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by Michele Lawrie
10 min read
Are you considering buying an investment property before first home? Many believe buying a primary residence before investing in real estate is best. However, compelling reasons exist to turn this conventional wisdom on its head.
Investing in property can be an intelligent financial decision, even if you still need to purchase your own home.
Whether you’re a first-time or seasoned investor, this blog will provide valuable insights into a unique approach to real estate investing.
Definition of an Investment Property
An investment property is any real estate purchased to generate income. Rental properties, such as single-family homes, duplexes, and multi-family dwellings, can be excellent sources of rental income for real estate investors.
Are you intrigued by the concept of investing in a rental property? Check out our guide on FHA loans for investment properties before purchasing your first property.
Should I Buy Rental Property Before Primary Residence?
It all depends on your situation. It may be a smart move if you already own a home and have the financial resources to purchase an investment property.
When investing in real estate, there are numerous benefits to purchasing an investment property before buying a primary home.
- The most significant advantage of buying an investment property before the first home is the potential for rental income.
- An investment property can generate a steady stream of passive income, which can help ease the stress of making a mortgage payment each month.
Ultimately, whether or not buying an investment property before purchasing a primary residence is right will count on your financial situation and long-term goals. Research and crunch the numbers to determine if this approach makes sense.
Why Should People Buy an Investment Property Before a Home?
There are various factors why people choose to buy an investment property before purchasing a primary residence. Here’s a sneak peek of the key benefits:
- Housing Prices: People find the housing prices in their area expensive and want to take advantage of lower prices in the residential investment property market.
- More options: Investing in real estate keeps options open. You can buy a home when ready or continue renting the property for income.
- Lifestyle flexibility: Buying an investment property first allows for lifestyle flexibility. You can move around or travel without worrying about being tied to a single home.
- Retirement Income: An investment property can provide an ongoing source of income during retirement years. The revenue generated from the property can help cover expenses and provide a reliable income stream.
- Source of Income: Buying an investment property can provide a steady source of income when rental rates are then the mortgage payment. You can use the investor’s monthly extra cash flow to cover other expenses or save for future investments.
- Property as collateral: An investment property can be collateral for other mortgages, such as a business loan.
- Bargain in the Real Estate Market: With some research and patience, investors can often find good deals in the real estate market.
Benefits of Buying an Investment Property Before First Home
Investing in real estate can be wise for anyone looking to grow their wealth and achieve financial security. While many people focus on buying a primary residence, there are several benefits to investing in real estate before purchasing a home.
- Cash Flow: Investing in real estate can generate regular cash flow through rental income. By renting out your property, you can create a steady stream of income that can help cover expenses, pay down debt or save for future investments.
- Appreciation: Real estate has proven to be a stable investment that tends to appreciate over time. By investing in real estate early on, you can take advantage of this appreciation and potentially increase your wealth.
- Diversification: Investing in real estate can broaden your investment portfolio and reduce your overall risk. Real estate investments are less volatile than other assets, such as bonds and stocks, which can help reduce your exposure to market fluctuations.
- Tax Benefits: Real estate offers several tax benefits to help investors save money. For example, rental income tax is at a lower rate than other types of income, and investors can also deduct costs such as property taxes, mortgage interest, and repairs.
- Long-Term Investment: Investing in real estate is a long-term investment that requires patience and dedication. However, over time, real estate investments can provide a valuable source of income and wealth accumulation.
Overall, investing in real estate before purchasing a primary residence can be a smart financial move for those looking to build wealth and achieve financial security.
Investing early in life allows you to take advantage of cash flow, property value appreciation, diversification, and long-term growth potential.
You can also opt for Cash Flow Mortgages to buy an investment property which will help you buy a rental property before your home.
Find the Best Cash Flow Mortgage Lenders
Get pre-qualified for Investor Cash Flow Mortgage based on potential rental income
Potential Challenges of Purchasing an Investment Property Before Home
It’s important to understand that buying an investment property before purchasing a primary residence does come with some challenges.
- Rental Income: As a rental property owner, you’ll need to ensure your rental income is enough to cover the costs of owning and preserving the property. If not, you risk facing financial difficulties in the future.
- Tenant Issues: If you plan on renting out the property, you’ll need to prepare for the challenges of being a landlord, such as learning fair housing laws. Finding good tenants can be challenging, and dealing with late payments, evictions, and other tenant issues can be time-consuming and stressful.
- Loan Requirements: Investment property loans tend to have higher interest rates and stricter application requirements than primary residence loans. It’s essential to understand the loan requirements before committing to a mortgage.
- Financing: One of the main challenges of purchasing an investment property is securing funding. Lenders typically have higher down payment requirements for investment properties than owner-occupied homes.
