Q & A with America’s Real Estate Professor: Buy personal residence or rental property first?

Insurance for fire-prone areas also discussed.
Zillow
Dec 11, 2013

Buy a Personal Residence or Rental Property First

Q. I am 29 years old and want to own real estate, both a home and rental property. Some people say I should buy the rental property first, so the income can help me qualify for a home. Some people say buy a home first. Do you have any thoughts? Jennifer L., Savannah, Ga.

A. If you want to own rental properties, and since you are young and mobile, the best way to get going is to buy a personal residence home that would make a good rental property, live there a few years, then rent it out when you move into your next home. That’s the best way to go, and here’s why:

  • You will get the best financing, lower rate and cost, plus lower down payment, when you purchase a property as a personal residence. So you can put less down and hold onto your cash. It’s also easier to qualify if you are buying a home as opposed to a rental property. You will sign a document at closing stating that you intend to live in the property for at least one year.
  • Living in the property helps you learn about it. So years down the road, when your tenant calls about an issue, you’ll know exactly what it is because you’ve experienced that electric, gas or water issue. This will help you better handle the issue at a lower cost.
  • You can live there while doing renovations to the property. It’s not fun, but paying rent somewhere else while your renovation on a property purchased for rental drags on, costing you money, is less fun. Plus you can take your time, shop around and get the best deals. If you are just buying a house to make it a rental, you’re rushed and it can be a very stressful pain!

So find a nice rental property that you’ll call your home for a couple of years, live there and then move to the next one. Repeat this exercise about 10 times in the next 30 years and you’ll be a happy retiree!

Insurance for Fire-Prone Area

Q. I am considering buying a house in southern California in an outer wilderness type area, and I understand that some insurance companies are balking at providing coverage to some properties due to fire risk. Is this correct and what can I do to work around this issue? Martha M., San Bernardino, Calif.

A. There’s no way around this issue. And you should really think this through. The reason insurance companies don’t like to provide coverage in wilderness areas is because there is a higher risk of loss to them. So if you buy a property in these areas, there is a higher risk of loss to you.

Many insurance carriers are dropping coverage to these areas. Even the ones that still provide coverage may drop it in the future or significantly raise premium prices. Other carriers are just increasing premium prices right now. So that is what you are faced with going forward if you purchase one of these properties.

There is an insurer of last resort in California, the California FAIR Plan Association. So for owners who cannot get insurance elsewhere, this quasi-state agency can help. But you will have to pay for the coverage.

With those facts you can make an informed decision. Good luck.

Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com