Looking for an affordable way to become a first time homeowner? One strategy is to buy a rental property as a first home. As long as you live in one of the units for a specified period of time, you can rent the others units out, using the money to cover the mortgage. Best of all, you can purchase the home with a single, low down payment mortgage. This is called owner-occupied investing.
A first time homebuyer can certainly purchase a rental property. This can be a wise strategy for an important reason that is often overlooked. One way to earn money in real estate is to have your property grow in value over time. The sooner one enters the market, the longer the property can accrue in value.
At the same time, it’s important to be realistic in your expectations. As with any investment, rental property isn’t going to produce a large monthly paycheck right away, and picking the wrong property could be a catastrophic mistake. Still, rental properties can be a lucrative way to invest in real estate as well as provide you with an affordable first home.
“The key point to remember is that real estate rentals provide three powerful wealth-building forces: rental income, asset appreciation, and mortgage reduction.”
Justin Pierce, Washington Post
The mistake most first time landlords make is paying market price for any old home on the market. Any house at any price won’t necessarily make for a good rental. Step one to making money is to buy the house at the right price based on both market value and rental income. You need to find the bargains.
Pros and Cons
Here are some of the pros and cons of purchasing a rental property as your first home:
Pros
- You can live in one unit and rent out the other(s) to help pay your mortgage.
- You can buy an owner-occupied property with a low down payment.
- After living in the property for a period of time, you can move to another property and rent out all the units for rental income.
Cons
- You’ll have to manage tenants.
- You’ll have less privacy living right beside your tenant.
- You’ll be responsible for maintenance and repairs on all units.
Owner-occupied rental properties allow for FHA loans with low down payments. These loans mean that as a first time homebuyer you can break into real estate rental investing quickly. You need to live someplace anyway, why not live in your investment?
Owner-occupied rental properties are a great way to buy an investment property at any time in one’s real estate business. However, it is ideal at the beginning. One reason is that the loan requires that you occupy the property for a number of years, typically two. Only after that can you move out and on and rent the whole property out.
Being a landlord can be a good way to earn real estate income, but it’s not easy or glamorous. In addition to choosing the right property, prepping the unit, and finding reliable tenants, there are always maintenance considerations.
Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody to do it for you or you could hire a property manager, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money.
“The great thing about owning a property is that you can leverage it to purchase additional income-producing properties. In addition to the rental income you earn, you’ll also gain equity as you pay down the mortgage and as the homes’ values increase.”
Erik Martin, Home.com
Remember, this is not your “forever home.” You don’t have to be in love with the setting or neighborhood. If you’re like most first time homebuyers, you are most likely going to buy and move out in a handful of years, so it’s important to look for the best value.
The Bottom Line
Buying an owner-occupied rental property can be a smart strategy that allows you to receive a steady income stream that will lower your overall homeownership costs. It can also help you build equity and create new financial opportunities for yourself. But you have to be prepared for the responsibilities that come with being a landlord and managing a rental property.
As always, I am here to help with all aspects of purchasing your first home – whether it be a single-family home or an owner-occupied rental property.
