I love getting this question because, after 25 years of coaching people in real estate investing and leading real estate investing classes, I can tell you that life is easier and richer if you start with a rental property BEFORE buying the really nice house. I have 100’s of real-life examples and people that are grateful that they followed my advice.
Buying a modest home, getting it rented and getting cash flow will set you financially for life versus buying the nice big home first.
It’s harder to qualify for a rental property AFTER you buy the really nice house because the really nice house probably comes with a higher payment using up most of your “qualifying income” leaving very little disposable income for savings and buying yourself security for retirement through rental properties.
Buying a rental first if it has positive cash flow and it should, will help you save for other things in life.
Buying the rental property first will give you tax breaks that will save you on taxes or create a refund putting more money in your pocket that your own principal residence will not. The reason is that all expenses that are ordinary and necessary on a business can be written off, on your personal residence it’s interest, taxes, and points on the original loan. These sometimes don’t even add up to the standard deduction so they are not usable. Consult your CPA for your specific situation.
The rental property will also become a piggy bank that you can draw on for more investments or life expenses. A non-taxable cash-out refi.
The really nice home for yourself won’t pay you every month, in fact, its expenses that go up without the benefit of a renter helping with expenses. Over time your property tax will go up and if you live in the property you are responsible. On a rental, the renter is paying most costs and the rent goes up with inflation covering most of the increases you would see in bills like the property tax.
If you buy the really nice home first I assume that your cash is now spent and you have to save a new pile of money for the rental
One caution: When you start getting that mailbox money from the rental you may not want to buy the really nice home but more paychecks through more rental properties.
Another caveat: if you have never owned a home before you buy the rental fannie mae and Freddie mac will not lend to you. They require that investors have prior experience so you will be going with a non-traditional loan.
This is why I recommend the following magical series to RE wealth building:
Buy 3-4 units (triplex or fourplex) as your first owner-occupied personal residence. You live in 1 unit and the rest are rented out. You can do 5% under Freddie Mac in some areas, you can do 3.5% under FHA, 0 down under VA and some non-traditional lenders will do 10% on units if you intend to live there. That’s what we call leverage!
Then after 1 year of living there, you are eligible to move to another property with minimum down again, so move to a nicer duplex
Then do a condo as long as the association is strong and the property cash flows when you move out. If you don’t like condos then move on to the next step.
Then move to a modest house that you can later rent out then and only then at a minimum would I recommend moving to a big house.
By year 5 or 6, after these moves, you will have cash flow and equity and be set for your retirement. But I bet you will want to keep building and not buy the fancy house.
If you want to learn more about real estate investing, check out my real estate training program for convenient and informative lessons so you can start making passive income and achieving your goals.
Cheers and Happy Investing!
Founder My Cash Flow Academy