8 Reasons why your first house should be an investment property

You might be thinking about whether to it’s a good idea to turn your house into an investment property or not. Whether you are a beginner buying a starter house, or you already own your home, this article will show you how you can make your money work for you by investing in a house and then turning it into a rental property. We share creative tips for being able to afford a starter house and disclose the mistakes we made so you don’t make the same!

Buying rental property doesn’t have to be complicated

When I talk to people about purchasing a house as an investment property, they often say it seems like so much work or that the process feels too out of reach. This is why I recommend starting with the house you are buying as your first home, and then instead of selling it, when you need to upgrade, simply keep the home and turn it into a rental.

I made the mistake of selling the first house I purchased. I could kick myself for not listening to my lender who was trying to convince me to keep the house. After purchasing many homes and rental houses through the years, I can see my initial mistake very clearly now. I want to at least share my tips for purchasing a house to turn into a rental with you so you run the numbers and don’t let fear get in the way.

Typical timeline for a financial journey…

Here’s a financial timeline for the average person:

Go to college

Get Your First Job

Rent Your First Place

Get Married

Rent Your Second or Third Place

Buy a Starter Home

Have Children

Buy a Bigger Home

Help Children with Education

Invest money in the market

Retire

Our journey was NOT normal, and I would encourage you to try a different way with rental property investment

The biggest reason I had financial success earlier in life is because I did not take the normal route when it came to money.

I worked for someone while attending college and realized very early on that to accomplish my goal of early financial freedom, working for someone else was not going to cut it. I was basically working to make someone else rich, and that didn’t sit well with me.

I quit within a year of working and decided to side hustle until one of my own ideas took flight.

That’s when I started a balloon business and made deliveries of balloons and helium. My new business took off and within 2 years, I was making more than I could have made as a employee fresh out of college.

The business paid for my college expenses (you can read more about my business paid for college here). And the income from my business also allowed me to live in an apartment instead of the dorms.

Buying my first house and how it could have been the perfect investment property

Within 3 years of starting my business, I started to realize that the money I was making was being wasted on rent. It was hard for me to see my hard earned money going towards making my landlord rich.

I started looking at house listings and stumbled upon a suburban community with newer homes. At the time, the houses were selling for $120,000. It sounded like such a huge number to me and I quickly got scared and decided to wait.

But within one month, those same houses were now selling for $150,000!

I decided to not let fear get in my way any longer, and I took the plunge to purchase a house.

I lived in the home for just three years, and in that short amount of time, the house value increased to over $300,000!

The neighborhood was changing quite a bit and things started to feel off. The house was also too small for our growing business, and all the signs were telling me it was time to go.

Moving on to a bigger house

I found a bigger home in a better location for the business, and started looking into the process of selling our current home. Our lender gave me the most incredible advice about our starter home. She said, “You don’t need to sell it to qualify for the new house. Just keep it and rent it out.”

And I didn’t listen…

Ooooooo, I could kick myself. Every time I tell that story, it’s like I want to travel back in time and tell my old self, “Don’t sell it!” But no, I thought I knew better and went ahead and sold.

We put the starter home on the market, and it sold in just one week. We made a profit of just over $100,000.

What I wish I would have done differently with the starter home

Financially wise people were trying to give me sound advice, and I wouldn’t listen.

It wasn’t until ten years later that I learned my lesson and gave investment property a chance. I wish I would have listened the first time around and learned sooner!

If I had sat down with the lender and allowed her to run numbers with me, I would have seen very clearly that not only did I not need to sell our first house to buy the next one. I would have seen that we could cash flow as landlords!

That’s right! We could have turned our starter house into an income producing asset!

AND, we would earn enough cash flow to pay off the house in 10 years instead of 30! So after 10 years, ALL of the income from the property would have been profit (of course with some expenses for insurance, property taxes, and repairs).

Yes! Big Oooops!

All I had to do was listen to someone wiser than me and run numbers… that’s it!

Check out more about our rental property story by watching our Youtube channel! You can watch us behind the scenes on how we invest in and improve investment property. Keep reading for the 8 reasons why your first house should be a rental.

8 Reasons why your first home should be an investment property

I’m obviously writing this article so you don’t make the same mistake I did with investment property. I don’t care what your circ*mstances are and all the reasons you think you might not qualify, PLEASE just allow yourself to open up to the many options below.

Being young has it’s advantages

Investing your money early ALWAYS sets you up for greater financial success down the road. The sooner you buy a house, the cheaper you are getting into the market. My wise dad always told me if he could invest in his twenties the way he started investing in his fifties, he would be a millionaire over and over. Take advantage of being young and having time to save and invest now! Check out this article about how to buy a house in your twenties…

It’s a better place to spend your money

Ask yourself if you could forego a little bit of spending money to make up the difference to pay for a mortgage. If you are renting, there’s a chance you are not too far off from affording a starter house payment.

