Why You Should Buy An Investment Property Before First Home ? There is no right or wrong answer to this question. It depends upon individuals situation. If you are planning to buy a residential property for yourself then it can’t be investment. But if you already have a residential property and looking for a business investment then definitely buy an investment property.
Since the pandemic, the housing market across the world has been booming. IMARC, a leading market research group, expects the global real estate market to exhibit a compound annual growth rate (CAGR) of 1.90% from 2022 to 2027.
The above trends show that investing in property would be a great idea to use the potential market growth. Suppose you are planning to buy your first house, think again, alternately. In that case, you have an excellent opportunity to make good money. Investing in a property is more advisable before buying your first home.
The houses in cities where you work or live are at an all-time high, and trends show they will increase further. So rather than buying a place to live in, investing in it as a property and renting it out is advisable.
Below are some reasons to invest in a property before buying your first house.
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Table of Contents
- 1 Why You Should Buy An Investment Property Before First Home !
- 2 Availability of Distressed Property
- 3 Final Words !
Why You Should Buy An Investment Property Before First Home !
1. House Values Are at the Peak
Global House Price Index for 2020 from IMF shows an increase in house prices by more than 5% in 23 countries. The United States home value increased by 7.6% last year. It will increase by 6.4% within the following year.
The National Association of Realtors reports that most metro areas’ existing single-family home values have increased by 90%. This increase is because of the low inventory of houses for sale. The demand for homes is very high, while the supply is low. So the sellers receive offers well above the market value and make huge profits.
The home supply is deficient because the home builders find it difficult due to high costs and labor shortages. In the metros, the home builders find it even more difficult because of the permits and zoning. And regulations are stringent.
The demand for real estate is increasing because of the healthy labor market and sound economic growth, encouraging young millennials to buy their first home.
As mentioned above, the supply and demand ratio has resulted in a decline in home sales and an increase in prices. It is one of the deciding factors for first-time homebuyers to invest in the property rather than buying it to live in that house.
2. Low-Interest Rates
Interest rates to buy investment property are more by 0.5 to 0.875% than mortgage rates for a primary residence. It means that when you buy a house in which you do not intend to live, you have to pay slightly higher interest than when you buy the same place for living.
Even though your interest rates on an investment property are slightly higher, the money you get by renting your house can be used for paying the monthly mortgage and other expenses incurred by renting your home.
But buyers can get lower investment property mortgage rates by having a good credit score, maintaining a 43% or less debt to income ratio, having reasonable cash reserves to pay the mortgage for at least six months, and putting down more than 20%.
- Credit score
You may qualify for a low-interest rate if you have a credit score of more than 740. If your credit score is less than 740, you’re considered a risk to the lender, so they may turn down your loan application or have to pay a higher interest rate.
- Debt to income ratio
If you mean 1043% or less debt to income ratio, you’re perceived to be less risky to the lender so that you may qualify for a lower interest rate.
- Cash reserves
Your bank account must have enough cash to cover your mortgage payment for at least six months. This cash reserve helps you to qualify for a low-interest loan.
- Down payment
The lender decides how much money to lend you and the kind of mortgage you qualify for depending on the down payment you make on your home. You have a lower loan-to-value ratio when you make a big down payment. The lenders consider you less risky and reliable so that you may qualify for lower interest rates. It may also help you avoid fees like private mortgage insurance.
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3. Tax Benefits
Rental real estate enjoys more tax benefits when compared to any other investment. You can apply these tax deductions to save on your interest on rental property. The interest you pay on your mortgage loan and additional loans for the property improvement of your property can be deducted. Draw on your credit card usage can also be removed if the card is used concerning your rental property.
- Save on depreciation
Rental or investment property is a long-term tangible asset. It loses its value over time. It is called depreciation after the first year of ownership. For rental property, you can deduct depreciation in smaller amounts over a long period.
Other property expenses are deductible.
- Cost of insurance.
The premiums you pay on the insurance of your property are deductible. It includes Landlord liability insurance and insurance on fire, flood, or theft.
- Cost of repair
Cost of common repairs like. Repainting. Fixing leaky pipes. Broken windows. On your investment property. Is. Tax-deductible. Within. One year of its occurrence.
- Use of personal property
You can deduct the expenses incurred after a year when you use your personal property to furnish your rental.
4. Other Tax Deductions
Depending on your income, you can deduct up to 20% of net rental income. Or. 2.5% of the initial cost of rental property with 25% of the price. For any. Employees or independent contractors used. This Deduction holds good till 2025.
5. Consistent Monthly Cash Flow
You have to pay the monthly mortgage when you buy a home and live in it. But if it is an investment property, you rent it out. And the tenant pays your mortgage when the rent is. More significant than the mortgage you pay every month.
The extra cash starts building as equity. You can save this amount for the down payment of your next house or investment or use the money for paying your bills, debts, or rent of your present home.
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6. Create Leverage or Equity
One of the main reasons to buy an investment property instead of buying your first home is to create leverage or equity. When you buy an investment property and rent it out, the consistent cash flow helps you buy your first home after some years in the area you need, which you cannot afford immediately.
After some years, when you have to leverage enough cash to buy your dream house, sell your rental property, or use it as an investment. It will help you in getting loans to buy your dream house. The savings from your rental income can be used to make significant down payments, qualifying you for loans with a shallow interest rate.
7. It Gives the Flexibility to Relocate
If you have transferable jobs and relocation is a part of your life, then buying a house will reduce the flexibility to relocate. But when you purchase an investment property, it gives you the freedom to move when necessary, and at the same time, you reap the benefits of investment property.
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Availability of Distressed Property
Young first-time investors usually go for low-priced investment property.
If you two are looking for a budget-friendly, low-priced investment property, try exploring distressed properties and homes. When a homeowner fails to pay the mortgage or the property taxes, the house is a distressed property.
The lender typically takes back the property and tries to select for a much lower price and close the books. Here are your chances of buying an investment property for a lower price than it would be otherwise.
But be careful about the condition of the house and the taxes pending to be paid before deciding to buy a distressed property. You can buy it at a low price and sell it at a high price making huge profits.
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Final Words !
The house you want to live in could be unaffordable to you when you begin your career. Buying an investment property is the first step to buying the home you want to live in. You as a first-time investor should go for buy an investment property before first home and leverage this to accumulate enough money over time to buy the house you want.