Homeownership is closely associated with the American Dream. What if the home you own to achieve that dream is not the one in which you live? In many cases, it can make more sense to purchase an investment property before you buy a house to live in. It may seem unconventional, but for many savvy real estate investors, buying an investment property before purchasing their first home makes sense. Let’s look at some reasons that lead many investors to purchase a rental property and remain renters for a bit longer.
Purchasing a home can be out of reach for those who live in expensive cities. Even as their down payment savings fund grows, ownership becomes further and further out of reach as prices continue to inflate. For buyers in these areas, it can make more sense to purchase an investment property in a lower-cost location. It allows them to enter the real estate market immediately rather than waiting until they can someday save enough to catch up with prices in the city where they reside.
As a real estate investor, you can purchase anywhere. If you aren’t familiar with other markets, a real estate investment group can help you locate profitable rentals in cities and states outside your area. Buying outside the place you live lets you begin reaping the benefits of owning real estate without forcing you to overspend or tie up all your money in one asset.
When you replace the furnace in your personal home, the money you spend is just a necessary expense, like groceries or hockey tickets. When you pay for a furnace at your rental property, the IRS treats that like a business expense. That means you may see some of the money back during tax season. Many other tax deductions are associated with an investment property, which makes the same expenses you’d pay on your personal home into tax advantages on your rental property. You can’t avoid paying property taxes, but you can avoid paying them and not seeing some of that money come back when you file your tax return.
If you can’t afford to purchase a residence and an investment property, the tax situation can tip the scales in favor of owning the rental home.
Investing first, then purchasing a home later, allows you to take full advantage of the time value of money. A dollar invested today has time to grow, making it worth more than a dollar invested in ten years. Buying your first investment property now means you start seeing a paycheck right away in the form of collected rent. You can put that money to work for you, allowing it to begin growing immediately. You can also save income from your rental properties for a downpayment, either for your next investment or to purchase a primary residence. You can use your increased cash flow to make the mortgage payments on whatever property you buy next.
Investing in rental property now instead of saving to buy your personal home means you can start being on the right side of appreciation. The person in that expensive city we mentioned earlier is watching appreciation make owning a home more and more difficult, even as their savings grows. Appreciation is working against them.
Buying now, even if that means something more modest than you’d want for your primary residence or a property in a less expensive area, means that instead of being hurt by appreciation, you benefit. You own the asset that is growing in value. And rent price appreciation increases your overall income.
Assets vs. Liabilities
An investment property is an asset. It makes money for you and can be sold if you need cash. A personal home is, in many ways, a liability. Identical $300,000 properties could either make $7,000 per year or cost $20,000. The difference? The former is owned and rented out so that there is income; many of the expenses associated with it are tax deductions. The latter is a personal residence. This is why it often makes sense to buy an investment property and delay purchasing your home, even if that means continuing to pay rent.
Homeownership ties you to one location. Sure, you can always sell and move, but if you happen to be in a lull in the real estate market, you could have to sell at an inopportune time. If you rent, all you have to do is pack up, hand over the keys, and go. That makes accepting that fantastic job offer in another state or county easier. It allows you to move to a larger place if you are suddenly expecting triplets and your cool downtown loft doesn’t have space for three cribs. Postponing the purchase of your first home allows you to keep your options open so that you can be open to whatever amazing opportunities come your way.
For many people, it can feel counterintuitive to buy a house for someone else to live in before they purchase a residence for themselves. However, in many cases, it makes more financial, tax, and logistical sense to switch up the traditional order of real estate buying and become a landlord first.