- Market Fluctuations: The real estate market is always subject to ups and downs, and there’s always the risk of the property losing value. Suppose you’re unable to sell the property. In that case, you’ll need to continue renting it out to cover your mortgage payments, even if the rental income is less than anticipated.
While there are potential challenges associated with buying an investment property before purchasing a primary residence, it can be a clever financial move for those looking to build wealth and achieve financial security.
With the correct information and professional advice, you can make an informed decision and manage the risks of investing in real estate.
How to Buy Rental Property Before Primary Residence?
Before investing in a rental property, it’s essential to do your research and comprehend the steps involved. So let us see the steps one by one.
Step 1: Research the Market & Determine Financial Goals
Before investing in real estate, it’s vital to do your research and comprehend the local housing market.
Thoroughly explore median home prices, housing costs, rental rates, tax deductions, interest rates, and mortgage rates to evaluate how they may influence your investment choice.
Once you’ve gathered this information, set specific financial goals to determine whether an investment property is right for you.
Step 2: Consider Down Payment and Financing Options
When buying an investment property, you’ll likely need to provide a larger down payment than required for a primary residence. Consider the options available and decide whether saving or borrowing money for the down payment makes sense.
If you want to learn about a down payment for the DSCR program (an investment loan), we have a guide to help you understand the process.
Step 3: Calculate the Cost & Potential Return on Investment
When calculating the cost and potential return on investment, you should consider monthly expenses such as mortgage payments, operating fees (insurance, property taxes, and maintenance costs), vacancy rates, and other factors.
If you are considering getting a DSCR loan for your investment property, check your eligibility with this DSCR calculator.
Step 4: Know Your Rights & Responsibilities as a Rental Property Owner
Research rental laws in your area and understand landlord-tenant rights and fair housing laws. It will help you comply with all regulations and protect yourself from liability.
Step 5: Seek Professional Advice & Connect with HomeAbroad
Connecting with a qualified real estate professional and the lender can help you make an informed decision and manage the risks of buying an investment property.
HomeAbroad can help you connect with lenders best suitable for investment loans.
Connect with the best investment property mortgage lender. (No personal income verification)
Tax Benefits of Owning an Investment Property
The tax benefits of having an investment property can be significant. For example, depending on your location, you may be eligible to deduct mortgage interest payments, property taxes, and other expenses associated with the rental or residential investment property.
You should consult a qualified accountant for advice on maximizing the tax benefits of owning an investment property.
Deductible Expenses for Rental Property Owners
Rental property owners can subtract certain expenses from the net operating income associated with the rental property. It can include mortgage interest payments, insurance premiums, advertising costs, travel expenses related to property management, and repair and maintenance costs.
Real estate investment is ideal for building wealth and achieving financial stability. However, before buying an investment property, be sure to do your research and weigh the potential risks against the rewards.
Capital Gains Exclusion When Selling Investment Property
You can take advantage of a capital gains exclusion when selling an investment property. Under the current tax code, real estate investors can exclude up to $250,000 in profits from their taxable income or up to $500,000 for couples filing jointly.
Again, consulting a qualified accountant before selling an investment property is essential to maximize your tax benefit.
Tips for First-Time Real Estate Investors
Buying an investment property can be a rewarding experience if done right. Here are a few tips for first-time real estate investors:
1. Consult with a Professional Before Buying an Investment Property
Before buying an investment property, consult a real estate agent and mortgage lender for sound advice. They can help you determine whether the property fits your financial goals and suggest ways to maximize your return on investment.
If you need help finding a lender, refer to our guide on tips to find the best DSCR lender for investment properties.
2. Manage Your Risk by Diversifying Your Portfolio
By diversifying your portfolio, you can lower the risk of investing in a single asset. You can do this by investing in different types of properties or buying several rental homes in other locations.
3. Consider the Location & Condition of the Property
Location and condition affect the resale value of an investment property. Therefore, look for properties in desirable areas that need minimal repairs.
4. Understand Cash Flow & Calculate Potential Risks
A positive cash flow is essential for any successful real estate investment. Before investing to buy an investment property, review your budget and determine the potential risks of purchasing an investment property.
Real estate investment can be a fantastic way to build wealth. Still, it’s essential to research and understands the risks before committing to a long-term investment like an investment property.
HomeAbroad can get you started on your investment journey by connecting you with the best investment lenders for free!
5. Analyze the Cost of Maintenance & Repairs
Maintenance and repair costs can add up quickly. So before investing in a rental property, calculate how much you’ll need to spend on yearly repairs and maintenance.
Then, consider hiring a property management company for assistance with upkeep.
Finally, it’s vital to consider the cost of getting an investment property loan. Mortgage lenders specialize in investment property financing, so compare rates and prices before committing to a mortgage loan.
