Should I buy an investment home before my primary?

Why Buy a Rental Property First?

While every buyer and investor is unique, there are compelling reasons why individuals may opt to purchase a rental property before acquiring their primary residence. Here are some key factors to consider:

1. Housing Prices in High-Cost Areas: In regions where housing prices are prohibitively high, even individuals with substantial incomes may struggle to purchase a primary residence. In such cases, investing in rental property becomes an appealing alternative. Online platforms like Roofstock have simplified the process, enabling remote real estate investments outside of one's local market. This strategy allows potential homeowners to redirect their funds from a substantial down payment towards a more affordable rental property, often in different locations.

2. Income Generation: Investment properties can generate steady income, unlike primary residences, which typically do not produce revenue. A rental property's cash flow can be substantial, covering monthly mortgage payments and property-related expenses. It's essential to create a cash reserve to handle any unexpected expenses or periods of vacancy.

3. Tax Benefits: Owning rental property offers various tax advantages. Operating expenses, as well as owner-related expenses like travel to visit the property and continuing education in real estate, can be deducted from rental income. Furthermore, depreciation can significantly reduce taxable net income. The IRS permits residential investment property to be depreciated over 27.5 years. This depreciation expense further lowers the taxable income, resulting in reduced tax liability.

4. Flexibility: Investing in real estate before acquiring a primary residence provides added flexibility. This approach allows individuals to seize job opportunities in different locations without the burden of a monthly mortgage payment. It also enables a lifestyle where one can travel and work as a digital nomad while earning rental income to cover living and travel expenses.

Drawbacks to Consider:

While buying an investment property before a primary residence has its advantages, it's essential to be aware of potential drawbacks:

• Negative cash flow in some months due to unexpected repair costs or extended vacancy periods.
• The challenges of self-managing a rental property, including understanding the Fair Housing Act and state landlord-tenant laws.
• The risk of legal issues if a rental property is not properly maintained, leading to injuries caused by owner negligence.

Tips for Buying an Investment Property:

For those opting to invest in rental property before purchasing a primary residence, consider the following tips:

• Research markets with growing job opportunities and increasing populations for optimal rental property investments.
• Understand key financial metrics used by real estate investors, such as cash flow, net operating income, cash-on-cash return, gross yield, and appreciation.
• Reduce personal debt by paying off credit cards and reducing student loan balances.
• Build a down payment fund, potentially by raising funds from friends and family or tapping into an IRA.
• Explore various lenders for your first investment property loan and consult with local lending institutions.
• Always plan for unexpected expenses, including major repairs or longer-than-usual vacancy periods.
• Be prepared for the responsibilities of a landlord or consider hiring a reputable property management company.

In Conclusion:

Before deciding to buy an investment property rather than a primary residence, individuals must weigh the potential benefits against the associated risks. While owning a rental property offers advantages such as consistent income and tax deductions, it's essential to be prepared for the challenges, including tenant management and fluctuating cash flow. Thorough research and a clear understanding of real estate markets can help individuals make an informed choice between investing and owning a primary residence.