A common concern many aspiring real estate investors have is if they should buy or rent a house. Even if they opt for buying a house, they are left wondering if that house should be used as a primary residence or as a rental property instead.
The answers to these valid questions will depend on your goals, and ultimately, your circumstances. Let’s look at these questions through the eyes of investors who plan to save up money to eventually buy an investment property, but who are also considering buying a personal residence. Should they buy the home first? The investment property? Or should they abandon the idea of property ownership altogether and instead rent out a property?
To answer these questions, we will look at the pros and cons of each choice and then evaluate them according to our situation. We’ll start with whether you should rent or buy a house.
Renting Out a Property vs. Buying a Property
To rent or buy a house, that is the question…
Renting out a property offers great movement flexibility for you as a tenant. If there is a chance you need to relocate for whatever reason, you can simply pack your bags and leave the area. The same cannot be said if you are moving out of a personal residence.
Some people say rent money is waste of money. This is complete nonsense. Renting out saves money. When you rent out, you are only responsible for one recurring payment – the rent. This makes renting out a more reasonable, financial decision for many people.
Renting does save money, there’s no doubt about that. Unfortunately, this comes at the expense of your freedom. The lack of freedom to do what you want with the property is because of one simple fact: you do not own the property.
Some people may be able to cope with the lack of freedom of renting when considering to buy or rent a house. What they may detest, however, is the inability to make a profit when renting. Once again, because you do not own the property, you cannot financially gain anything out of it.
Buying a Property
As mentioned previously, owning an investment property can be very profitable. The profit from an investment property can come in many forms. In the short term, you can make rental income by renting out the property. Appreciation will build up over time for any real estate property. This will increase the percentage of the property that you own, increasing total profit when the property is sold.
Another benefit comes in the form of pride. Homeowners have the pride of ownership once they purchase a house. They are free to do what they want with the property, with restrictions only coming from the law.
Buying an investment property is a great choice when wondering whether to buy or rent a house. It still comes with its disadvantages, however. The most evident one is that it is very costly to own a property. Renting a house means paying only one cost – rent. Buying and owning a property leads to many costs, several of which are recurring. Costs associated with buying and owning include monthly mortgage payments, interest payments, property management, maintenance, renovations, property taxes, closing costs, and more.
Verdict: If you want to buy a property in the future but are low on money, renting out a property and saving up a is a good idea.
Buying a Rental Property vs. Buying Personal Residence
After you’ve solved the ‘buy or rent a house’ question, if you opt for ‘buy a house’, should you buy a home first or a rental property?
When you ask yourself whether to buy or rent a house, only one answer made more sense if you were on a tight budget. How about when buying a rental versus buying a primary residence? Both owning a home and owning a rental property cost a lot of money, but only one of those choices can pay itself off quickly. That’s why the main benefit of buying rental properties is quick profit in the form of rental income.
Tax deductions are common with any form of real estate. With rental properties, however, you are eligible for more tax deductions, further easing the financial burden of owning an investment property.
Rentals might pay off the purchase faster, but they require higher qualifications to purchase in the first place. Buying a rental requires a higher credit score, for instance. A good credit score for a rental is around 630, while a great one would be around 720.
A rental also requires a larger down payment upon initial purchase. A down payment of a typical rental property is between 20% and 25%. For a primary residence, in comparison, it can be anywhere from 5% to 20%.
Buying Personal Residence
For many people, there’s no better feeling than owning a home. The sense of security is comforting and desirable. Coupled with this security is the freedom to do what you want with the house. After all, it’s yours, and you can change it and use it however you want.
Although buying a rental may require higher qualifications, buying a primary residence can be the more expensive purchase in the long term. A rental property repays itself off over time. The only way you can profit from your own residence (without renting it out) is to sell it, which obviously leaves you with no primary residence.
Verdict: Buying a rental property and continuing to save up to purchase a primary residence makes more sense financially.
The two big questions addressed in this post, to buy or rent a house and to buy a rental or a home, can be answered differently depending on your goals. Regardless, the method of eventually buying a home, by saving up through renting out and buying a profitable rental property, is a smart and sound one. Of course, it’s definitely not the only way. You can always use different sources of financing to buy a home or investment property head on. You could even purchase a property with multiple units, live in one, and rent the rest!
For more on whether you should buy or rent a house, visit the Mashvisor blog! If you know your answer to ‘to buy or rent a house’ is to buy, use Mashvisor’s property search to quickly find the best positive cash flow properties available in the US!