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InquisitiveSage's avatar

Rental Income or Buy First Home?

Asked by InquisitiveSage (61points) March 4th, 2016

I recently graduated and started work around 8 months ago. I still live with my parents for the time being, but have tried to save ⅔ of my salary every month.

I was thinking about buying a house later this year and start my life(move in with girlfriend, propose, start marriage plans), but then I thought of an alternative plan that would honestly be horrible for the time being, but could pay off big time in the end.

[Plan B]I thought about instead investing the money I’ve saved and renting a really nice apartment in a nearby major city and renting it out on Airbnb, Homeaway, etc. for passive income. I would then build that income over time and eventually accomplish plan A(Buy a ring, house, start marriage plans, etc.)

Obviously Plan B isn’t popular at all with my girlfriend or my parents. They don’t mind me living at home for longer, but think this isn’t a great idea and rather me invest in a home of my own before thinking of rental properties and passive income.

My only worry is that once I buy a house and start my life that it will be difficult to amass enough money to easily perform the same plan later on. What do you all think I should do? Plan A? Plan B? Something in between or completely different?

TL;DR Buy a house, plan for marriage, buy a ring? OR Rent an apartment out and make a profit using Airbnb and similar services to bring in passive income, buy a house, ring, plan for marriage a little later(1–1.5 years later)?

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17 Answers

Haleth's avatar

How would that even work, though? Rent or a mortgage on a nice apartment in a major city is an insane amount of money. You may not always be able to get renters or make a profit off them. Especially on a site like airbnb, it probably varies considerably by season. And you will always have to make a rent or mortgage payment, so you could end up losing money on an expensive apartment.

If you’re making a good income and living at home, you’re in a good position. The best thing to do would be live at home a little longer, and then find an affordable apartment and keep saving as much as you can.

If you want to cut your bills, you and your girlfriend could get a roommate. At my apartment building, one bedroom apartments are $1400, two bedrooms are $1700, and three bedrooms are $2000. (We’re in a big city; it might be cheaper somewhere else.)

So assuming you and your girlfriend shared a room, the rent would be $700 each in a one bedroom, $566 each in a two bedroom, and $500 each in a three bedroom. This kind of broke 20-something lifestyle isn’t for everyone, but it’s not that bad if you’re young.

Your plan has a lot of contingencies. It depends on your girlfriend moving in together and marrying you, and on you holding the same job or a similar salary. Life has a lot of twists and turns and you’re only eight months out of the gate. Making a big financial commitment right now seems premature.

Thammuz's avatar

Many contracts just flat out prohibit your Plan B. My rental contract does, for one.

Plus, you’d have to manage to make, monthly, more money after tax than what you pay in rent, in a major city no less.

Plan B is not viable, go with plan A or just rent and be done with it.

Especially if you haven’t lived together before, I heartily recommend renting first, that way if it goes wrong you don’t end up with a mortgage to pay for a house your girlfriend is very likely going to get in the divorce (unless there is a prenup in place).

JLeslie's avatar

I think you should buy a house for yourself first, or a house for you and your SO first. You can propose and get married and then go house hunting together and buy it together. Or, you can buy the house, maybe have her along for input, and get married afterwards. You can add her name to the house after you’re married.

Buy a house you can easily afford, so you are still saving. Within a few years you can rent that one out and move to a bigger and nicer home if you want.

Buying a rental will not give you a lot of extra cash most likely, and it comes with risk. I am very in favor of owning rentals for the long term, especially if the numbers work really well, but there can be blips while owning rentals that set you back. When something breaks down. If you don’t rent it for a few months and it sits empty with no rent being paid. If a tenant trashes it or doesn’t pay.

We can help you work through the numbers if you want. Mortgage, insurance, property tax, maintenance fees, and then the rent amount you can get for only rented out 10 months (that’s assuming you rent it out quickly). Also, your money out is the down payment plus closing costs. I don’t know how much you have saved. Plus, I’m think renting unfurnished. I guess you are thinking furnished, so you have to pay to furnish it. Furnished does usually yield higher return, but it requires more money up front. Airbnb is very random and it might not be rented out very consistently. If it’s really nice you might get corporate renters.

No matter what I think buy a house for yourself first, but the exercise of how much you will make on the rental might be worth doing.

ibstubro's avatar

If you’re determined to buy something, I agree with @JLeslie‘s advice to buy a house you can easily afford, to begin with.
You may find that what you can easily afford on paper is just comfortable in practice.