6. Evaluate Property Taxes & Insurance Costs
Property taxes and insurance costs are tax-deductible in many cases, so be sure to factor these other property expenses into your budget when calculating the costs of owning an investment property.
It is essential because it can affect your monthly cash flow and make or break a real estate investment. Talk to a qualified tax professional to help understand the tax benefits of owning rental properties.
Following these tips and researching can boost your odds of success when buying an investment property.
With HomeAbroad’s help, you can find a lender suitable for financing an investment property loan and start your journey to becoming a successful real estate investor. So, get in touch with us now to get started!
Best Mortgage Option for Investors: Cash Flow Mortgage
A cash mortgage allows you to borrow money on your property’s annual rental income rather than basing loan qualification solely on your personal income and credit history. The amount of cash flow mortgage you can qualify for depends on the property’s rental income, expenses, and other factors.
HomeAbroad can connect you with the best cash-flow mortgage lender to help you get the investment financing you need easily. It’s free!
Find the Best Cash Flow Mortgage Lenders
Get pre-qualified for Investor Cash Flow Mortgage based on potential rental income
Conclusion
Buying an investment property is a terrific way to generate income and build wealth, but it’s essential to consider the risks before investing.
You can be a thriving real estate investor by understanding the associated costs, consulting with professionals for advice, and adequately diversifying your portfolio.
HomeAbroad is the perfect way to locate lenders suited for investing in real estate and receive expert guidance to ensure you maximize your return. Don’t wait. Contact us now!
Find the Best Cash Flow Mortgage Lenders
Get pre-qualified for Investor Cash Flow Mortgage based on potential rental income
Frequently Asked Questions
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At what age should you buy your first investment property?
A. The age at which you should purchase your first investment property depends on several factors, including financial goals, risk tolerance, and real estate market knowledge.
We recommend consulting a qualified mortgage lender or real estate agent for advice before making any decisions.
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What are the tax benefits of owning an investment property?
A. Owning an investment property will provide several tax benefits, including deductions for loan interest and operating expenses.
Talk to a qualified tax professional about the potential tax advantages of owning rental properties.
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Should I invest or buy a house first?
A. It depends on your goals and financial situation. Investing in real estate can provide potential income while building equity over time, but it also carries some risks.
Consider consulting with a financial advisor to identify what’s best for your circumstances.
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What is the 1 rule for an investment property?
A. The number one rule for an investment property is ensuring your potential rental income exceeds your mortgage payment, operating expenses, and taxes.
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How much money should I save before buying an investment property?
A. This depends on your financial situation and the type of property you want to purchase.
Generally, saving enough money for a down payment plus enough cash reserves to cover your mortgage payments for at least six months in case of vacancies or unexpected repairs is beneficial.
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Should I pay off my mortgage or investment property first?
A. Paying off your mortgage or investment property first is up to you and depends on the rate of return you earn from each asset.
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Is qualifying for a second home or investment property easier?
A. Generally, qualifying for an investment property loan is more complex than a second home loan due to the higher risk of buying and renting out a property.
Your lender will examine your debt-to-income ratio, credit score, cash reserves, and more.
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Is buying a house and renting it out a good idea?
A. Buying and renting a house can be a great idea, but you should understand the risks of investing in real estate.
Make sure you have the financial means and knowledge to succeed before making decisions.
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Do you save money renting or buying a house?
A. This depends on the property and real estate market, but generally, renting can save money in the short term since it requires less money upfront than buying a house.
Long-term financial benefits depend on the value of your property and rental income.
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Why is renting your first house better than buying?
A. Renting your first house can save money in the short term since it requires less upfront than buying a home.
Renting also provides more flexibility since you don’t need to stay in the same house for an extended period; plus, you’re not responsible for making any repairs.
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What is the difference between a second home and an investment property?
A. A second home is a property you purchase as a personal residence, while an investment property is one you buy to generate income.
You can make money through rental income and appreciation with an investment property.
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How do I buy an investment property for the first time?
A. Buying an investment property requires research and patience. You’ll need to decide on a good location, understand the local real estate market, determine the type of property you want to purchase, find a lender, and create a budget for operating expenses.
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What type of property is best for the first investment?
A. Residential properties are typically a good option for first-time investors as they’re easier to manage and often have lower operating costs than commercial buildings.
Buying a duplex, triplex, or fourplex can also help you generate rental income from multiple units and maximize your investment.
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What is the 50% rule in real estate?
A. The 50% rule is an approach to determine the annual operating expenses associated with a rental property by calculating 50% of the gross annual rent.
Operating expenses include mortgage payments, taxes, insurance, repairs and maintenance costs, marketing fees, and other costs of running a rental property.
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