Should our first property be a residential home or an
investment property?

For the umpteenth time this year I received an urgent call, “Cherita, this house has become a noose around my neck. Help me to sell it please.”  I can’t help but to wonder, in the midst of these outcries, if buying a residential house at the first opportunity instead of an investment property has caused many of us to feel trapped by our mortgages.  Should our first property be a residential home or an investment property?

From school days we have been programmed that we should get a good education, get a good job, rent for 2-3yrs, purchase a starter home, have kids, expand the current home or buy a second home.  There’s absolutely nothing wrong with following this timeline. At a young age this model can facilitate living freely, dining out endlessly and traveling without a care in the world. Enjoying substantial discretionary income is awesome but stewarding one’s money with wisdom could still simultaneously facilitate building credit and saving money.

At a younger age, when obligations are not as large, it is the perfect time to cut costs and start building wealth.  By effectively managing your money you can eventually come up with cash towards your down-payment.

There is such a glut of property on the market that it is possible to find a distressed property at significantly less than market value.  “But, what if I want to purchase somewhere to live in addition to having an investment opportunity?” Great question. There are properties which have the advantage of dual features – a main house with additional apartments or there are complexes which offer sizeable units that can suffice for residential use while you earn an income off the others.

The reality is that, as soon as you find a tenant, you can start to profit off of your investment.  You can take the money that you earn, pay off the mortgage, reinvest it into your property, pay off other bills and debts and even save.

The plus side of the investment property approach first, is that if you purchase right now, you are buying in at the bottom of the market upturn and able to look forward to a future upswing in the value of your investment.  You are able to pay off your property using someone else’s money and eventually create a financial stream that is separate and distinct from your retirement plans and other savings instruments and not subject to the same risk.

Is it therefore the status quo and trying to keep up with the Jones’ that make many of us not even consider investment property as our first option?  So, you may not have your dream house from the onset but the investment approach could perhaps better steer you into taking financial control of your destiny.

So, what is the downside?  Well, for starters, you might not be able to get away with a residential interest rate unless you plan to live in the property initially.  Some banks are stringent that apartment complexes for example should be treated as commercial property, hence higher interest rates and higher monthly payments.

In addition, being a landlord is not for the feint of heart.  Unless you screen your tenants like a military officer screens his recruits, there is the possibility that you can get a bad card, that tenant that doesn’t pay on time, messing up your cash flow and giving you stress every month as you hunt, chase and reprimand for your late rent.  Also, as regards expenses, tenants can do more damage than you realize and at the end of tenancy you might have to spend a ton just to bring the property back up to scratch. And, of course, they are those unexpected expenses.

Even though not initially being experts, some people swear that buying an investment property first was the best decision they could have ever made.  They are not only excited about the prospect of adding more real estate to their portfolio but about riding on that passive income in years to come.