Alternately, continue to live with your parent as long as that’s mutually agreeable and save, save, save. Every dollar you can put down on a property will save you several dollars in the future.

Alternately, have you considered looking at duplexes? Something that combines income with dwelling and breaks you into ownership?

InquisitiveSage's avatar

@Haleth You make a very good point. That plan would only work based upon a consistency of job and salary.
@Thammuz I didn’t know that some contracts prevented this. That is definitely good to know. I’ve read about people being successful doing this, but like you all have said there is a distinct possibility of losing money and just putting myself in a bad situation.
@JLeslie Your answer really convinced me to stick with a Plan A or some form of it. That totally makes sense and the possibility of it being an investment that yields a loss or an unsubstantial profit could be devastating. Thank you for the help!

Thank you everyone for the help. I was already leaning more towards some form of Plan A, but I think you all really helped me to solidify that as a choice!

JLeslie's avatar

Welcome to Fluther! Stick around and check out the place.

LuckyGuy's avatar

Can I offer an alternative? Plan C – Call it plan AB hybrid. Buy a double house live in half and and rent the other half.
When I got married we bought a double house. We lived in one half a rented the other. Renting and maintenance were so much easier. Our tenants behaved since they knew the landlord was right upstairs.
There were many tax advantages as well. We could depreciate half the value of the house and take it off our combined income at our high taxable rate. When we sold it we paid capital gains on the increased value over the deprecated price at te low capital gains tax rate.
We lived there for 3 years and amassed enough cash to buy a house we loved . (And were able to keep the rental and rent out bot halves!)
It was a very good investment.

jaytkay's avatar

I know people who rent apartments and then sublet them on AirBnB. They are realtors with years of experience in the area, both selling and renting property. I wouldn’t do it unless you know the neighborhood extremely well and have a very good idea of how consistently you can fill the place.

However, I have an alternative, like @LuckyGuy suggests.

Buy a 2— or 3-flat building. You can live in one and rent out the others. This has worked out well for people I know.

One friend did very well on his first building. He bought two more. Now he has three rental properties (18 apartments).

Another couple I know bought a 2-flat. They really like the neighborhood, so when they had kids they converted the building to a 2-story single family home. 20 years later they are still there enjoying the house.

MollyMcGuire's avatar

Wacky was the first word that came to mind. Really you need to gain life experience a little at a time. Stay with mom another year and then BUY, or go ahead and move into an apartment and try to save some (you and girlfriend both). You’ll be saving toward the same goal but have your privacy and independence….................and your parents will bless you.

There is liability when you rent…....you don’t need that now. And remember, no matter what, you would be responsible for the rent every single month. If your tenant bails, you still have to pay. Learn before you leap.

ibstubro's avatar

^^ “Alternately, have you considered looking at duplexes? Something that combines income with dwelling and breaks you into ownership?”

InquisitiveSage's avatar

Thank you everyone! I have also been looking heavily into Duplexes and just can’t seem to find any for sale in the area I am looking in. It seems that there may be a few for rent, but none to buy. For now I will keep searching, saving, and doing research.

ibstubro's avatar

”...searching, saving, and doing research” is the best plan, regardless, @InquisitiveSage.

From what I’ve read, staying within you’re desired location might be the biggest hurdle to buying a duplex.
Have you talked to a real estate agent? If not, I suggest doing a lot of networking and interviewing before you settle on one. I’ve had more poor real estate agents than good. Buying is a huge step and you need to be sure you have an agent that not only has your interests first, but is competent and hardworking.

InquisitiveSage's avatar

@ibstubro I have a family member who is a real estate agent in the area. I have full confidence in her, but have also heard not to use a real estate agent who is a friend/family member, but that would definitely be better than someone lousy that I do not know. What are your thoughts?

ibstubro's avatar

Probably impossible to avoid, regardless, @InquisitiveSage.
If she’s good and can give you some insider information, all the better. When I sold my last house my agent was working for the buy (a friend) more than she was me.
Take advantage of whatever resources you can, especially with it being your first buy.

Thammuz's avatar

@ibstubro @InquisitiveSage Plus, with her being family and all, it’s unlikely she’ll try to fuck you over. She might not be the best but trustworthiness is also good.

findhomesinli's avatar

Choosing the right property, maintaining it, dealing with tenants—all that takes work. Think hard about whether you’re prepared to put in the time. Before you take the plunge, do your homework.

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