Buying an Investment Property Before First Home

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Owning a home is a major life milestone, but it’s also a major financial commitment. That’s why many people purchase an investment property before they buy a primary residence. Doing so can help pay the mortgage and offer certain tax benefits that are attractive to many first-time homeowners. Here is a look at the benefits and drawbacks of buying an investment property before first home.

Should I buy an investment property before my first home?

It depends on your financial situation and where you’re at in life. Owning a rental property has a variety of benefits that are difficult to ignore but does bring certain challenges.

Advantages of Investing in a Rental Property Before Owning a Home

Advantages of Investing in a Rental Property Before Owning a Home

The biggest advantage is the predictable monthly cash flow that rental properties provide. Owning a home comes with certain financial burdens that can become tough to keep up with for many first-time homeowners. You not only have to pay your mortgage, but you are also on the hook for property taxes and paying any costs related to maintaining the home.

By purchasing an investment property before your first home, you can use the rental income to offset some of these expenses. Plus, you can use the income to help you save for a down payment while you’re still renting.

So if you suddenly lose your job or you have to pay for an unexpected repair, you have another stream of income to help cover it. Plus, if you scale your portfolio, you may even be able to quit your job and pay your mortgage and other expenses using the monthly cash flow from your investments. 

Rental property owners also enjoy numerous tax benefits. You can deduct all your operating expenses from your taxes and write off things like depreciation and mortgage interest. Not to mention, you can also use the property as collateral if you need a quick loan or line of credit.

Disadvantages of Investing in a Rental Property Before Owning a Home

Purchasing a rental property before your first home has several drawbacks, as well. For instance, your rental may not always be cash flow positive. If you experience an extended period of vacancy (vacancy rate), you’ll have no money coming in, but you’ll still have to pay for expenses like taxes, utilities, and maintenance. So if you’re relying on that income to pay those expenses and your own mortgage, you may get into some hot water.

Being a landlord is also a major time commitment. Although it’s not as hands-on as a 9 to 5 job, you’ll still be expected to respond to tenant requests and maintain a habitable environment. Plus, you’ll need to research Fair Housing Laws and review relevant landlord-tenant legislation to make sure you follow the rules.

If you’re working full time and have other responsibilities, it may be overwhelming to manage a rental property on your own. So you should carefully weigh the pros and cons and be sure that becoming a landlord is a responsibility you can handle.

Why do most people to buy their first home before their first investment property?

Even though purchasing a rental property before your primary residence comes with many benefits, most people still choose to invest in a primary residence first. Here are a few of the positives and negatives of doing things the traditional way.

Advantages of Buying a Home Before Buying a Rental Property

Advantages of Buying a Home Before Buying a Rental Property

Many people prefer to purchase a primary residence before buying an investment property, so they can gradually get used to the responsibilities of home ownership. Owning a property is a major responsibility. But owning a primary residence is a bit simpler because you don’t have to deal with the added responsibilities of collecting rent and responding to requests. So many people choose to start with a primary residence and move on to investing once they have built some equity.

Plus, it gives you somewhere stable to live while you build your real estate portfolio. The stability that a 30-year fixed rate mortgage can provide can often be beneficial when planning a long-term investment strategy like buying rental properties. If you’re still renting, your landlord may suddenly decide to sell your building, putting you in a precarious position while you’re still on the hook for paying the expenses related to the rental. So many people prefer to establish themselves before buying an investment property.

Disadvantages of Buying a Home Before Buying a Rental Property

Purchasing a primary residence may make it harder to qualify for a loan to get a rental property until you’ve paid down the principal a bit. So, if you’re looking to buy a rental as soon as possible, it may be best to do it before you buy your first home.

Lenders will look at your current liabilities when qualifying you for a loan and if you just recently took on a mortgage it may make it more difficult to convince them to give you a second loan. So you may have to settle for a cheaper home or wait a while until you’ve built some equity.

Plus, you won’t get as many tax breaks compared to if you owned a rental property. This additional tax burdern may make it more difficult to save for the down payment or closing costs on a rental property.

Final Thoughts

Purchasing an investment property before a primary residence offers a variety of advantages in terms of cash flow and tax deductions that are attractive to many business-savvy individuals. If done correctly, it can allow you to eliminate some of your own housing expenses and have a reliable cushion to fall back on if you experience any cash flow problems.

But, it does bring an added layer of complexity that may be intimidating to some. So, be sure to do your research and weigh the pros and cons carefully if you’re going to purchase an investment property before your first home.

Frequently Asked Questions

It depends on the type of property you’re looking to buy and where it’s located. For instance, a single-family home in Indiana is going to require far less to purchase than a brownstone in Brooklyn. But in general, you should save for at least a 20% down payment and an additional cushion to account for closing costs, repairs, and maintenance. Most experts recommend having at least 6-months of cash reserves saved to account for expenses.

So, say the property you’re looking at is worth $200,000 and yields $2,000 per month in rental income. You’d want to save 20% for a down payment ($40,000), 3-6% for closing costs ($6,000 – $12,000) and six months of cash reserves ($12,000). So, ideally, before you purchase the property, you’d like to have at least $64,000 saved. Although this is conservative and it’s possible to do it for less.

Not necessarily. Chances are if you have a 30-year fixed rate mortgage it’s going to take you a long time to pay it off. If you wait to pay it down completely, you may miss out on many of the key benefits of owning a rental property.

However, if you do purchase a primary residence before an investment property, it may be wise to wait a few years before you purchase a rental. You don’t want to over-leverage yourself and end up borrowing more than you pay back. But buying an investment property can be a smart way to help you pay off your mortgage faster, which can free you up to expand your portfolio.

No, it’s typically a bit harder to qualify for a loan on an investment in property. Mortgage lenders see investment properties as inherently riskier because they rely on keeping a consistent stream of tenants. Most lenders assume that if you have a stable job, you won’t stop paying your mortgage unless something catastrophic happens like you lose your job or go through a divorce.

But tenants can be a bit more unpredictable. They may decide to suddenly move out or stop paying altogether, leaving you to foot the bill. If you have your own mortgage and other debts, this can easily cause a domino effect that can spiral out of control.

So, in general, loans for investment properties tend to feature higher interest rates and require a larger down payment. Plus, beyond proving your financial credibility, you’ll also be required to prove you have a solid business plan for handling the additional responsibility.