I’m just out of college and in the finance world. I know about the obvious reasons for building your own equity, but I’m having a hard time deciding whether I should buy my own 1BR condo in Chicago, or to purchase an investment property to rent out. Either way, I will be building equity, and obviously both would be the way to go, but I don’t have enough for both down payments yet.
Should I buy my own condo or an investment property?
23
Jan
Fabio G
January 23, 2012 at 3:51 pm
buy a property were you live investment properties are a headake
lepr0kan
January 23, 2012 at 4:31 pm
It wuold be more difficult to qualify for the purchase of an investment property because the bank would consider the amount of your current rent plus the mortgage payment in your debt to income ratio, so basically they would need to be able to prove that you could pay for two housing prices. Plus, often unless you completely flip a property and then rent you probably won’t make very much income, since you not only have a mortgage payment, but taxes and insurance as well. You’d need to find a very inexpensive property in a prime location. Plus interest rates are higher and it’s harder to qualify for an investment loan. I’d say for a first timer buy yourself the property to live in and build equity, then in a few years perhaps rent out that first property and buy another for yourself.
redwine
January 23, 2012 at 5:06 pm
Tough decision that cannot be made without more details. Just be aware that being a landlord is also a part time job. You have to deal with tenents that may not care about the building. And there will always be repairs, etc., which you need to do yourself or pay someone else to do. I think buying your condo is the easier, and possibly less risky approach, but may not have as much upside, particularly if you are looking at emerging areas to be a landlord.
too l
January 23, 2012 at 5:11 pm
Work on your credit….. Find who does property management in your area. buy both at the same time.
John M
January 23, 2012 at 5:26 pm
figure out what kind of a place meets your needs and desires for a home to live in. then figure what it will take to rent that vs buy it, figuring in your tax deduction for mortgage interest and property tax etc.
then look at what you can expect for cash flow, either positive or negative, on the rental property. Be sure to use realistic assumptions about vacancy rates, appreciation of the property etc.
then just do the math. one or the other option will turn out to have a better return on investment. Where you may struggle, is to quantify the intrinsic benefits of owning the condo vs renting it, the things that are not easily expressed in dollars. Things like being able to paint your living room walls any color you like, or investing in modifications to your home that don’t pay off financially, but make it nicer for you to live in.
One caution is to avoid buying a rental property very far from where you live. Your initial burst of enthusiasm can make a 1 hr drive to the property seem okay, but eventually you end up paying people to make minor repairs and stop driving by to check on the exterior, because its just too far away.
Be very very careful of overly optomistic vacancy rates and appreciation. Look at the long term averages in your area, and then be judicious about assuming anything better than that. Luckily for you, I think you tend to find current vacancy and appreciation to be worse than normal, so you should find some decent bargains out there if you shop enough and have a longer term view.
Good luck
DP1980
January 23, 2012 at 6:09 pm
Purchase your own place first. You’ll have a difficult time getting positive cashflow out of an investment property in Chicago without a very substantial downpayment (I don’t recommend using a loan product unless it’s amortized without adjustments or balloons for rentals… eventually you want to pay that sucker off). You do not want an alligator (property that eats cash every month), obviously, the point is to make positive cashflow so consider your PITI as well as maintenance cost and vacancy rate. Tax benefits can only make up for so much, in my opinion if you’re not breaking even on cashflow, it’s probably not worth it.
Possibly the best of both worlds, if you can find a place in or near Chicago that you can afford and wouldn’t mind living, buy a duplex. Live in one side and rent out the other, ideally rent will pay for or get close to paying for your mortgage. This is a very powerful wealth building strategy that few people consider. When you have the money, buy a new place and rent out both sides.
Good luck with whatever you decide to do.