To older investors, buying an investment property before a personal home might seem like putting the cart before the horse. Understand, though, that the next generation of investors – younger millennials and Gen Z – faces wildly different financial circumstances than many of us did in our youth.
They want to invest and secure wealth for themselves and for their families. But right now, even saving up for a down payment on their first home seems insurmountable – let alone buying a house and an investment property, too!
But should first-time homebuyers make their first purchase an investment property? Should they delay the dream of homeownership in favor of investing first? Here’s what budding investors need to consider!
Pros VS Cons: Buying a Rental Property Before Your First Home
PRO: You build better equity
Outdated financial wisdom tells us that a home is an excellent investment. So many people continue to rely on their residence as a future nest egg. And while that can work out in your favor, it’s not enough by itself. We often delay or neglect property maintenance and problems in our homes. This causes your home equity to suffer and creates a need for costly renovations before you can sell.
Rental properties, by contrast, tend to be more diligently and carefully maintained. Property managers ensure your rental retains its value and generates great cash flow. You also buy these properties with equity and appreciation in mind, free of personal preference or attachment.
PRO: You benefit from cash flow—now and over time
Cash flow is the big standout when comparing a home and a rental property. Your home does nothing but cost you money until you sell again. While you still utilize leverage, the interest you pay over time can have you paying far above what the property is or will be worth. Rental income changes that. It lets you pay off your mortgage quickly and with someone else’s money.
Your passive income can go towards your big-picture financial goals at that point! And the more properties you own, the greater cash flow you enjoy.
PRO: You can access more affordable options
Real estate has gotten much more expensive in the past few years. Of course, these numbers vary by market! The benefit of buying rental properties is that you don’t have to limit yourself to where you live and work. You’re not looking for something that checks all of your personal boxes. So, if where you want to live is too expensive, you can still buy a property in a more affordable area.
You don’t have to wait until you save up for a hefty down payment to reap the benefits of equity, appreciation, and passive income.
CON: You lack practical experience
Buying a home for the first time is a whole thing. For many outside of the real estate world, it’s all a bit confounding. As a first-time homebuyer, you lack practical knowledge of the process – what it truly entails and its costs. The sticker shock is real!
If you intend to make your first property an investment, go into it with caution. You must take extra care to understand the numbers and costs. Mitigate your risk as much as possible before you buy. We absolutely recommend speaking to a financial or portfolio advisor throughout the process.
CON: You delay the personal satisfaction of homeownership
As logical as we want to be about all of this, sometimes you just want a home to call your own. Homeownership is still engrained in us as part of the American Dream. Buying an investment property first does mean you delay purchasing a place to call home.
Granted, the added cash flow and equity will make it easier to do in the future! But you’ll have to keep renting in the meantime. Depending on your circumstances, that may not be a palatable option.
CON: You may encounter more rigid financing standards
Lastly, investors contend with stricter lending standards than the average homebuyer. Lenders tend to ask for bigger down payments from investors and look for exceptionally high credit scores. Saving up for a down payment may take longer as a result.
So, Should You Do It?
Ultimately, we can’t tell you whether or not buying a rental property before your primary home is right for you. We’ll always be honest if we think our model isn’t a good fit for someone. Take careful stock of your resources and financial goals.
What do you want out of an investment experience? What do you want those rental properties to do for you? Discuss these goals with your advisor. They’ll lay your options on the table and help you find the right fit. All in all, buying a rental property first is certainly an option worth considering!
When you're ready to be a passive investor, our team makes it simple!