Becoming a homeowner is frequently associated with stability, security, accomplishment, and prosperity. That’s why for many people buying a home is a compulsory step towards feeling successful and completed. The truth of the matter is, however, that although buying a home might be a very emotional achievement, it does not always make the most financial sense.
If you’ve come to a point in life where you have saved up enough cash to put down on a house, it is the smarter financial move to buy an investment property and not a home. You are better off investing your money in a rental property, which will make more money for you while continuing renting. In a few years’ time, you will have enough cash to not only buy the home of your dreams, but to also grow your real estate investment portfolio with another rental property.
Let’s have a look at the reasons why you should buy an investment property first and only then buy your own home:
1. Financing the Purchase
Most people have to take a mortgage loan when buying a home. Very few are lucky to have enough money in the bank to pay in all cash. Moreover, the majority of lenders (other than traditional banks and a few government programs) are hesitant to lend money to homebuyers as they don’t have a guarantee.
The situation is different with real estate investors. When buying a rental property, you are not limited to a conventional loan, but can also finance your property purchase through hard money lenders, private money lenders, crowdfunding, syndication, and other forms of partnerships. You have more options to get creative with financing as the rental income you’ll make from the property will help you pay off your loan faster and more efficiently.
In a sense, when you invest in real estate, it is your tenants – and not you – who make the monthly loan payments. So, month after month, you grow equity in your property without paying from your own pocket. Actually, your renters pay for all other recurring expenses such as property tax, insurance, maintenance, utilities, etc. as well. That’s one of the most important reasons to go for an investment property before purchasing a home, where you will be the one making all the payments.
2. Making Money in the Short Run
As a real estate investor, you should only buy positive cash flow properties. For this purpose, you have to conduct careful investment property analysis before deciding on a property. With positive cash flow properties, tenants not only make the monthly mortgage payments to the bank, but also make you money. Any part of the rent which doesn’t go towards the ongoing rental property expenses comes straight to your pocket in the form of profit. Indeed, as long as you buy a profitable property in the right market and manage it reasonably, rent is the most stable source of income out there. Moreover, you can start making money right away – all you need is a property in a condition which allows to rent it out.
If you decide to buy a home instead, you don’t get to make money. Of course, you can say that if you continue to rent the place where you live, you will have to pay rent to the landlord, so you are losing money. The trick is to buy an investment property which brings you more cash than your own rent. You can do that by finding a profitable property type in a strong investment market.
3. Making Money in the Long Term
As a real estate investor, your goal is to make money. A rental property helps you achieve this goal not only in the short term but also in the long run. Once your housing market has experienced enough real estate appreciation, you can sell your investment property. The price you receive for it will be much higher than what you paid for it a few years ago.
Natural appreciation is one of the most important benefits of real estate investing. Thanks to it, you get to make money without putting any efforts into your property. All you have to do is to assure that you maintain it well.
This is different from selling your home. While you can easily sell your investment property to buy a bigger one or to buy two rental properties instead, selling your own home is a very emotional decision, which few will take upon.
4. Having No Limits on the Market
If you are buying a home, you obviously have to choose a property in your local housing market or within a few miles from it. This doesn’t make much sense in a high price to rent ratio market, where property prices are too high compared to monthly rental rates. For example, the price to rent ratio in Miami is really high at 29. The average monthly rent is $1,740, while the average property price is $616,000. Such a property price is not something which everyone can afford. In such a housing market, speaking from a purely financial point, it is more rational to rent rather than to buy a home.
At the same time though, if you are buying an investment property, you are not limited to any particular market. With the advancement of professional property management companies, out of state real estate investing is becoming an ever more popular option among property investors. With real estate investments, the sky is the limit. You can find a housing market with high rental demand and relatively low property prices to get high return on your investment.
5. Facing No Restrictions on the Property Type
When you buy a home, you have to take care to choose a property which will serve your needs for decades to come. If you have a family or are thinking of starting one, you better go for a single-family home which will have enough rooms and space for your growing family. This limits the type and number of properties you can purchase in the local market. Not to mention that single-family homes cost significantly more than apartments or condos, let’s say.
If you are buying an investment property, however, you can choose any property type, as long as you can afford the down payment. This gives you significantly more options and opportunities to find a property within your budget.
6. Benefiting from Tax Deductions
When you buy a home, you have to start paying property taxes. This is not to say that you don’t have to pay taxes if you buy real estate for investment purposes. To the contrary, you have to pay property tax and income tax as well, but you can get tax deductions on many of your business expenses such as travel, office space, utilities, and others. As a real estate investor, you should utilize every opportunity to increase your cash flow and return on investment, so make sure to study all available tax deductions carefully as they apply to your particular situation.
Even if you’ve spent all your life to this point hearing how important it is to buy a home, you should keep your mind open and realize that this is not necessarily the best decision from a financial point of view. As a matter of fact, buying an investment property makes more sense. If you do your market research and property search well to land a positive cash flow property, you can start making and saving money from month one while growing your equity in your rental property. In this way, your investment property will help you save up enough money soon to buy the home of your dreams.
Daniela Andreevska is Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.