Some believe acquiring a first home before buying an investment property is the way to go, while others say they would rather invest in real estate first before purchasing a primary residence. Let’s find out which option is better in this article.
Should You Purchase Rental Property Before Buying Your First Home?
It depends on your financial goals. If you want to receive passive income every month, then buying a rental property is a viable option.
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There are several benefits that come with purchasing an investment property before a primary residence. They include:
Lifestyle flexibility – Investing in real estate first lets you live a flexible life. You can travel around without worries of being tied to one home.
Retirement income – Investment properties have proven to be reliable sources of income for years. They can help you maintain your lifestyle after retiring.
Investment property as collateral – It is possible to collateralize your business loan with investment property.
Appreciation – Investment property appreciates in value over time. This helps you to boost your wealth.
Diversification – Real estate investments are relatively stable compared to volatile assets like stocks and crypto. So, buying an investment property allows you to diversify your portfolio and lowers investment risks.
Challenges of Buying Investment Property Before Primary Residence
There are several downsides to acquiring investment property before a first home. They include:
Little rental income – In some cases, the rental income generated from your investment property may not be sufficient to cover the costs of maintaining it, which could lead to financial problems.
Tenant issues – Before buying an investment property, you need to understand that you are likely to face some problems with tenants. For example, a tenant may fail to pay their rent on time. In some cases, you might have to evict them.
Loan requirements – If you are planning to finance your investment property with a loan, then you should be aware that you will be charged a high interest rate.
Market fluctuations – You should keep in mind that your investment property can lose value at any time. For instance, if there is an increased crime rate in the area where your property is situated, the real estate market in that place will no longer be attractive, thus causing a decline in property value.
How to Purchase a Rental Property Before First Home
Here are the steps to follow when buying a rental property:
Step 1: Conduct Thorough Market Research and Determine Your Financial Goals
It is crucial to research the local real estate market before investing. Check out the housing prices, rental rates, maintenance costs, loan interest rates, and tax deductions and evaluate their influence on your investment.
After researching, set financial goals to gauge whether buying an investment property is the right option for you.
Step 2: Explore Financing Options
As mentioned earlier, if you decide to finance your investment property purchase with a loan, then expect high interest rates. Moreover, the lender will require you to make a large down payment. So, before taking a loan, check whether it makes financial sense.
Step 3: Evaluate the Cost and Potential ROI
You need to calculate the costs associated with your investment property. Consider expenses like property taxes, insurance, and maintenance costs. After determining the costs, it is time to estimate the period it will take you to realize a return on investment.
Step 4: Be Aware of Your Rights and Responsibilities as a Landlord
When acquiring an investment property, understanding rental laws and your rights as a landlord is vital because it’ll help you comply with regulations and shield yourself against liability.
Step 5: Connect With Professional Real Estate Agent
The real estate market can be complex to navigate, especially if you are a new investor. So, it is advisable to explore this market under the guidance of a qualified real estate agent who will help you to make an informed investment decision.
With all said, purchasing an investment property is an excellent way to generate passive income. However, consider all the risks involved before investing.