Rent prices prices in 2015-2016 in NYC made it near impossible to purchase an investment property while you rent. The NOI on an investment property just did not yield enough to tip the balance in your favor of also paying rent for a large home that was safe enough to raise a child. However, for someone starting out in real estate and not wanting to purchase an investment out of state just yet, one strategy that we choose was to purchase a property with the intent to rent out but live in first. This strategy allows you to be more patient and see where the market heads but still be in the game. For our situation, purchasing a rental property before primary residence worked for us for 3 main reasons.
When we started searching for our first property we asked ourselves the typical questions. What is our budget? Do we want a house or condo? If having to choose, do we care more about the school district or commute to work? Do we want to stay here long term? What our answers told us was we were just not ready to settle down and purchase a primary home.
Once we knew we would be purchasing a rental property before a primary home with the intent to first live in the unit and then rent it out in the future our investment criteria and what we were looking for become more relaxed. Our criteria included the following:
♦ a condo
♦ at least 2 bed/bath (and 1,000+ sq ft)
♦ to use only a portion of our savings (under 50%)
♦ positive cash flow when we rent out
♦ close to Manhattan (under 45 min using public transportation)
♦ water/city views
It took 2 years to purchase our first property but we finally did in early 2017. When we got started we realized trying to buy our first home in a sellers market made us feel forced to make decisions irrationally. We tried to justify the high prices relative to what we perceived the home would be worth but just could not see it. But after we acknowledged the market conditions and after seeing over 200 homes our patience paid off. We found the perfect home that fit our strategy.
Benefits of purchasing a rental property before primary residence
Purchasing a home using this strategy gave us the opportunity to have options and with that comes the luxury to be patient today. Because we purchased a home that met our criteria, we can choose to be flexible in our next home. Those options are our biggest benefit.
While we decide what and when to purchase next we are also able to aggressively continue growing our savings. What this means is rather than being reactive to life events like we have been each time we moved we can choose to be proactive and seek the best opportunity when we do move next.
3 Reasons Why This Worked For Us
1: Uncertainty of where to settle down
My wife and I are not originally from NYC so we are not emotionally attached to staying here for the next 20 years. We still talk if we want to raise our kids in a large city or move to a less populated area. Until we see where our jobs and life takes us, we knew we did not want to purchase a house today.
2: big picture goal
We want our cash to work for us. With the uncertainty from reason 1 we knew we still wanted to be in the real estate game as early as possible. Building a cash flowing portfolio is our biggest priority and we plan to construct our portfolio around rental properties.
3: stage in life
Having a newborn still allowed us to feel like we can be more mobile. If our kid(s) were enrolled in school or if we were in our 40s I would not have chose this strategy.