By Peter Aleogena
An investment property is a property that pays you rent every year. It gives you cash flow. A primary residence, on the other hand, is a property you live in with your family—a place you consider your home.
The decision to either buy an investment property or a primary residence first totally depends on where you are on your journey of life or your journey to financial freedom, and how fast you want to build your real estate portfolio.
All principles are universal, but their applications are personal and are influenced by context and geographical location. For instance, on planet earth, everything you throw up is bound to fall down because of the force of gravity. However, this does not apply on the moon.
Real estate may be the best investment option possible, but nobody ever thinks of buying real estate in a war-torn location. It is, therefore, necessary to consider your goals and priorities when faced with the decision of the type of property to buy first. Let us quickly look at the advantages of owning a primary residence versus those of owning an investment property.
Primary Residence
Buying a primary residence is a massive achievement. It is a reward for your many years of hard work. It provides security and stability for you and your family, and you finally become your own landlord. You are free from the harassment of landlords, and you do not have to constantly move around because the landlords have need for their property or constantly worry about the increment on your rent. You can even increase the value of the property by renovating it and bringing it up to the standard you desire. It can also be used as a collateral when you need to take a loan from the bank.
However, if you take out a loan or mortgage to purchase your primary residence, it reduces your borrowing capacity to buy another property. You will have to keep working to pay up the loan or mortgage. Hence, this reduces how fast you can build up your real estate portfolio.
There is also the temptation to keep renovating and improving the property, which can easily lead to overcapitalization. This is a situation where the improvement on your property is beyond that property’s resale value in its current location.
If real estate is not your primary vehicle to financial freedom, or you are retiring and just want to buy your first property to give you and your family the well-needed security and stability in your retirement years, then it makes perfect sense to buy a primary residence first.
Investment Property
If real estate is your primary vehicle to financial freedom, then it makes better sense to buy an investment property first. This will help you scale faster.
If you take out a loan or mortgage to purchase your investment property, the income from the property can be used to pay up the loan or mortgage, while you keep renting and saving some of the income from your work or business.
Buying an investment property first gives you the leverage to buy more properties faster than owning your home first would. And as you increase your real estate portfolio, the effect of compound growth knocks in, helping you build your asset base faster.
If you are young, you do not have a family yet or you have a young family and you have chosen real estate as your primary vehicle to financial freedom, then it is better to delay gratification and keep renting so as to afford you the opportunity of buying an investment property first. This will enable you to build your asset base faster, after which you can then buy your primary residence.
My Recommendation
You can have both an investment property and your primary residence in one transaction. You can move to a lower location with growth potentials and buy or build multiple units whether a block of apartments, semi-detached bungalow, semi-detached duplex or town houses. You can live in one of the units as your primary residence and rent or lease out the other units. This gives you the benefits of both worlds, and you can scale faster and move to a prime location.
I will end this article by encouraging you to evaluate your goals and plans so as to consider the best course of action for yourself and your family. Thank you for reading.