Should your first home be a primary residence or investment property? The “traditional” path is to buy a primary residence first, but we’ll challenge that line of thinking in this article by comparing the two options, weighing the pros and cons, and sharing an investment strategy that could allow you to buy both!
Summary:
A primary residence is the home that you occupy for most of the year. You can only have one primary residence at a time, and it’s usually the address listed on your driver’s license, tax returns, and other important documents. A rental property can also be your primary residence if you occupy part of the property while renting it out.
An investment property is a real estate asset you buy with the goal of making a return, which can be through rental income, appreciation, and tax benefits. Investment properties can be residential, like single-family or multifamily rentals, or commercial buildings, like retail or office spaces.
Primary residences and investment properties can be indistinguishable from the outside, but there are key differences between these two types of assets. Here’s what you need to know about down payments, interest rates, and other factors when buying these properties:
Generally, you can put less money down when buying a primary residence than you can when buying an investment property.
Primary Residence: With VA and USDA loans, you can put as little as 0% down on a primary residence. Other loans, like conventional and FHA, require 3%-5% down.
Investment Property: You’ll need 20%-25% for most investment property down payments, but Rent to Retirement allows you to put as little as 5% down on select new builds.
Buy your first investment property for just 5% down!
While interest rates depend on the borrower’s financial profile, you can usually get a lower interest rate on a primary mortgage than on an investment property, all things equal.
Primary Residence: For a primary residence, VA and USDA loans have some of the lowest interest rates, followed by FHA and conventional.
Investment Property: Generally, investment property mortgage rates tend to be around 0.5%-1% higher than primary residence mortgage rates.
Investment properties are much easier to rent out than primary residences, which can’t immediately be turned into rental properties unless you use house hacking strategy.
Primary Residence: While you can rent out part of your house while occupying it, you cannot turn it into a full-time rental property right away. Most lenders require you to live in the property for at least one year first, unless your situation changes dramatically.
Investment Property: You can rent out an investment property immediately, and with turnkey rentals, property management and tenants may be in place on day one!
There’s some crossover between loan types, but for the most part, primary residences and investment properties require different loan programs.
Primary Residence: For primary residences, there are government-backed loan programs, like FHA, VA, and USDA, as well as non-government programs like conventional loans.
Investment Property: You can get a conventional loan for a rental property, but there are other types of loans for investment properties, too—like portfolio loans and debt service coverage ratio (DSCR) loans, which are approved based on the property’s projected income rather than your personal income.
Let’s look at when it might make more sense to buy a primary residence than an investment property and vice versa:
If you live in a market where owning a home may be cheaper than renting, buying a primary residence could be a great move. Just be sure to account for maintenance and repairs when doing the math!
In many (but not all) markets, it’s cheaper to rent a home than it is to own one. This means you could save money on your personal living expenses and allocate more money to investments instead—like an investment property!
Your home can simultaneously be a primary residence and a rental property if you use the house hacking strategy. This is when you rent out units or rooms to tenants while continuing to occupy the property yourself.
Whether you’re renting to tenants or forcing appreciation with renovations, an investment property can produce additional income streams—money you can use to supplement your W-2, save for the future, or reach retirement faster.
If you’re eligible for a VA or USDA loan, you could buy a primary residence with as little as 0%-down financing (and get other incentives, too). You can’t get these kinds of terms with most investment properties!
If you plan on changing jobs or relocating for work, it may not be worth it to commit to a primary residence just yet. However, you can buy an investment property anywhere and invest remotely, so there’s no impact to your property when you move. You just need to hire a good property manager!
You can buy a primary residence or an investment property, but why not have both? Since Rent to Retirement offers 5%-down options for new builds, you could roll a 10% down payment into two properties—5% on your primary residence and 5% on an investment property (provided you meet all financial and DTI requirements). This could allow you to start building wealth while also having a permanent place to call home for you and your family.
Traditionally, most people buy primary residences before investment properties, but it’s becoming more common to start with an investment property. If you live in an expensive area of the country, like Los Angeles, you might not be able to afford a $1,000,000 primary residence, but you might be able to afford a $300,000 investment property in Georgia or South Carolina.
What’s more, many people also prefer renting a home since they aren’t responsible for repairs. This concern still exists when buying an investment property, but thankfully, with new build turnkey properties, your systems are all new and you may not have to worry about as many repairs!
Regardless of whether you’re buying a primary residence or an investment property, you’ll need to make sure your financial house is in order first. If you haven’t already, start working on the following:
Your credit score is one of the primary factors most lenders consider when approving you for a mortgage. Minimum credit score requirements vary depending on the type of loan program, but generally, you’ll want to aim for 580-620 and above for FHA and conventional loans, respectively.
Lenders often bring the bulk of the funds to closing, but you’ll still need enough money for a down payment, closing costs, and reserves. If you’re buying an investment property, you’ll usually need to put 20% down (for example, $60,000 on a $300,000 property). However, you could put much less down with Rent to Retirement’s 5%-down loan options on select new builds—leaving you more money for reserves and other investments!
Next, you’ll want to connect with a lender and get pre-approved for a mortgage. This will give you a better idea of what you can afford, and a pre-approval letter lets sellers know you’re serious about buying. Rent to Retirement can connect you with nationwide lenders!
Your finances are in check, and you know your purchasing power. Now it’s time to start looking for properties that fit your buy box. If you’re buying a primary residence, you’ll be tied to one area, but if you’re buying an investment property, you can handpick a market that fits your investing goals. Rent to Retirement has turnkey rental properties for sale in over a dozen of the best places to buy rental property!
Still not sure if you should buy an investment property or primary residence first? With Rent to Retirement, you may not have to choose! Put 0%-5% down on your own home and then buy a turnkey rental property with our 5%-down financing!
This strategy gives you a place to live and an investment property that generates monthly cash flow and grows your net worth. The best part? Our turnkey rentals are professionally managed and require very little upkeep, meaning you can invest out of state and have a property manager handle all of the typical landlord duties!
When getting a mortgage, the lender will usually verify that the home will be your primary residence based on its distance from your workplace and by having you sign an affidavit stating that you will occupy the property for at least 12 months. Don’t take the chance with mortgage fraud. Lenders can “call the loan,” which means the entire mortgage balance is due immediately.
Whether you should pay off your primary residence or investment property first depends on your financial situation and the loans on each property. The interest rate on your investment property could be higher than that of your primary residence, in which case paying off the investment property first might help you save on interest. However, if one loan has a much lower balance, it could be worth paying it off first to eliminate one mortgage payment sooner!
The 2% rule is a guideline (albeit an outdated one) that real estate investors may use when analyzing rental properties. It states that a rental property should generate 2% of its purchase price in monthly gross rental income—a number very few rental properties make today!