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I have heard of people having to choose between buying a property versus renting a property. Yet that seems like a weird dichotomy for me. Couldn't you do both?

  • Buy a property and rent it out to someone else.
  • Use the rental income to pay for your own rent on another property.

The only way this would be a profitable trade if you are renting your property at a higher rate than you are "paying" for your rental (you're charging rent for a two-story house while renting a one-room apartment). But even if the trade isn't profitable, you would still be in possession of an asset that can be liquidated when necessary, while having the costs of maintaining that asset defrayed by your tenant. This makes this approach more ideal than just paying rent for a bigger house (rent that you're not getting back).

Now, if you borrowed money to pay for the property, then it might be a bit more difficult to make this trade profitable, but one approach could be to increase the rent you are charging the tenant to help handle the interest payments.

Why is this "third way" not seriously considered? Is it just too complex to think about? Or require too much capital and micromanagement (needing to manage your landlord and your tenant)?

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Of course, you can do both on different properties.

But everyone needs a place to live, and for your own living space, you have to choose whether or not you will live in a space that you own, or one that someone else owns. The factors for that decision come down to many variables, which have been discussed in other questions. Some of these variables are financial, and some are not.

However, the fact that you have another rental house as an investment property doesn't really factor into whether or not you buy or rent your own home. The two are not related. That is why we don't discuss both things in the same discussion.

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    note that some people do do this but as a result of other considerations. My sister owned her home in Wales and then, a year or so later, took a job in Northern Ireland. She elected to keep the house in Wales and rent it out using the rent to cover the mortgage and part of her rent. Some years later she found somewhere to buy in N.I. and now has a rental property and a mortgage on a house. – MD-Tech Oct 10 '16 at 16:00
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That's two separate transactions. You are buying an investment asset and renting a personal residence. As a general rule, you want the rental income from your investment asset to go for paying the loan on your investment asset. Or you want to enjoy the income from your investment asset if you bought it without a loan.

Having an investment asset doesn't change your buy/rent decision for your personal residence except in that it is easier to buy a personal residence without an investment asset mortgage. If anything, once you have significant equity in the investment asset, it's more advantageous to buy than rent. If you already have the ability to rent out property, you could convert your personal residence into a rental if you needed to move. That takes away one of the big reasons to prefer renting to owning: flexibility.

Now, if you borrowed money to pay for the property, then it might be a bit more difficult to make this trade profitable, but one approach could be to increase the rent you are charging the tenant to help handle the interest payments.

But as a general rule, you can't. Rental price is limited by the financials, not empowered by them. The primary determinant of rental price is what others are charging for an equivalent property. If everyone else locally is charging $1000 for a two bedroom apartment, you can't charge $1200 just because it would make your cash flow work.

Also, most people don't want to live in a cheap residence if they could afford more. So most people would buy or rent a nicer place rather than buy a nice rental property and rent a cheaper property of their own.

The closest I've seen is someone who buys a residence and then rents out part of it. This can allow people to buy bigger now rather than waiting for later. And it can be easier to manage your rental if you're on-site.

Note that it's non-trivial to be a landlord. The money doesn't come in automatically. You have to find a tenant, collect rent, and maintain the property. Sometimes, you get stuck. Tenants lose their jobs and have to move out immediately. Or worse, you have to evict them. And of course, they don't do that when it's easy to find a replacement. Or there is a major maintenance failure and the tenant moves out because the apartment is unlivable.

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    +1 for "If everyone else locally is charging $1000 for a two bedroom apartment, you can't charge $1200 just because it would make your cash flow work." – Charles E. Grant Oct 9 '16 at 18:41
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    Re rent not being automatic income: that's why I keep reminding people that rental property isn't an investment, it's starting a business and purchasing equipment for that business. It's a perfectly reasonable business to be in, but you have to actively want to run the business yourself to make real money from it. – keshlam Oct 9 '16 at 19:01

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