If you have not read Are you planning for your Future? Real Estate Investing – Part 1 you may wish to start there.
This may seem beyond obvious but if you want to invest in Real Estate you should start by buying a house for you to live in yourself if you do not already own one. You would be surprised by the number of people that call me and want to invest in Real Estate with a rental property, but not for them to live in.
There are some cases where I understand that this may not be possible. As an example one person I spoke with needed to live close to his work, but home prices were prohibitive for him to buy a quality home, but he could afford an investment property in an out lying area.
Here are several reasons why you should buy your own home first:
• You can get the home with little or no down payment.
• You will get a better interest rate on an owner occupied home.
• Through FHA you can get good rehab loans on owner occupied properties.
• Why should you be paying rent to someone else when you need to build equity in a property of your own?
• If you go to flip the home after living in it you can avoid Capital Gains Taxes without having to do a 1031 Exchange. (I am not a tax expert and all tax issues should be reviewed with a tax expert. The tax rules are always in flux.)
• Your own home can provide capital for further real estate investments. This is hard in our market where there is not a lot of capital appreciation in home values, but long term it works and it can even work in this market with the application of sweat equity in the home. Either by flipping the home and buying another primary residence with the profits or by pulling money out with a refinance or Home Equity Line of Credit for the down payment on another home. Another option is to buy another home down the line as a primary residence and to turn the current home over to a rental.
A word of caution here is in order. Many people in the last few years have pulled a lot of money out of there homes with nothing to show for it. The only time to pull money out of a home is for capital investment in another home, long term home improvements (improvements that will last like an addition), or drastic emergencies. When pulling money out always access your ability to pay the mortgage on the new loan realistically.
• No one will take better care of the property than you – the owner.
• You may wish to buy a duplex or other multiplex home; living in one unit and renting out the others. For series investors this may be a very good option if you are starting out with little cash.
• Even if all you do is hang on to your primary residence and build equity the home is an investment that can prepare you for retirement. When you are ready to retire sell the home and buy a home to live in that is either a down size (therefore cheaper) or in another part of the country where homes are cheaper.
If you have equity in the when you retire reverse mortgages can be an option. I do not sell reverse mortgages and only recommend people purchase them when the absolutely need the money, not for Mad Money. You still retain your unused equity in a reverse mortgage, it will end any ongoing house payments you have, the lender cannot get assets beyond the house if they end up paying you more than the house is worth, and you get to stay in your home. The down side of reverse mortgages is large up front fees and you may not have the equity in your home left to pay for assisted living or other things you may need when you move out.
Reverse mortgage products are always changing and I suspect there will be more diverse reverse mortgage products on the market in the future.
Here is more information on First Time Home Buying. Please contact me with Questions.
If you are buying your first home and intend to sell or flip it in a few years or a few months, or buy another and rent your first home out, wisely consider how much money you invest in upgrades and improvements. We all want nice homes and many of us are willing to pay lots of money for upgrades to those homes. This is great if it is for your own pleasure and enjoyment, however, the return on investment if you plan to sell or lease the home should be strongly considered.
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