For many people the struggle of saving money in order to purchase their first family home is increasing with the continued rise of the real estate market. Owning a personal family home brings stability and ends years of paying rent for many people. But is this the right move for real estate investors? Does it make more sense to buy a family home or a rental property first? These are questions facing investors that are confused about which path to undertake first.
Family homes are a great choice for buying real estate properties if you are already rich and financial stable. For those who have money saved up for either a rental property or a family home, the idea of investing in a family home becomes worrisome. Owning a home costs a lot of money in terms of interest, down payments, repairs, and taxes. Owning a rental property would be costly as well, but it offers the opportunity to make money from that investment. Thus, from a real estate investing point of view, buying an income property before buying your personal home makes a lot of sense.
Why Invest in Rental Property Instead of Family Home?
Source of Income
Unlike family homes, which can drain your income through mortgage payments and taxes, rental properties are actually a good source to have a secondary source of income other than the one you already have from your full-time job. A mortgage for a rental property could be practically paying for itself depending on the rental income that you manage to generate and the mortgage payments that you have to make. Family homes don’t provide that because it will be you who lives there rather than tenants paying rent. Moreover, purchasing your home will have drained your entire savings for a down payment. Of course, to become a real estate investor, you will need to sacrifice the need for a family home by getting a rental property that will make you money, which is totally worth the inconvenience from living in a rental yourself.
Related: How Passive is Your Rental Income?
Way Less Expenses
People who have a certain amount of savings which they plan to spend on buying a family home should think again. A family home is not equivalent to saving money (from not paying rent) because it will cost you a lot, especially in the beginning. Not all real estate properties are built and decorated in the way that their buyers have always imagined their dream home; everyone sees their future home in a different way. This makes family home purchases costly due to the renovations and repairs that will be needed in order to make the property as you want it to be, because that’s the only way you’ll feel it was money well spent. After all those expenses have been paid, you will still need to pay monthly utility bills including electricity, gas, and water.
Compare that to rental properties, and you will find a major difference in the operational expenses. A rental property might need necessary repairs, but the renovation quality and cost don’t have to be to the highest standard that you’d want in your family home. Renting out your investment property also means that you don’t need to worry about utility bills as the tenants will pay for them.
Leads to a Second Investment
To put this point in the simplest way, we are going to consider two scenarios: A and B. Scenario A explains the possibility of buying a second real estate property if a family home was purchased first, and scenario B looks at the opportunity to buy a second property if a rental property was purchased instead.
Scenario A: Purchasing a family home as we mentioned before will undoubtedly consume all your saving account and/or cost you mortgage payments for years to come. This family home has already forced its buyer to chase financial stability, between mortgage payments and trying to save again to buy a second property. It’ll be years before you are thinking of purchasing another property again.
Scenario B: If you ditch the plans to buy a family home for now and go for a rental property, what happens? It’s simple; rental income comes about. Even if you have mortgage payments, the rental income of your property will cover them and perhaps give you more profit to save on the side. The positive cash flow from a rental property gives you the ability to keep building your real estate investment portfolio because it provides you with another income source. If you are successful, then what is to stop you from getting that family home you dream of and becoming an owner of two properties: one for profit and one to live in? Or you might even get so much into real estate investing that you decide to go for another rental property before you buy a home.
Related: Buy a Second Investment Property: Why and When?
Being Less Picky
Let’s be real, you are always more picky about what property you buy when you start visualizing yourself living there and it being your family home. For rental properties it is an entirely different prospect. Yes, you would want the property to be of high standard and to constitute a good investment, but all these personal reasons go away. Personal preferences can include how far your family home is from work or if it is close to your children’s school, while these things won’t matter if you will be renting that property out to tenants.
Young Investor
The youth are more flexible when having a choice between a rental property or family home. This is because their current living habitat will suffice for now and they would rather focus on making money, at least in the time being. Rental properties can guarantee young people a way to make extra money to build their futures. If you are a young investor – whether married or single – then a family home would seem redundant at this point.
Creating Partnerships
Buying a family home eliminates the possibility of having real estate partnerships. You can’t offer a proposal to anyone to jointly own your property; it’s risky and unreasonable. Becoming a real estate investor who makes profit from investments means you are able to seek out partners. A partner can help you expand on those investments and make it easier for you to purchase better quality rental properties.
Conclusion
The truth based on all the considerations above is that the smartest move would be avoiding a family home as your first investment in real estate. Saving money doesn’t come easy to many people, and in order to save money again you need to be debt free. This is why a rental property is the logical choice; it gives you more security for the future, a rental income, less expenses to pay, and most importantly investing experience. Investing and profiting should be the priority; the family home will come eventually as a result of that investment in real estate. So, once you are ready to make your first real estate investment, make sure to check out Mashvisor for thousands of properties across the US.