Why your first 'investment' should be your primary residence
When working with buyers in Denver and Colorado Springs, we hear two statements all the time:
We want our first purchase to be a multi-unit.
Should we just keep renting here and buy an out-of-state investment?
To the first, we say … eh, maybe, but only if you really know what you’re doing. And to the second, we say, absolutely not. In answer to both of these, we always recommend that your first real estate investment be your primary residence and likely a straight up single-family home.
Why buying out of state can be a mistake
Don’t get us wrong, buying an out-of-state real estate investment can be a smart play. But we don’t think it should be your first purchase.
First off, you know your own market better than some anonymous Midwestern town, so you’ll be better equipped to pick a home in a good location.
Second off, everyone needs to live somewhere, so you might as well gain some equity from it. “But Denver is so expensive!” you say. You’re totally right. So why not a small condo? It’s a great way to dip your toe in the market, have the HOA pay for maintenance of important mechanical systems, and if you ever want to move up, a small condo will always rent well in a cool city like Denver that draws young renters all the time. Plus, if you buy a 2br condo, you can still take a roommate and help offset your mortgage.
If you want to go full-on house hacking, find a relatively affordable 3 or 4 bedroom home in a suburb like Westminister or an area just outside of the hot areas and rent out the other rooms. (These clients of ours are a great example.)
The multi-unit bottomless pit
If you’re a fan of sites like Bigger Pockets, you’ve probably read amazing success stories of people buying a quadplex for their first purchase and making gobs of money. We applaud them and think if you’ve got the guts, you can find the glory in that.
But for most people, this isn’t an option. In a place like Denver or Colorado Springs, multi-units are rare and unless you’re willing to shell out $500,000 or more, you’re likely looking at a fixer-upper. Some people go the fixer-upper route, but be prepared to spend six months to a year living in dust, hating your spouse and hating your life.
The importance of an easy win
Real estate investment is a long-term play. One purchase doesn’t matter so much as many purchases over many years. So I think it’s vital that your first purchase be a success. That way you’re excited about the next and the next and so on. Get your feet wet first, then learn how to swim in the ocean.
Lower down payment
Another benefit of buying a primary residence for your first investment is that you can put down as little as 5% for a conventional loan (and as little as 3.5% for an FHA loan). For many people, 20 percent is a considerable chunk of change, so this allows you to get into a house with less money down.
If you still really want rental income with your first home, there are some great ways to house-hack with a single-family home. We see a lot of success with buyers renting out their other rooms. (To be honest, though, this tends to be a guy-specific thing, as women aren’t psyched about having three different strangers in their house.) Or you can work with an experienced agent to find a home with a basement apartment, which you can then rent long-term or on Airbnb.
This will give you experience being a landlord before you strike out on a full-on investment property later.
We know you’re excited about getting into real estate investing. But take the easy win first. Buy yourself a home or condo, learn the ropes of maintenance and maybe how to collect rent from roommates, etc. After that, go hogwild with your multi-unit.