The average American fiscal timetable puts in place a common path we are all familiar with: get a degree, land a job, rent an apartment, get married, and save enough money to purchase a house. The main hitter here, for our purposes, is that buying a house is a must. But is it really? What if you instead used that money to buy an investment property while renting out a residence?
Perhaps the main reason there is much emphasis on buying a home is the belief that it is a good investment. This does make sense. For instance, there is more stability in living in a house you own rather than in a rental property. There is also more freedom in some aspects of owning a house. You wouldn’t need permission from your landlord or property manager to renovate, fix issues with the property, and decorate. There far less restrictions when it comes to home ownership.
So why should you buy an investment property while renting? Although it may appear unconventional, here are some reasons why you should do so.
Related: 7 Steps to Buying a Rental Property
- Source of Income: Using a property for the sake of investment instead of a residence will obviously generate income. You’ll be able to earn money as soon as you find tenants.
This is especially great since the property can pay itself off (when managed properly). Generating positive cash flow by renting the property can help cover mortgage payments and other expenses. It can even build up profit.
You can even decide to rent out a unit or even just a room on Airbnb instead of the entire property and still earn income.
Even if you buy an investment property while renting is not your goal and you intend on living in the property later on, renting it out early can be a reliable source of income.
- FHA Loans: Typically, there is a 20% down payment when purchasing a property. But what if you can’t afford that much? Don’t worry. With FHA loans, the down payment can possibly be as low as 3%. If your credit is less-than-perfect, then a FHA loan can help pay for mortgage insurance. This is also great because the lower down payments and lower interest rates will help with future cash flow. There is a catch, though. FHA loans allow you to purchase up to a 4-unit property only if you occupy one of those units for the first year.
- Cost of house expenses can be very, very high: According to the Office of Federal Housing Enterprise Oversight, the cost of expenses over 30 years on a $290,000 house equals $783,000. Even if you want to fluctuate the amounts assigned to expenses (such as property taxes, insurance, and mortgage interest) in the report, and deduct about $100,000 to $200,000, the total cost of expenses is still high, nearing double the amount used to purchase the property. In this regard, opting to instead rent will save you more money, and leasing other properties will add profit. Buying investment properties while renting could be the better investment in the long-term.
- Appreciation on a house may not be in your favor: Sometimes appreciation is not as smooth as we might perceive it to be. The Office of Federal Housing Enterprise Oversight provides another example. A $50,000 property in 1977 became worth over $290,000 in 30 years. From this alone, it seems clear that the property has appreciated greatly through time, but when you compare this new value with the expenses costs, a different picture arises. The expenses during the same time period were $340,000. Now if we were to compare the appreciation with the expenses we can see that there is a negative result ranging from $50,000 to $100,000. The high appreciation does not seem as lucrative anymore. You can avoid this debacle if you buy an investment property while renting instead of owning a home in which you live in.
- Easier to purchase as an investment property: Purchasing a property as an investment can be easier than buying it as a house, as family members and friends are more likely to contribute to the payment if it is an investment property, provided they expect some gain out of it.
Related: Buying a Rental Property
- Distance: Usually, properties located in the heart of a city are more expensive than those located elsewhere. If your desired property is located far from the city yet you regularly need to be in the city (for work or other reasons), then choosing to buy an investment property while renting in the city would be a good idea. That way, you are not too far from where you normally spend most of your time in and you can earn income from the property.
- Flexibility to move: Selling a house can sometimes be a hassle if you plan on moving, whether for an emergency or not. The market value could be different depending on the time you decide sell, which could result in a potential loss in terms of an investment. The process of selling could be tedious as well. On the other hand, if buy an investment property while you rent out instead of living in a purchased home, you can easily move without having the headache of trying to sell the property first.
Related: Should I Sell or Rent Out my House?
- If you aren’t spending much on living expenses, why not give it a shot? If you are young and are living alone or with a roommate and do not spend too much on living expenses, then the choice to buy an investment property while renting can help you save and earn more money than owning and maintaining a house.
With all of this being said, is buying investment properties while renting superior to owning a home, or vice versa? There is no surefire answer; it all depends. It depends on your current situation, your goals in real estate investment, and your property. There are some pros and cons to both buy investment properties while renting and to simply buying a property as a home. Consult advisors and carefully plan your decisions. Be sure to use Mashvisor to look for investment properties, estimated cash on cash returns, expenses, and rental incomes.