If you are a prospective investor, you may be wondering if buying an investment property before your first home is a smart choice. If you are longing to purchase your first home to reside in, maybe considering to turn it into an investment property can be a lucrative idea.
Most people completing college plan to find a job and buy their first home before they start investing in real estate. While the majority of people out there usually wait after buying their first home to commence investing in real estate, you can begin much sooner than that. Buying an investment property before your first home will pay off if done correctly. By renting out a house you have purchased, you leverage your credit, limited responsibilities, and your lifestyle into an investment. All you need is a little bit of real estate insight. Buying an investment property before your first home might be a good idea because of the following reasons:
1. Affordability
Even though everyone may have a dream area they would like to live in, not every place you may want to live in will always be affordable. Maybe you want a place where you will commute for a just a few minutes or want a place with a vibrant cafe and restaurant scene. Regardless of your preferences, if the place you like is too expensive and you can live in another place, then you can continue to rent while possessing an investment property. Becoming a landlord may be the best option you have to get onto the investment property ladder. You can choose to buy investment property on the outskirts of the city where the prices of houses are quite affordable, while the average rate of rent is still high. A lower buying price means that the mortgage will be of a lower amount and therefore it will be less difficult to qualify. This makes affording an investment property more plausible.
2. Lifestyle Flexibility
Buying an investment property before your first home and renting instead will give you the opportunity to reside in any location you choose to. It may be a location that is too expensive for you to buy a home. You will be flexible since you won’t be tied down to a specific area. For instance, when your life or career dictates that you relocate to a new area, city, or country, you can do so easily without worrying about what to do with your home. For some potential buyers, the idea of being tied to a mortgage and being incapable of changing location when there is need is not attractive. Even though some home purchasers will like the stability provided by living in the same area and having no need to answer to a landlord, people who move around or travel may like the flexibility that comes with short-term leases. Buying an investment property before your first home will give you the freedom to change address when you need to while also offering future stability and growth.
3. Partnership with a Family Member or Friend
In instances where you lack enough cash for a down payment of your dream rental property, you could decide to partner with a family member or a friend and buy the investment property together. Even though they may not be willing to help you purchase your first home to reside in, they may consider investing together. However, this will need you to communicate well, have aligned objectives, and make proper contracts.
Related: How to Start a Real Estate Business Through a Partnership
4. Cash Flow
If you do the right selection of investment property (fairly low priced and with a high amount of rent) and select the right tenants, you can start gaining positive cash flow straightaway and use it to improve your life. In this case, the tenant pays off your purchase and possibly leaves you with some extra funds. After allocating the down payment from your savings, future costs such as maintenance, insurance, mortgage, and property tax should get covered by the rent from the property that is paid by the tenants. Equity is amassed over time as the payment of mortgage is made. The investment property will be like forced savings and will also appreciate in value as the real estate market rises. Moreover, buying an investment property with high cash flow may also make mortgage lending easier since lenders will take into account your possible rental figure.
Related: How to Find The Best Cash Flow Investments in Real Estate
5. Flexibility When Choosing Location
You may be willing and able to purchase in a certain area, but this does not mean the purchase is a good financial decision. Buying an investment property before your first home allows you to select an area that is growing and gain from natural appreciation in the market as well as to maintain your desired lifestyle.
6. Tax Benefits
Buying an investment property before your first home comes with a number of tax benefits. For instance, you can claim back some of your expenses including paper costs like depreciation and upkeep on the investment property. If the property is your home, you have to pay for such expenses. Bringing down your tax as the year ends can provide huge savings, especially for people earning high income with a lot of tax. Even though this should not be your main reason to invest in investment property, you ought to consider it.
Related: The Tax Benefits of Real Estate Investments
7. Leverage into Your Home
Buying an investment property before your first home does not imply that you won’t have the funds to purchase your actual home at some point. In fact, investment properties that have been purchased wisely and have grown in value can offer you a sizeable amount of wealth and equity. You should consider the influence that capital gains tax has on your eventual profit. Those that pick an investment property well may eventually manage to purchase their dream house within a short time. You can also refinance the home and make use of the equity, instead of selling it out straight away.
Buying an investment property before your first investment can be a worthy investment if done correctly. Because of the reasons mentioned above, buying an investment property while renting is often a smart choice. You can decide to build a portfolio of residential real estate instead of owning a home, thereby accumulating wealth over time. However, both options have their pros and cons. You should arm yourself with relevant information and also seek expert advice to make the right choice for your particular situation.
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