For many first-time home buyers, buying an investment property as their first purchase may seem appealing. The chance to generate rental income while building home equity can be tempting. However, there are important factors to weigh when deciding if buying an investment property is the right first step. Carefully considering financing options, tax implications, and the responsibilities of being a landlord can help first-timers make an informed decision. Looking at both the benefits and challenges of buying an investment property first is key.
Evaluate if you meet lender requirements for an investment loan
Lenders have stricter requirements for loans to purchase investment properties versus primary residences. Often, a higher down payment of around 20-25% is required. Strong credit scores above 700 and a debt-to-income ratio below 36% are also common requirements. As a first-time buyer without proven experience managing rental properties, qualifying for an investment loan may be difficult. Coming up with a higher down payment amount could also be a stretch. First-timers need to seriously assess if they can meet the lending standards before deciding to buy an investment property first.
Consider hiring a property manager
Becoming a first-time landlord while also being a new homeowner can be overwhelming. Dealing with tenant screenings, maintenance issues, vacancies, and more all take time to manage. Novices may struggle balancing landlording duties with their regular job and personal life. Hiring a property management company to handle day-to-day oversight is an option, but eats into rental profits. Weigh if you can really devote the effort needed to effectively self-manage an investment property as a new buyer.
Factor in taxes and insurance costs
Owning rental properties comes with tax and insurance obligations first-timers need to include in their budgets. Investment properties do not qualify for the homeowners’ tax deduction. Instead, landlords pay taxes on rental income minus deductions for expenses, depreciation, interest, repairs and more. Higher rental property insurance rates also apply. First-time buyers should educate themselves on these costs before jumping into an investment purchase.
Assess your risk tolerance
All real estate investing carries risks like non-paying tenants, maintenance surprises, and market fluctuations. While buying an investment property as a first purchase can pay off over time, losses are also possible. Those with lower risk tolerance may want to start with a primary residence they can pay for comfortably. First-timers should think carefully before exposing themselves to the risks of rental property ownership right away.
In summary, first-time buyers can legally purchase an investment property, but will face hurdles getting a loan and handling landlording duties. Weighing financing, tax, and management challenges against the income potential is necessary. For many, buying their own home to live in first is the more prudent move.