Investing In Real Estate Before Buying Your First House?



By Leon Yang

For many people their first goal in real estate is to purchase their own home. While it is most ideal to buy your first home before thinking about investing further in real estate, I believe at times that depends on where you live. The costs to purchase real estate in places like New York, San Francisco, and Los Angeles are often extremely expensive. Furthermore, maintaining the property is expensive as well -- property taxes, management fees, HOAs, etc. For those home buyers it is a huge investment and can take a long time before they can truly take the chance.

Not All Real Estate Prices are the Same

On the other hand, there are other cities in America that have extremely reasonable real estate prices. For example, a single-family house in Las Vegas can cost anywhere from one-fourth to one-sixth of what it would have cost in New York. The two properties are the same, but just located in a different area.

Not All Rental Incomes are the Same

Despite the vast difference in the price of real estate, the discrepancy in the rental rates of those two locations are not proportionally different. Just hypothetically, a $600,000 house in New York might net you $2,000 a month in income while a $150,000 house in Las Vegas might net you $1,000 a month. So on one hand, a house in New York might offer you a 4% return while a house in Vegas might get you a 8% return, double the rate of return!

But let's flip the script for a moment. What if you are a renter instead? If you lived in New York, you will be paying $2,000 to live in a $600,000 house. But in Vegas, you will be paying $1,000 to live in a $150,000 house. Which location is offering a better deal? That's right. New York. You are paying much less to live in a much higher valued property.

Try to Seek the Highest Returns

So what I'm trying to get at is that you don't have to buy your primary residence first before thinking about getting into other real estate investments. You should really begin assessing what it costs to live in your neighborhood and whether your neighborhood is good for investment. If where you want to live in does not offer a high return on your investment, you don't have to buy it first. Instead, you can choose to rent in your neighborhood while using your capital into other investments.

For example, say you have $600,000 in cash to invest in because your rich uncle passed away and you want to live in New York. So you decided to buy a $600,000 house in New York. On one hand, you no longer have to worry about mortgages (but you still have to pay property taxes, insurance, etc), but then you will no longer have a source of income.

You can take another route. You can instead, buy 4 houses in Las Vegas for the same total. Remember, each house can net you about $1,000. So now you have $4,000 monthly income. You, being a diehard Yankees fan, still want to live in the Big Apple. And you can by renting the same $600,000 house for $2,000 a month. But this time, you have an extra monthly income of $2,000 left because you have all these investment properties.

In other words, you can use your capital more efficiently by putting them towards where the return is the highest. You may miss out on being able to say you own your own home. But that is okay. Wouldn't you rather own something that'd give you a better return?

Additionally, a 20% down on a $600,000 house is $120,000, whereas a 20% down on a $150,000 house is $30,000. Which investment is going to get you started the fastest?

This article was originally published on BiggerPockets.com.

See more on BiggerPockets.com:
The Ultimate Beginner's Guide to Real Estate Investing
Tenant Screening: The Ultimate Guide
How to Buy a Foreclosure: The Comprehensive Guide

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