than owner occupant financing. So go buy a primary residence, let the appreciation train work its magic. And in a couple of years, you can either move out of that primary residence and convert it into a rental thereby creating a rental with owner occupant financing, or do a cash out refi or get a HELOC on that property. Again, with owner occupant financing and use that money to go start investing down the road, it becomes so much easier and so much cheaper when you have owner occupant cash to compete against peer investors for bidding on properties. So it's a no brainer. In my opinion, go buy your primary First, get it locked, ready in an appreciating market. And watch what happens. It'll blow your mind. Tom: Mike, you ready to take it? Michael: Let's just do it. I would love to see what you're going to try to drum up here. Tom: All right, Michael, it's time to September some real talk. Michael, I think you need to be long term greedy. You know, I think the short term greedy thing for you to do is Oh, I'd like a house the women that I own right now and to go buy a house, you know, and that might be great for current Michael. But future Michael is going to be so much better off for so many reasons of deploying the capital in building his real estate Empire, you have plenty of time to buy a house. In fact, you're going to be able to buy a better house in the future by making these smart, prudent, long term greedy decisions now of buying, you know, buying rental properties right now. And one of the reasons why it makes a lot of sense is your money can go so much further if you were to buy rental property, especially remotely. So where you're living at now, Michael, you weren't what you would be paying to buy a house, you could buy like three houses three rental properties, think of all that cash flow you can have your money just goes so much further versus in the market that you're living right now versus if you were to go and invest in one of these remote markets. So be long term greedy. The other really value of this is being a person Michael, who likes to travel and stuff. You don't have to weigh yourself down with some house, you can deploy this capital, get it working for you, if you have it just sitting at your own house. It's not working. It's being slothful, you want to get this working for you invested, get it running. So you can go do some fun things. Oh, you want to go ride a motorcycle up and down Chile? Great. You can go do that. If you want to go to Spain, great. You could do that. It's out working so you can go be playing, right? So get your money working. Be young, be awesome. Go do fun stuff. And do that. So my next little bit, I'm going to just put on my economist cap. I'm going to mess the countries up. But this is that I'm specifically talking about but I'm it's going to be directionally right. So within Europe, there's this inverse relationship between unemployment and homeownership. It's true. So countries like, again, I might nest the specific countries, but countries like the pigs countries like the Spain, Portugal, they have very high ownership, but also very high unemployment, versus certain Scandinavian countries like the Norway and Sweden, they have relatively low homeownership, but very high employment. And the reason for this insert inverse relationship is by not owning your home that you're living in, it gives you a lot more flexibility to move around to wherever the jobs are at. So when you're done riding your motorcycle in Chile, you can go to wherever the jobs have, it gives you flexibility, but you know that key investment in housing, you're able to still participate and all that upside by deploying that capital in a good market that you can be remote investing. So in closing, you want to be long term greedy Michael, don't be shorted short term greedy, buy your house now and get your money working for you. Number two, take your money further, you're able to do a lot more by deploying it in investment properties. And number three, look at the European model be a Scandinavian country not a one of the pigs country that Portugal, Spain, I forgot the other ones, but be one of those ones where it's a high employment, you know, riding a motorcycle in Chile. Go ahead. Michael: Tom, I really love and appreciate those points you brought up first and foremost being long term greedy, I couldn't be more excited that the fact that you brought that up because what could be more long term greedy than living in a property for two out of five years and getting a capital gains exemption when you sell the property of 250,000 as an individual or 500,000, as a married couple. It totally personifies long term greedy. So thank you so much for bringing that up. And then secondly, get your money working for you. I also love the fact that you Mention this point, I'm getting an owner occupied key lock on my owner occupied property that I live in at two and a quarter percent. What better way to get your money working for you then appreciating in a California market and being able to take advantage of that owner occupant financing for the purchase and then owner occupied HELOCs. Amazing, amazing money again, really great point. Thank you for bringing that up for in support of owner occupant property first before investment property. And then you mentioned taking your money further. What better way to utilize your money than using an FHA owner occupied financing loan where you only have to put down a much smaller percentage and 20% 20%. And on it so happier to 25% get out of town. If I can put down between two and a half to 5% on a primary residence, get into something get rid of paying rent, start building appreciation, building equity, getting HELOCs, getting owner occupant financing. It's just an all day when win win win you look at the math, so I would say you know thank you so much for proving my point, that owner occupant is the way to go. Tom: Yeah, yeah, yeah. All right Emil, come in here. Emil: Ding ding ding Guys, get back to your corners. That's what I'm talking about. That's how we throw some haymakers bring some emotion, leave it all in the ring, guys. Well done. My comments here you guys on the second round, basically got through some of the stuff I had written down, FHA loan was being the big one on the primary just to be able to get in with 5%. Down, I think the to step back