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Why First Homes Could Be Investment Properties

Investment Property

If you’re young and looking to purchase a new home to live in, you may want to consider turning it into an investment property. While most people wait until after they’ve bought their first or second home to begin investing in real estate, you might be able to start much sooner than you think. However, taking on this kind of venture is no small task. Consider speaking with a financial advisor about what you’re envisioning beforehand.

Buying Your First Home as an Investment

Many people, especially in the wake of the mortgage crisis, have found themselves wondering: “Is buying a house a good investment?” One way to ease your worries about whether buying a house will pay off is by renting out the first home you buy. By turning your home into an investment property, you can leverage your less-than-perfect credit, less-than-perfect lifestyle and limited responsibilities into an investment. All it takes is a little bit of smarts and real estate shrewdness.

The idea of making your first home an investment goes against the general notions of personal finance. In fact, it goes against how most people approach post-college life. The typical financial timeline for your average American adult might entail going from college to a first job to renting an apartment to marriage and buying a home, and so on and so forth.

There’s nothing wrong with following that timeline, since it can give you plenty of time to build credit, save money and enjoy being young. But if you’re a 22-year-old college graduate with a solid job, waiting until you’re well into your 30s or 40s to start investing in real estate might not be wise.

Here are four reasons why you should entertain the idea of investing in real estate while you’re still young.

Reason #1: You can handle more risk while you’re young.

Being young and independent can be pretty amazing. You can make your own rules, live where you want, buy what you want and travel whenever you want. But that can get old pretty quickly, especially if you have other goals in mind.

All the money you’re currently spending “living the life” while living in a crappy apartment could be spent on something else. Saving money and building credit aren’t impossible and they’re part of what you’ll need to qualify for a mortgage loan (more on that below). Your current lifestyle might actually allow you to cut costs in a way that might not be possible later in life when you have larger obligations.

If you can learn how to effectively manage your money, you can come up with enough cash for a down payment.

Reason #2: You can find bargains in certain real estate markets.

Investment Property

According to recent reports from National Association of Realtors home prices are on the rise. However, most real estate markets present many bargains to potential buyers in the form of distressed sales. Distressed sales are homes or properties that have usually been foreclosed on that the bank is willing to sell at a loss in order to clear its books. These distressed sales also help drive down the cost of all properties in the area.

There are plenty of distressed homes for sale. Buying one would allow you to own an investment for significantly less than market value, especially as prices begin to rise. Before buying any property, however, it’s important to make sure you purchase a house that you can afford.

Reason #3: You’ll have another major source of income.

If you are purchasing a property that you plan to rent out, you’ll be able to profit off your investment as soon as you find tenants. Then you can take the money you earn and reinvest it in your property or use it to pay off other bills and debts.

Reason #4: You can take advantage of an FHA loan.

Industry standards say that you’re required to put at least 20% down when buying a house. But if you can’t afford to pay that much, you might be able to purchase an investment property as little as 3.5% down by getting an FHA loan.

FHA loans give people who don’t have the greatest credit the chance to become homeowners. If you decide that investing is for you, an FHA loan could be the perfect way to finance the purchase. There is one catch, however, FHA loans require that you live in the property you seek to purchase. To get around that rule, you can purchase a property with up to four rental units and make one unit your primary residence.

Bottom Line

Taking out a major loan for real estate might seem like a daunting venture, but there could be major upside to it. This is especially true if you can take advantage of the various perks associated with FHA loans. However, make sure you do your due diligence before investing in anything.

Tips for Becoming a Real Estate Investor

Investment Property
  • If you think real estate investing could be right for you but aren’t sure how to start, you may want to find a financial advisor who can help you understand all your options. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re nervous about making a large purchase of a home, there are other ways to get into real estate. Check out SmartAsset’s guide to REITs and real estate investing to learn more.

Photo credit: ©, ©, © Chernaev

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