Is it smarter to invest in real estate first, or buy a home to live in?
This is a debate which has very passionate advocates on both sides. The conventional mindset may be to buy and get more material things first, and then try to invest if there is anything left over. Others see that approach as being backwards, and refuse to bend to convention at the expense of their financial freedom and security. So, for those still juggling this chicken and egg question; what are the benefits of each path?
The Benefits of Buying A Home First
There are valid reasons to consider buying a home to live in first.
Learn the Home Buying Process
If you hope to invest in real estate, or even become an agent, it is smart to experience the home buying process first hand. It will give you a completely different perspective and a lot of hands on education. You’ll learn how it works, what’s wrong with the system, and what you can do to make it better.
There are many benefits of homeownership. Some of them are directly financial. Others aren’t. Data shows that children of homeowners seem to do better at school, and at keeping out of trouble. For some it brings great peace of mind, and acts as a launch pad for getting to the next level in life, while enjoying more peace of mind. Not everyone needs to own their own home to feel this, but some do.
Get a Head Start on Retirement
If you’ve got to use a mortgage to afford a home, buying now may give you a much-needed head start to have that home paid off by the time you retire. Note that for this to work you would have to be disciplined enough not to refinance and take out the equity, and would still have to keep up with taxes and insurance, even once you have no mortgage.
Reduce Living Expenses
For many it can be far cheaper to buy and own a home than to keep throwing away money on rent, which is just paying for someone else’s investment and lifestyle. Do make sure you work all the numbers though. Your true housing cost includes your mortgage payment, insurance, taxes, maintenance, and money for updating along the way.
Make Money to Invest
Buying a home at the right time and in the right area may provide big leaps in equity. That is wealth which can be leveraged to make a down payment on a new home, or to spread across several true investment properties.
The Benefits of Investing in Real Estate First
While it may seem weird to buy rental properties or invest in real estate before buying a home, it can make a lot of sense too.
A Residence is Not an Investment
Many investors argue that a home you live in is not a true investment or asset. It is simply a liability which costs you every month, and as you’ll always need somewhere to live you can’t really trade it objectively or liquidate it.
Generate Income First
Few first time homebuyers can afford their dream home. That gap can become even greater once they finance a home, and then take out loans for furniture and contractors, and borrow to keep up with the Joneses. Having anything left over to invest is rare. If you invest for cash flow and wealth building first, those investments cannot just pay for themselves, but your dream home, toys, and vacations, leaving any earned income as disposable cash to spend out having fun or to reinvest. And it can develop passive income which can afford the lifestyle you really want to live.
Even if you have no desire for frequent or long term travel, investing first opens up the whole map as your menu for buying property and investing. Some who live in high cost areas like California, New York, Washington DC, or South Florida can find it hard to find a home they can afford and would want to live in. When you invest, you can invest anywhere. You can invest in the most affordable destinations, and those with the best growth prospects and cash flow. You may not want to live there, but that’s okay, because investing is all about the numbers.