from our debate here and talk about our own personal situations, all three of us, I think, bought a rental property before we bought a primary. I think just depending on where you live, it just makes more sense to do one or the other us being in expensive cities, looking elsewhere, buying a rental property, I think made sense. But I don't think there's anything wrong with buying a primary if you can afford it just like the Hilo cash out that you mentioned, Michael, especially if you're an appreciating market, and you use like an FHA loan to get in for 5%. And then your home appreciates a bunch. Like that is an awesome way, if you don't have a ton of cash up front to get into something stop paying, you know, quote, unquote wasting rent, you know, build some equity, and then in a couple years, if the market is good, you can actually pull some cash out and then go buy rental properties with it. But you know, I think there's something to be said about us all buying rental properties before we bought a primary. And the big one that stood out to me was you're using you know, if you think about it, the cash flow from your rental properties can go towards paying your own mortgage on your primary, right, you can use it to pay your mortgage, you can use it to just grow your portfolio, whatever it is. Yeah, I think solid points on on both sides. Tom: Yeah, I mean, I bought a rental before my primary. And I would do it again. And again, there's a great article on the New York times.com slash interactive slash 2014 slash up slots hash by slash rent slash calculator. If you just type buy or rent calculator, New York Times, it's a really cool calculator that they have that evaluates like, oh, should you buy or rent, basically, and it's very situational from person to person on where they live, it got to the point where me where I was just getting jammed at this apartment in the East Bay, just outside of San Francisco, where my rent was very close to what my mortgage would be. And you know, there was an initial kind of nut to pay with the downpayment. But after that, it was actually cheaper on a monthly basis to pay my mortgage versus my what the rent had gotten to and it wasn't like that when I first went in there was just as crazy increases in rent year after year. So it just at that point is like, okay, you know, bite the bullet, I suppose that that was like super hardcore and discipline, I would just continue to rent and just continue to use that down payment and using my house on other rental properties. But there is something to be said, of, you know, having a place to live that your own that you can do fun projects on is is fun, it may not be the most long term greedy thing to do if you're really bullish on on building your investment. And this is a decision that you know, I have now like pretty regularly like, Oh, do I want to do some remodeling on the kitchen? Or do I want to add a couple of roofs or do something like that it's it's honestly kind of hard and making that decision. I mean, it's a very blessed to be able to have like decisions like that to be made, but it's kind of a constant pull and tug, tug and pull, push and pull, you know, how much am I spending on building this these rental folio, which I love and is really fun and has major long term benefits versus these current times doing projects on the house or whatnot. So it's a kind of a push and pull for me kind of related to this conversation of ongoing stuff, you know, that you want to do on your own house. So for my 10 cents it's different for everybody's situation, Emil: You guys view the primary as a hotly debated is your primary and investment? Tom: No. Michael: I would say pretty confidently for me that it's not I kind of I use Kiyosaki Rich Dad Poor Dad definition of asset versus liability, who puts money in your pocket, it's an asset. If it takes money out of your pocket. It's a liability. No point in getting any more complicated than that. Every month I pay money to live in this home. It's a liability. Every month I get money in my pocket from my cash flowing investment. It's an asset so you could expand that absolutely and say well Yeah, if I sold it down the road and I made money on the sale, well, maybe it would be an asset, but on a kind of snapshot month by month basis, it cost me money. So it's a liability. Tom: I like that. I mean, I would take Yeah, whatever the kind of harshest stances, you know, it's, yeah. Emil: I wanted to rent for a long time until my wife was pregnant. And we were both just like, to me buying a home is a emotional decision. And you do it because you want to not because you think it's gonna be this amazing investment. Hopefully, it turns out that way, but I try not to treat it as such. So yeah, for us, it was just like, the timing was right, we were in the place in our lives where we wanted to do it and and did it for nothing, besides wanting it not looking at it as an investment. Tom: Yes, pretty funny. the buying process of like owner occupied versus buying a rental where I feel like a rental, like I'm extremely disciplined, like, I have my performance, my max bid and all this stuff. And like now I'm out, get out of here, versus like when you get it home, and it's like, Emil: It's so emotional Tom: Wife and baby look at it like, oh, that's the one that's the right one. Michael: I took a semi different approach when we bought our primary. And so we were looking down in the Central Coast and everything became way more expensive than we anticipate. And I had a really tight budget just because I knew how much I wanted to pay on a monthly basis based on how much the rentals are bringing in. And so I thought, Okay, this is what we can afford. So we actually ended up buying a condo down here. And we analyze it as an investment because we knew if we were to move out, or when we were to move out. And when we started having kids that we were gonna turn it into an investment. So it totally makes sense as an investment property and cash flows as an investment property, which is super exciting. But something else to be thinking about as you're looking at buying primary residences is the maintenance and exteriors additional stuff that just comes with owning a property when you're living in it versus being a rental and Tom, we were kind of talking about that in the showdown is Yeah, you're gonna have expenses