With the housing market in one of the biggest slump in decades, I’m contemplating the possibility of buying an investment property. Those who know me will probably think that I’m nuts because I don’t even own a primary residence but let me explain the reasons why I haven’t bought a house in more detail.
Current Living Environment
I just got married in February and moved into a gorgeous apartment. There are lots of free amenities and activities for residences that we truly enjoy. The rent is not cheap but at least it is still affordable and we decided when we moved that it was worth the extra cost. In fact, the apartment turned out better than we originally thought. After we moved here, we were both happier and found ourselves enjoying life much more.
It is impossible for Emma and me to afford buying a house with all these amenities in our current financial situation, so if we buy a property, we will in effect downgrade our quality of life.
The Unused Space
We currently live in a one-bedroom apartment and although you can argue that we can use a second bedroom, the space we have is plenty for the two of us. If we buy a place, we will at least get a 2-bedroom, if not a 3-bedroom condo/house because we don’t plan to move when we have kids.
This means that we will just be paying extra property tax for the unused space until we can grow into the house.
Renting Part of the House
Many homeowners in California rent out unused rooms to help pay the monthly mortgage. I thought about buying a home and doing this too but since I work on my blog so many hours of the day, I don’t want to run the risk of my tenants causing distractions when they are in the house.
Why an Investment Property Seems to Make Sense
Since I convinced myself that buying a house might not suit my circumstances, I thought about buying a smaller piece of property and renting it out. The reasons below seem to make this a sound choice.
We are in a Housing Slump
Most people are much happier buying a house when the market is going up but all we end up doing is overpaying for the properties. I remember hearing stories of bidding wars in California where people were putting in bids of 15-20% over asking price in hopes that they will get the property.
The story is completely different these days. Realtors are begging potential home buyers to look at houses and buyers who are interested are putting in bids as low as 40% below asking price. It is in these markets where a first time home buyer like me can take my time and pick a good location.
Practice Makes Perfect
This investment property will be a smaller and less expensive place than my primary residence down the road. If I can use this time to learn what I like and dislike about houses and sharpen my skills in the home buying process, it will only benefit me down the road.
Long Term Investments
Unlike my primary home where the emphasis will be on livability, the emphasis of an investment property is return on investment. As long as the rent is generating a positive cash flow after expenses, I can ride the highs and lows of the market and still come out ahead.
There are so many other options out there for my money like stocks, bonds, CDs, and even investing in businesses. Why am I thinking about real estate?
Real Estate versus Stocks
I currently own some stocks, but it is almost a part time job keeping up with them. I want to get into a more passive approach and something that will generate an income for me. If I buy any individual stock, I run the risk of it never recovering. If I buy the index fund, I don’t get the income.
Another major benefit is that I won’t check my property performance like I would my stocks. This will keep me from being emotional when the market tanks so I can focus on my other day-to-day operations (like writing on my blog).
Real Estate versus Bonds or CDs
Since this is a long term investment, I need something that gives me a higher rate of return. Bonds and CDs are great for safety but the return on investment when my time horizon is taken into account is unsatisfactory.
Real Estate versus Investing in Businesses
This is an interesting alternative but I will definitely want to be involved with the business if I ever invest in one. This is the total opposite of passive.
Real Estate versus All
It is a nice feeling to own a piece of real estate since it is an asset that you can actually see. Furthermore, there are amazing tax incentives in the United States for owning real estate. I believe the specific rule is tax free capital gain for the first $500,000 as long as you have been living in it for 2 out of the last 5 years. So if we are lucky enough to pocket some gains on this property, all we have to do is move there for 2 years and then sell it.
What Do You Think?
Even though in theory this all make sense, it does not mean that it’s necessarily practical. Does anyone agree with what I’ve said or can anyone think of something that I’m not seeing? As a next step, I will start looking at the closing and renting prices of various properties to see if I can generate a positive cash flow. I will keep you updated and I look forward to hearing your thoughts.
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence. They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.