Pros and Cons of Buying An Investment Property While You’re Still Renting

home renter looking to buy an investment property

Gone are the days of a traditional approach to, well, almost anything. College degrees are no longer the exclusive pathway to a career. Younger generations are getting married and starting families later in life, if they even do either of those things at all. Also changing is the tradition of going from renting to buying a small starter home before eventually buying a bigger home down the line.

Today some buyers are skipping right to purchasing an investment property and some are even doing it while they're still renting themselves. The downside of taking a new path, though, is that you have to do a lot of the trailblazing yourself. There aren't as many examples to follow. Determining whether or not you should buy a rental property before a primary residence is a major decision.

Luckily it's one that, slowly, more and more people are doing. No matter where you are in your decision-making process, here are the pros and cons of buying an investment property as your first home.

Buying a rental property as your first home: What to consider

There's a lot to think about when you're deciding whether or not to sink some serious cash into an investment rental property. Perhaps most importantly, you'll probably have to be in it for the long game since returns are usually low at the outset. This is especially true if your startup costs are high — if you don't have much for a down payment or you're planning on furnishing your rental.

However, "as you gain experience, your returns should improve as well as your knowledge of tax implications, which are generally very favorable for real estate investors," Edward Mermelstein, a lawyer and consultant for private equity and luxury real estate, told MarketWatch.

The particular city you're looking at will also make a major difference. Buying a rental property or investment property in New York City or Los Angeles is going to be a different proposition than buying in Cleveland or San Antonio will be. Because every location's real estate market is different, it's important to also look into any local rules or ordinances that might impact your decision.

For example, there are often local programs for first-time home buyers available in cities across the country like the homestead program in Minneapolis. You'll have to find out whether or not those programs are available to first time home owners who aren't using their property as their primary residence if that's your plan.

The pros of buying a rental property before your first home

Every person's individual situation is different, so the exact pros and cons of buying a first home as an investment property will be different for everyone. But in general, some of the up sides of investing in rental property before a personal home include:

  • The ability to buy outside of your local market. Especially if the city or region where you're living is home to high real estate prices, purchasing an investment property elsewhere gives you the ability to invest in an asset before you're able to buy locally.

  • Income from your rental property can be put toward buying your own home. If you have your sights set on a particular neighborhood or a particular dream home that's not quite in reach now, an investment property can help you get there. Once you start seeing returns, that money can be used for a down payment on your personal home.

  • You can invest in an asset before you're ready to commit to a home or city for yourself. One of the major downsides of renting is that you're giving your money to someone else every month. But just because you have a bit of money squirreled away that you're ready to invest doesn't necessarily mean you're ready to make other commitments. If you're still not sure where you'll be in five or 10 years, an investment property can be a good place for you to funnel your money until you are ready to pull the trigger yourself.

  • There are major tax benefits available to investment property owners. For better or worse, rental real estate comes with some of the best tax benefits available. Landlords can deduct the interest on their mortgage, many maintenance and repair costs, and more. However, it's important to determine your level of involvement first. "Are you a passive investor or a real estate professional," George D. Lambert asks in Investopedia. "Your classification as one or the other determines how your income and losses are treated."

The cons of buying an investment property as your first home

The upsides of buying an investment property can be pretty enticing, but there are some downsides to making the leap as well. Some of the common cautions around investing in a rental property rather than a private residence for your first home include:

  • The cost of maintaining a rental property. Whenever there are issues with your rental property, they're yours to deal with. That means that any repairs will be a cost that you'll have to shoulder in addition to the cost of rent you'll still be paying for your place. Plumbing, heating, and electric issues can add up fast, especially if your property is in another city or state and you have to rely solely on professionals in the area to carry out the work.

  • Capital gains taxes. When you see a home that you're living in, you don't have to pay capital gains taxes on any profit you make. When you sell a rental property, however, you will have to pay capital gains taxes on any profit you make.

  • You're still renting in the meantime. Each situation is different, but for many renters, there's a pervasive sense of unease that comes with renting. At any point the landlord could tell you to move out when your lease is up. It's seriously stressful to have to find a new place to live with short notice. If you have renters in your investment property, even that won't be available to you until their lease is up, so there's the potential to find yourself in a pickle.

At the end of the day, the decision is yours. The only thing you have to do is weigh the pros and cons carefully and make the best decision for you and your future.