Should I Buy Rental Property Before Primary Residence?

When it comes to investing in real estate, there are several factors to consider, including whether to buy rental property before your primary residence.

While it may seem counterintuitive, there are both pros and cons to this approach.

In this article, we will explore the benefits and drawbacks of buying rental property before your primary residence and what factors you should consider before making a decision.

Pros of Buying Rental Property Before Primary Residence

Generating Passive Income

One of the most significant benefits of buying rental property before your primary residence is the potential to generate passive income.

By renting out the property, you can earn a steady stream of income that can help cover the cost of the mortgage and other expenses.

If you purchase a property in a high-demand area, you can charge a premium for rent, increasing your profits.

Tax Benefits

Another advantage of owning rental property is the tax benefits. You can deduct expenses such as property taxes, mortgage interest, and repairs from your taxable income.

There are several tax benefits that are unique to rental properties, such as the ability to depreciate the property’s value over time.

Building Equity

Owning rental property can also help you build equity over time. As you pay down the mortgage, you gain more ownership of the property, which can increase its value.

If you make improvements to the property, you can increase its value, allowing you to sell it for a higher price in the future.

Cons of Buying Rental Property Before Primary Residence

Difficulty Obtaining a Mortgage

One of the biggest challenges of buying rental property before your primary residence is obtaining a mortgage.

Lenders are often more hesitant to approve loans for investment properties, as they are considered higher risk.

You may need to have a larger down payment and a higher credit score to qualify for a loan.

Increased Financial Risk

Owning rental property comes with inherent financial risks.

If you are unable to find tenants or the property requires significant repairs, you may be left with a significant financial burden.

If the property’s value decreases, you may be unable to sell it for a profit, resulting in a financial loss.

Lack of Flexibility

Another potential drawback of owning rental property is the lack of flexibility. If you decide to move, you may be unable to sell the property or may need to continue renting it out.

If you need to make significant repairs or renovations to the property, you may need to temporarily halt renting it out, resulting in a loss of income.

Reason To Buy Rental Property Before Primary Residence

There are a few reasons why someone may choose to buy a rental property before a primary residence:

Cash flow and investment potential – Rental properties can generate rental income and appreciated value over time, acting as an investment. This can help build wealth and passive income. A primary residence generally does not provide income or appreciates as much.

Leveraging other people’s money – With a mortgage, you can buy a rental property with a smaller down payment. The renters then help pay the mortgage through their rent payments. This allows you to leverage other people’s money (the renters and the bank loan) to build equity.

Tax benefits – Mortgage interest and other rental property expenses can offset rental income and provide tax deductions, reducing your taxes. There are fewer tax benefits with a primary residence.

Ease of real estate investing – Getting started with a rental property versus flipping houses can be easier. The rental property provides a more stable cash flow initially.

Flexibility – Rental properties provide more flexibility if circumstances change. You can always move into a rental property later if needed. But starting with a primary residence makes it harder to turn that into a rental.

Factors to Consider Before Making a Decision

Before deciding whether to buy rental property before your primary residence, there are several factors you should consider.

Financial Stability

One of the most critical factors to consider is your financial stability. Owning rental property requires a significant financial investment, and if you are not financially stable, you may be unable to cover the costs.

If you lose your job or experience a financial setback, you may be unable to continue owning the property, resulting in a significant loss.

Investment Goals

Another factor to consider is your investment goals.

Are you looking for a long-term investment that will generate passive income, or are you looking for a short-term investment that will provide a quick return?

Depending on your goals, you may opt to purchase rental property before your primary residence or vice versa.

Current Housing Market

Finally, you should consider the current housing market. Is it a buyer’s or seller’s market? Are rental properties in high demand, or are they sitting vacant?

These factors can impact the potential profitability of owning rental property and should be carefully considered before making a decision.

Is It Worth Buying Property in Colombia?

FAQs

What are the tax benefits of owning rental property?

Owning rental property comes with several tax benefits, including deductions for property taxes, mortgage interest, and repairs.

Rental properties have unique tax benefits, such as the ability to depreciate the property’s value over time.

It is essential to consult with a tax professional to fully understand the tax implications of owning rental property.

What is the minimum down payment required for a rental property?

The minimum down payment required for a rental property varies depending on the lender and the type of loan.

Generally, you can expect to need a larger down payment for an investment property than for a primary residence.

Some lenders may require a down payment of 20% or more for a rental property.

What should I consider when choosing a rental property to purchase?

When choosing a rental property to purchase, you should consider several factors, including the location, potential rental income, property condition, and expenses.

Researching the local rental market and the demand for rental properties in the area is also essential.

How can I finance a rental property?

There are several ways to finance a rental property, including conventional mortgages, FHA loans, and cash purchases.

Obtaining a mortgage for an investment property can be more challenging than for a primary residence, so having a strong financial profile and a solid business plan is essential.