Should I Buy a Small House?
In this episode, I talk about buying a small house.
John: Hey, John Sonmez from simpleprogrammer.com. I got a question about investing in property. I did a couple of videos on property investment since I do some real estate investment and this email comes from John and John says, “Hi John, myself and my wife have been considering getting into the property investment market for a long time. The time has never been quite right but things have improved a lot over the last 12 months for us financially and now feels like a good time to get the ball rolling. We live in a rented house at the minute. It’s not super big but it’s big enough that we can manage for another 4 or 5 years possibly. We have a 5 year old boy who will likely outgrow his bedroom by then. We’ve got about 250K to invest. Personally I’d like to throw all that money in and purchase say 3, potentially 4 decent quality apartments for rental. My wife has a slightly different perspective. She thinks we should invest in 1 to 2 flats and buy a smallish house for us. That way we avoid paying rent to our own landlord and pay our own mortgage instead. I’d rather wait until we’ve built up enough equity to be able to buy a medium or even a large size house for us. We’ve moved several times during our life and it’s always stressful and I’m in no hurry to put my family through that again. My question is if you’re starting out now what would you do? Thanks.”
So John I am more than happy to cause an even bigger fight between a husband and wife. I’ll gladly do this for you which this will inevitably do no matter what advice I give you since one of you is going to be right and one of you is going to be wrong. With that said I’ve definitely got some good advice for you at least I think it’s good advice which is—I’m not just saying this because she’s your wife but I think for the most part your wife is right and let me tell you why, there’s a couple of reasons.
Here’s the thing to think about. This is kind of a foundation of investing in real estate. I think everyone has to start at this place which is basically if you live in a place regardless of where you live you are using up space and taking up money, potential money. It costs you money to live somewhere. It doesn’t matter—a lot of people say, “Well, should I rent or buy?” The only difference between renting and buying is that if you rent you’re paying money to a landlord. It costs you so much to live. You got to pay rent somewhere. If you buy you’re paying rent to yourself. You are your own landlord. Regardless you still require the same amount of money to live. What I mean by that is that the value of the space that you need is a concrete thing. It’s not something that changes whether you buy or rent.
For example let’s say that you’re renting a place for $1000 a month. Well, let’s say you buy a place that has a mortgage of $2000 a month. Well, if you could live in a $1000 a month place then buying a big house that costs you $2000 a month you’re essentially—you’re losing $1000 a month. We can talk about how you’re investing it in the principle and whatnot, but essentially just from of what it costs you to live versus what you’re paying you’re at a loss of 1000 because you have too big of a place.
That’s why I would say that what you want to do is probably closer to what your wife is suggesting which is—for the 2 reasons. One, you want to buy the smallest place as possible. The reason why is because a house can be an asset or can be a liability. A house is an asset in my opinion when you’re getting a benefit from it when it’s not too big, when it’s not more space than you need. Anything more than you need you’re paying extra for and it’s costing you. It’s not an investment because you can rent a place that is smaller that will cost you less money. You want to buy a small place as possible especially if you’re starting out in investment, right? The more money that you save, the better, the more that you’re going to be able to invest and earn money off of, the more money that you spend essentially you’re going to waste it if you buy a bigger house for yourself because that money is not going to go to any good use. You’re going to increase the amount that you take up.
With that said the other reason why I would suggest buying a house is like I said about renting, you are your own landlord, right? One of the things about—you kind of get one of these when you invest in real estate which is you get one perfect tenant that always pays the rent on time and that’s you, that’s the house you live in. If possible, if the market allows it you should try and buy a house as your first investment and pay the rent to you only if the house is small enough where it makes sense.
Let me kind of spin this around a little bit. I know that we’re getting kind of complicated here but let’s say that you bought a big house and let’s say that you lived in that big house as an investment. Let’s say that you could pay $1000 a month to rent a place or you could pay $2000 a month mortgage for this big house, it’s a nice big house. What you got to think about is if you didn’t live in that big house, you could have rented that big house to someone for $2000 a month. You’re actually losing that $1000 a month. You don’t want to do that. You want to maximize the amount of money that you’re earning and saving so that you can invest more. In the long run you’re going to be better by having your own place that you’re renting to yourself. You’re the perfect tenant that’s going to pay 100% of your rent on time. That’s a good investment as long as it’s small enough. If it’s big it’s a waste and you’re actually losing money. As long as you buy a small house and then you invest in a couple of flats then you’re going to probably be in the best situation.
It’s not a huge, huge difference. I mean if you bought 3 or 4 properties and you continue to rent that would be okay. I would say that’s the second best choice. The problem there is of course going to be that you’re not taking advantage of that one golden tenant that you get to have by owning your own place and paying the rent on time.
Then I would say that the third, the worst choice though would be to buy houses now like 3 or 4 properties and then buy a large size or medium sized house for you. Don’t do that until you are well off. If you’re in this mode of start out in investing you want to save as much money as possible because the more money you save the more money that you’re going to be able to invest and that’s going to build you passive income. At some point yeah, you can buy your medium or big sized house if you want but wait, do that way, way later on. The smaller you can reduce your expenses to the faster you’re going to accelerate your pace to retirement and then the less that you’re going to need to retire. You can learn to live on less and you’re going to be better off.
So if your goal is sort of early retirement that’s the advice I would suggest. So you can tell your wife that she is right in this case. Thanks for the question though. It’s an interesting question. I think you can’t go wrong by doing some kind of investment. Either one of these choices is going to be better than doing nothing. Whatever you do, don’t sit on this and debate this forever. Do something. Take action. Either one of those choices is going to be better than doing nothing at all. In 10 years down the road you’ll be glad that you did something.
What I think is the optimal solution buy a small house and live in it and then buy a couple of others with the money that you have and you’ll be in good shape. Anyway, if you have a question for me, even about real estate, you can email me at firstname.lastname@example.org and I will talk to you next time. Take care.