For some, buying a first home can be a major life milestone, so it’s natural to want to invest in a property you can call your own. However, some may consider investing in a way to generate passive income. One great way to do this is to instead purchase a rental property instead of a first home.

Read along as we discuss reasons why investing in a rental property instead of your first home may be a smart financial move and why you may want to consider it.

Why might you choose to become a landlord?

Why might you choose to become a landlord?

Who Should Invest in Residential Properties?

Younger individuals who may have fewer responsibilities may have more time and energy to invest in new ventures. Being more open to taking risks with personal property is essential if you’re considering becoming a landlord. Many landlords have to deal with some form of risk, whether in the form of missed rent payments, vacancy periods, or unexpected repairs. Individuals with a full-time job and still building wealth may be more apt to take risks with personal assets than someone with a family to support or other significant financial obligations.

Should I Do Research to Understand the Upfront Costs?

Real estate investing requires a bit of research, but the potential rewards can be significant. When deciding to buy a rental property versus buying a first house, there are a few factors to consider, such as location, vacancy rates collecting rent due, and median home prices.

In some areas, you may find you can buy a rental property at a much more attractive price than a primary residence. You might also find a rental property can generate higher cash flow through rental income and appreciation than a personal residence. If you’re willing to put in the work and do your research, you may also be able to find real estate bargains. This is where working with a real estate agent can be beneficial, as they can help you find the most bang for your buck.

Do I Put Less Money Down with a Rental Property Instead of a Primary Home?

One of the benefits of buying a rental property, as opposed to a primary residence, is you may be able to qualify for an FHA mortgage loan. FHA loans are a type of mortgage backed by the Federal Housing Administration for as little as 3.5% down. They require a lower down payment and more lenient credit score requirements from a mortgage lender than conventional mortgages. Keep in mind if you use an FHA loan to buy a rental property, you have to live in one of the units as your primary residence for at least one year.

Rentals as a Form of Passive Income

Perhaps the most attractive benefit of owning an investment property is the ability to earn passive income. If economic conditions support a monthly rent rate exceeding your monthly mortgage payments, then rent collected from tenants allows you to have a steady stream of income every month. You can use this income to pay off your mortgage, build your savings or even invest in other assets. It is a source of income requiring minimal effort if you have set everything up correctly.

Owning Rentals Can Help You Build Equity

When you own a property, you are building equity over time. As you gradually pay off your mortgage, the value of the property will appreciate, gaining more equity. You can also perform renovations on the rental to further increase your property’s value. Additionally, owning a rental property can serve as a great hedge against inflation – as housing and rent prices tend to increase over time, you can benefit from the growth in value.

Doing any necessary repairs to a property can be considered a tax benefit.

Doing any necessary repairs to a property can be considered a tax benefit.

Are There Tax Benefits to Investing in a Property Instead of Buying a House?

There are numerous tax benefits a rental can also offer. For example, expenses related to managing the property are tax-deductible. Expenses can include mortgage interest, property taxes, legal fees, repairs and maintenance. Depreciation can also be claimed on your property, which helps in reducing your taxable income.

Diversification of Your Investment Portfolio

Choosing to invest in a rental property over buying a first-time home can provide investors with the ability to diversify their portfolio. Investing in real estate as an asset class offers good returns and is generally not correlated to equities and bonds. This means by investing in a rental property you’re able to spread investments to different sectors of the economy.

Long-Term Growth Opportunities

Real estate is a long-term investment, and buying an investment property gives you the potential for long-term growth. While there may be some short-term volatility in the market, real estate generally appreciates in value over time. This makes it an excellent long-term investment opportunity. Plus, you also have the added benefit of rental income during the time you hold the property.

Valuable Experience

Finally, becoming a landlord or a property manager can be an excellent way to gain valuable experience in real estate investing. You can learn not only about property management, but landlord duties, property insurance, landlord insurance, and real estate law as it applies to prospective tenants by owning and managing your rental property. As you gain experience, you may decide to expand your real estate portfolio and invest in more rental properties, which can help you build your wealth and achieve your financial goals.

Investing in a property can provide regular income and provide valuable experience as a landlord.

Investing in a property can provide regular income and provide valuable experience as a landlord.

The Bottom Line

Choosing to invest in rental properties is an excellent way to diversify your portfolio and create multiple streams of income. Choosing to purchase a rental property instead of a first house may be an ideal investment strategy for those seeking long-term financial stability and generating passive income. By purchasing a rental property as your first investment, you can start building wealth and taking advantage of significant tax benefits.

Investing in a rental property should be something to consider if you’re looking to grow your wealth. If you want to learn more about consider a real estate agent, real estate broker, or even a real estate attorney who can help answer your questions.