that pop up that you're able to control a little bit less on your rentals and your primary. But if it's your primary, you're probably going to take a higher degree of like, you just want things looking a lot better, I would say in your primary because you're living there versus a rental. So there's a lot more pride of ownership, as they say. And so I find that people often dump a lot more money into their primary than they would into a rental of similar caliber. And so with a condo is just kind of nice, I don't worry about exterior maintenance, roof, paint, any of that stuff, all I have to take care of is the inside of my place. And and it's good. So from a maintenance standpoint and a cost standpoint, aside from the HOA, I mean, the condo can be a decent way to go. So I would employ everybody to kind of think about that. And then also evaluate it as a rental for if you ever plan on converting it into one or at least that at that point, you have the option two if you'd like as opposed to being saddled with this huge mortgage payment that would never make sense as a rental. Now you're stuck. Emil: You don't pay to fix your roof on a condo? Michael: Every Hoa is a little bit different. But the condo pays in my particular case, they pay my water sewer trash, they pay all the exterior maintenance, which includes paint, landscaping, and roof and then just maintenance in the association itself. The Hoa the fee is way too high for what we're getting, because we don't have any real amenities. But my homeowners insurance is a little bit less. I don't have to worry about any of that stuff. So we just had our roof redone, like last week. And we didn't come out of pocket for that. Yep, it's nuts. It's nuts. But something to think about and consider as an option, because I didn't for a long time, but it's just especially in older homes. First time homebuyers are looking to get into you know, if there's a lot there, I think there's just a lot more than meets the eye. So make sure you go into it kind of eyes wide open. Tom: So Michael, are you aware of your condo if they have Hoa rules about renters if you were to move out and to rent that place out? Michael: Oh, yeah, we checked the CCaRS way before we purchased this thing, and they don't, which is the important thing. So they don't have any rental restrictions. Tom: Good, good, good. Michael: Well, okay, I think that like they have rental restrictions for short term rentals. So there has to be 30 days or longer. So when we Airbnb at our place, we had to have a 30 day minimum stay, which because we're doing this during COVID times that worked out just fine. Emil: Cool, nice job guys any other parting wisdom before we clock out of this episode. Michael: I would just say to everybody who's kind of on the fence considering between the two, just look at the numbers, like Tom was saying at the beginning of the episode and see what makes the most sense. But also understand that there's an opportunity cost it to whatever decision you make. So if you buy an investment property before you buy your primary, just look and understand how long it's going to take you to save up your down payment before your next either investment property or to your next primary. And conversely if you're going to go buy your primary before your investment property, go look and understand how long it's going to take you to save up for your down payment for that next investment property or for the first investment property for buying your primary first and understand that there's a cost and benefit to doing one versus the other. And I don't think there's one right or wrong universal for us. It seemed to be investment properties first owner occupant you know, primary residence after the fact but everybody's coming at it from a different place. So talk with whoever's in your life Tom: Love it just to reword it, you know, have a plan that everyone's situation is unique. But just kind of map out short term, long term, midterm middle term, middle term. Yeah. Emil: Did you guys actually plan that far ahead? Like for me, I kind of just like, let me get some rental properties. And then we'll kind of figure it out as you go along. Like, do you guys find that like, mid to long term planning is a helpful? And B, do you even stick to it? Like, do things just change so much in the journey that it's like, it's almost not even worth it, Tom: I enjoy the exercise of putting it down to paper, and then modifying it everybody's functions differently. But I think doing it at some sort of a high level, there's value to that, in that there's more of a Northstar. And like we talked before, with like Academy, you know, write it in pencil, have an idea doesn't need to be in pen or in stone. But in sort of providing yourself sort of a Northstar. There's a lot of value to that. And in the way that you're kind of managing the day to day to have that. Michael: I totally agree. I mean, for me, when I first started investing, I was just flailing around. And not having a plan makes it so easy to flail, but I was also single, I wasn't married. And so none of that was even part of the picture. I was just go go, go, go go. And then after the fact is like, Oh, I guess I should consider buying a primary, I guess that makes sense to do now, now that I'm getting married. So I think, again, if you have the resources, like the educational resource that goes into this podcast, you can just evaluate where you currently are, and then also talk to other people who have done it before you I didn't have that luxury. When I first started investing, I was kind of figuring it out. My dad now we're kind of figuring it out for ourselves. So didn't have many other people to lean on to talk to you about what that planning might look like or even how to strategize. Emil: Thank you everybody for tuning in to another episode of the real estate investor. I hope you guys enjoyed this one. If you do, we always like to ask that you leave us review. Let us know your thinking of the show. And if you do sometimes we'd like to just pick people at random and send them some cool stuff, like we've done on previous episodes. So wherever you listen your podcasts, leave us a rating and review we'd love that and we might pick you to get some cool swag. Alright guys, check out the next one. Happy investing. Tom: Happy investing. Michael: Happy investing.