Let’s say you pay rent for 5 years, and you are paying $1000 a month. You will forego $60,000 which could have gone towards the purchase of a house!!! AND, I’m being quite generous here… if you rent, most likely, your rent will go up about every 3 to 5 percent every year. A benefit to purchasing a house is your monthly mortgage stays the same (depending on the loan). With time, you could even refinance and decrease your monthly mortgage!

Real estate is cheap in the now

If you wait down the road twenty years to buy a house, it will most likely be more expensive. Real estate climbs in value on average 3 to 5 percent per year. A house valued at $150,000 today will be worth over $270,000 in twenty years (at 3%). If you buy sooner, you are giving yourself more time for the house to appreciate in value.

The tax write-offs make it more affordable than you think

When you buy a house, the mortgage payments include your interest and principle. At tax time, you get to write off the interest. But that’s not all! If you paid points on the loan, you might be able to write them off. Property taxes can also be deducted (which can be huge in some states!)

After taking these deductions into account, you might actually come out ahead when purchasing a house.

Once you turn that house into a rental, you can deduct things like advertising, cleaning, commissions to rental agents, and repairs.

Buying a house as investment property establishes your credit

According to FICO, the types of credit you use accounts for about 10 percent of your credit score. A mortgage loan is considered an installment debt (like a student loan or car loan). You need a balance of installment debt along with revolving debt, such as credit card accounts, to build a great credit score. If you already have credit cards, and no installment debt, then a mortgage loan could greatly benefit your credit score.

Making payments to a rental property improves your credit

Making on-time payments to your bank for your mortgage loan is even more important for improving your credit. Your ability to make regular payments on time makes up 35% of your credit rating. This makes your payment history the number one factor for influencing your credit. If you fear you might miss payments, many banks offer automatic bank drafts to help make your payments on time.

Rental property provides you with leverage

When you purchase a property and make payments over time, at some point, you will have equity in the home. You can always use this equity as leverage and borrow against the house to either move into another home or purchase more rental properties. The value of the house must go up over time for this to work, but as mentioned earlier, traditionally, the house values tend to increase.

Borrow against rental property in a real emergency

Having equity also means you can borrow against the house when an emergency arises. Also, you could list the house as an asset if you wanted to start a new business and get a loan.

Owning a house provides you with so many more financial options that you may not have if you continue renting.

Builds your investment portfolio

As mentioned earlier, this house you purchase becomes an asset which you can add to your investment portfolio. You’ve probably heard the phrase, “Diversification is key in investing.” When you purchase a house and then rent it out, it now become an investment vehicle working for you!

Easing your doubts about investment property

You may have some doubts about whether you can purchase a house or get into rental properties. Here are a few thoughts about some major things that come up when it’s time to make the big decision about buying a house:

Not sure about where I want to live-

Maybe you are unsure about where you want to settle down. Buying a house doesn’t have to be a permanent decision. Many lenders in the real estate industry will tell you to make sure you can stay in the house for at least 5 years to make the house purchase worth your while. This is because you may spend thousands on closing costs. But with the option of always being able to turn the house into an investment property, you can still move out of the area and explore living in other places while the house works as an investment for you.

Let’s say you buy a starter home, but then discover you need to move for a job. You can always turn it into a rental property as well!

Okay, BUT HOW do I buy a house now if I don’t have lots of money saved?

First use a few real estate calculators or sit down with a lender or CPA. Here is a great calculator for determining whether a property will cash flow, break even or require some out of pocket money.

Then check out the types of loans available to you. An FHA loan or other creative types of financing could help you qualify. Check with your local lender to find out more.

One creative way of qualifying for a loan is to pool your money together with family. If many family members will be sharing the house, then see how much each person can offer from savings.

Once you have the house, you could rent a room or two or three to bring in extra income. A friend of mine did this to pay for his first house and he paid it off in ten years saving him thousands of dollars in interest!

Look into distressed properties or properties that need a lot of work. If you are feeling priced out of the market, buying a foreclosure, short sale or REO could be your saving grace. Many times you have to purchase the property as-is, but if you like to work on houses, then this could be a great investment opportunity!

Finally, start a business! This is what I did to increase my wealth faster. Starting my first business allowed me to write off expenses at tax time and keep more of my income in my own pocket. This led to me being able to buy a house in my early twenties! If you need help getting started, head over to Be Passionate and Prosper How to Start a Business.

What are your thoughts about purchasing a house to turn it into an investment property? Does it seem like an investment you would like to try out? What steps can you take to make it happen?

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