Some Tips On Buying Investment Property vs Buying a Dream Home.
Q: My primary residence is under contract and I am trying to make a wise decision around my next home purchase. I am trying to decide if I should purchase a “dream home” that I could see myself living in for many years, or a much less expensive home that I could pay for with cash, live in it a few years, and then turn it into my first rental property.
The interest rate for a loan for the dream house is less than 5 percent and I would put 20 percent down. I can afford the nicer home, but I wonder which scenario is better for me in the long term financially. I know ultimately this is a personal lifestyle choice, but I am interested in your opinion from an investment standpoint. Thanks for all the great information!
A: I think it’s tough to look at investing in real estate unless you simply look at the dollars and cents of it.
Certainly, if you can put down 20 percent and the house is affordable at a super-low 30-year fixed-rate loan, and you plan to stay there for 7 to 10 years, then you should buy the house you want to live in for that amount of time.
In terms of affordability, we won’t see these low prices again for a long time. And, you will get the benefit of living in the home of your dreams for years to come. There’s a value to living in that home to you but that may not make it the best decision if you’re evaluating it based strictly on its investment potential.
Over time, you’ll do better by purchasing your “dream house” or rather, your “dream location” with maybe a nice enough house that you can get at a particularly great price and fix up over time.
The smartest thing you can do is buy the best location you can afford. Keep that tip in mind, even when you’re renting a property, location matters.
If you’re looking purely for investment, then you have to look at a neighborhood where you can buy a property and finance what you can for it without paying through the nose in fees and interest expenses and then generate a fair amount of income from it once you decide to move on. Again, location is important, but you should also consider how easy it will be to rent the property, who can afford it, and how you would find your renters.
Finally, you need to evaluate whether you can earn enough money from the rental of the property to justify the monthly expenses. If you assume that real estate values will be flat for some time, will that investment in real estate pay off over time with rental income that increases over the years? Or will you need to rely on appreciation of the real estate to make the investment work out?
If you can’t answer those questions to your satisfaction, you’re better off buying a home that you’ll love and enjoy. Another tip that you should keep in mind is you are better off buying the right property for the long term, than buying the wrong property for the right reasons.
My sense is that you should buy a home that can become your dream home while still being a good investment.