Invest in Yourself First
It sounds simple enough, but many truly overlook this simple statement: Invest in yourself first. Most will hear this when they ask "how do I start in real estate?" and taking the time to educate yourself on some basic investing techniques is definitely a must do before jumping into buying properties. However, this article's title is the answer to the question most asked after reading a few books/courses on REI which is usually, "what type of property should I buy first?" And my answer to that is invest in yourself first.
By that I mean if you do not yet own your own home, then your first investment property should be your new home. Why you ask? You can't make money buying your own home, right? How will that help me in real estate investing? Won't that hinder my ability to buy more investments? I'm sure that these and other questions immediately pop up in your head, especially with some of today’s writers/gurus teaching that buying your own home is a bad thing. If you notice, however, most of them are writing that from the comfort of their own home. Hmmm.
Why should your first investment be your own home? It gives you a specific goal of what you're looking for in your first property. It gives you the best opportunity to get to understand what is actually involved when you buy a property without the added potential for failure (since you'll be the 'tenant' you won't have to worry about your 'exit strategy'). It also covers you if you have misjudged the numbers a bit. Regardless of your intended type of investing, you can buy your first property through a real estate agent. Doing it this way, and asking several questions along the way, will help you understand a real estate transaction more thoroughly than any course, and you'll have the agent there to guide you through your state's forms and procedures.
Once you purchase your own home, it can be your stepping stone to further investments. If you were practicing your investing strategy, you should have gotten a pretty fair deal off of FMV. That translates into equity. If you bought a property that appraised for $100k for only $80K, then you've got up to $20K in equity for down payments on other investments. If you bought a mult-unit, you've got the other units to rent out that will help you cover your own monthly payment. If you live in this property for at least 2 years under current tax laws, you can sell it and you won't have to pay taxes on the profit. Average appreciation is 3-5%, so you'll net yourself a cool $6-10K just for owning a home.
Won't owning a home make it harder to buy more properties? Truthfully, if you're buying conventionally, it might, but only a little. By now, you should know that the best place to obtain "conventional" type loans is through a mortgage broker. A good mortgage broker should have loan options that greatly reduce or eliminate the debt to income ratio. If you're buying rentals, 75% of the fair market rent will count as income to you from the new rental. So on a $400/month rental, $300 of it won't count as debt. If your monthly payment is less than $300, then you have actually lowered your debt to income ratio. And, making your monthly payments on your home not only improves your credit score, it gives a positive impression to the lender. Homeowners are more stable and dependable.
Finally, take a look at the statistics. Over 90% of people who pursue a career in real estate investing never buy one property. By deciding to invest in yourself first, you've already set a goal which is what most of these 90% fail to do. Of the 10% left, fewer than half ever by more than one property. The reasons for this are many, most of which are eliminated or reduced by the mere fact that this is your home you're buying. And if it turns out that you only buy one, at least it's the one you live in. If you already own your home, take another look at it to see how it can benefit you in your REI career. If you don't yet have a place of your own, then consider my suggestion when cruising for properties.
Roger Johnson
I agree with most of what you say. Although I think there are times where you can justify buying an investment property before you purchase your own home. If a good deal comes along, and you dont necessarily want to live in this property, I dont think you should p***** it up. Also you can get owner-occ rates on investment property if you're currently renting.
There are exceptions to everything, including buying your home. Certainly, it would be dumb to p***** on a good deal simply because you didn't want to live there. However, most new, first-time investors, have never purchased a home, don't understand the closing process, and probably wouldn't truly know if they had a good deal or not. Setting a goal to buy your own home first gives you a good start to your career. Also, just on a personal investment strategy, I never buy a home that I wouldn't want to live in should the need arise. If I wouldn't be comfortable living there, why would your buyer?
As far as owner occupant rates on investment property while you're currently renting goes, can't happen unless you are willing to commit loan fraud and tell the lender that you plan to move into the property. With today's rates, there is only about a point difference between owner and investment loans. Hardly worth the risk for the jail time that it would give, IMO
Roger
Wise advice. Especially important is the part about picking up a property at less than market value. Get a property for yourself with built in equity, pull it out at closing or through a 2nd, and presto! You now have and extra $10-40,000 to invest with. A number of my associates have bought Jumbo properties at the foreclosure auction and pulled out over $100,000 in equity.
I agree with you. However I bought an investment property a few years ago with the intent on purchasing more. I had every intention of buying a property to live in. To make a long story short, became disabled so income is low an even rehabs are over $100,000 in my area. I guess I'll have to find a REI to buy from but don't know how to go about it. My goal is to return to investing.
There is obviously another side to this and I strongly believe that your first real estate purchase should not be your own home.
I feel that Robert Kiyosaki's book "Rich Dad Poor Dad" explains the other side of this quite well. It all goes back to the spending habits of the lower, middle, and upper cl*****. Take the simple definitions of an asset as something that makes you money and a liability as something that costs you money. Your home is obviously a liability. But so is an apartment or other place you are renting.
You need shelter to live. It is part of life. If you can buy cheaper than you can rent, then I defiantly agree with your article here. But this likely is not true. If the costs of owning a home are not that much more and you have a well paying job, you may be able to save money through the interest deduction on your taxes.
However, that said the money you save by renting can be turned into purchasing an asset. The rich buy assets that generate cash. Your home is an expense.
There is much satisfaction about owning your home. This has nothing to do with investments unless you can argue some psychological benefit that helps you excel.
Just my two cents! Good luck to all!
Before Robert Kiyosaki was born, the accounting community had a definition of asset as something that could be converted to a monetary value. The note to purchase the asset is the corresponding liability. Have you ever lived in a house and made $1000 per month payments while the house was appreciating $1,500 per month? I have several times, and so have millions of others.
You can put the payments on a 10% credit card ,if need be, and at the end of the year owe less than $13,200 on the credit card while your house went up $18,000. Now if that's a liability, I'll take as many of them as I can get!
myfrogger,
I'm surprised that it took you this long to respond to this article, since you are usually the one that refers to ol' RK's "asset and liabilities" speech. I actually had a good speech about how he gives a very simplistic definition of an asset because it better fits in his motivation speech, and again mention that he promotes this idea from the comforts of his on multi-million dollar home, but it seems that chuckhughes2 above has beaten me to it and said it much better than I could have.
Roger
You both respond with good points. I suppose that RK's definitions are not the best choice of words. His point was simply that the attitude/mindset of the rich is to purchase things that will make them money.
I think Robert Kiyosaki's intent of that speech was that point out that the average homebuyer has the same intent or thought that the renter does: a place to live. That is purely and simply an expense.
Now if you go about your home purchase from an investment perspective, I will agree it is possible to purchase a house for you to live in with the plan that it will make you money. You may buy a fixer upper, buy under market value, or choose to buy in a highly appreciable area.
If you have the idea in mind that your home is going to be an investment, then I agree that it can be. But people don't buy homes with the intent or plan to leave most often. Statistics show that a 30yr fixed mortgage is the most popular. I am a huge advocate of ARMs as most people move every 5-7 years.
I won't ramble on. I didn't explain this the greatest but I think you'll understand my point. Your article touched on this point but didn't give it the emphasis that I feel it needed.
Thanks Roger for your participation on this board. I enjoy your input!