Permanent vs. Investment Property

Permanent Residence

How long will you live there?  You may have caught the bug to buy a house instead of renting, but you need to take a good look at how long you intend to stay in the area.  You will find that most of your mortgage payments in the first few years go towards interest instead of the principal balance, and if you rolled any of the closing costs into the loan as well then turning around to sell the house a couple of years after buying will more than likely result in you taking a loss instead of a profit. 

Home buying is best left to the folks who know for sure that they will be in a home for at least two years…and that's at the very minimum…so a person subject to moving often (such as a military person or a college student just about to graduate and go look for a job elsewhere) would probably be best served by a rental home.  If, however, you have a pretty good idea that you will be staying at this home for a few years then purchasing makes sense as long as all the financial factors make sense.

Is there a possibility of growth for your family? If you and your spouse are daydreaming about starting a family soon then it probably isn't the time to go buy a one-bedroom condominium. You need to take into consideration what sort of family dynamic you intend on having in the future.  Future children aren't the only issue either; if an aging parent expects to someday move in with you then you need to think about the extra room you will need when this does take place.  Look further than the present and try to do a rough estimate of what your future needs may be.  

How many homes should you look at? The numbers of homes you look at while looking to buy depend a lot on how much time you have.  If you currently have a nice place to stay and there is really no rush then some real estate experts suggest seeing as many as a hundred different homes.  This is quite time consuming, of course, but with every home you see you are increasing the odds of finding the perfect home for you. 

If, however, you are in the sort of situation where you have just transferred to the area with a new job and need to find a home immediately then you probably don't have the luxury of viewing a hundred homes unless you are incredibly motivated and caffeinated and can convince people to show you their homes at odd hours of the night.  Never ever take the first home you see… even if you fall in love with it right away.  At the very least view a few other houses before making your final decision.  You may indeed wind up buying the first home you viewed but it will be a more informed decision if you see other houses too.    

Investment Properties

Don't be shocked when the interest rates are higher.  If you need to finance the purchase of an investment property you should know that in most cases the interest rates are going to be much higher than if you were purchasing a primary residence.  Why is this? Banks and other mortgage lenders generally prefer to lend money for primary residences because they statistically have a much better payback rate than investment properties.  Think about it; if you find yourself in a financial emergency, which mortgage are you more likely to pay first…the one attached to the home you live in or the one attached to your rental property. 

Lenders know that most people would rather allow an investment property to go into foreclosure long before they would consider something like that for the roof above their own head.  So even if you just financed your own home at a great interest rate don't expect a similar rate when you inquire about an investment property.  Of course it is always best to purchase investment properties with cash, but since this isn't always the feasible option for everyone it is important to be prepared to deal with higher rates. 

Do you want to be a landlord?  Many people procure real estate through the years in order to secure some retirement income.  They figure that by slowly buying up carious houses they can pay off the mortgages with renters and then have a good profit later in life.  This works for many people, but it is vital to realize that being a landlord simply is not a passive occupation.  Every time something goes wrong with the house, the landlord is called.  That means that one day the water heater in your own house may burst and then the very next day the same thing happens at one of your rental properties, and of course you're liable for both.  You must have plenty of money set aside for repairs to be an effective landlord.

Additionally, a landlord must be a savvy businessperson.  If you are a bit of a pushover and you happen to have some tenants who are not only shiftless but aware of your passive nature then they may wind up trying to take advantage of you.  Can you handle listening to a sob story and still demand rent? No matter how much you would like the be the Good Guy or the Good Gal you will need to harden your heart a little in order to be a profitable landlord.  This isn't to say that you need to develop a heart of stone and become completely inflexible when your tenants have financial trouble, but you simply cannot allow emotions to rule you in these sorts of situations. 

As an alternative you may want to look into hiring a rental management company, although this costs more than if you handle all these sorts of things yourself.  The advantage of a rental management company is that they deal directly with the tenants so you don't have to.  This means less profit for you, but in the long run it may be worth it to avoid big headaches. 

Speaking of headaches, how long can you financially stay afloat if your tenants do indeed suddenly stop paying their rent or if you can't find suitable tenants for an extended period of time? You should never look at rental properties as solid and consistent income sources.  Sometimes there simply aren't any interested renters and the property will just sit, unoccupied, until the right people come along.  Yes, owning rental properties can bring in money, but only if there are occupants paying the rent. 

Do you want to flip properties?  If you have ever stayed up late and watched the various infomercials on television you will have undoubtedly stumbled upon one of the many segments involving purchasing foreclosed and otherwise undesirable properties only to fix them up and sell them at a fantastic profit.  In theory, this is a logical system.  Buy a house which nobody else wants because it is slightly wrecked then fix it up and make it a house somebody would actually want to buy.  Before jumping into something like this you need to ask yourself, "Can I fix a house?"

Many times the issues with problem houses extend way beyond cosmetic difficulties. If you go to an auction and purchase a home for $135,000 with the intention of fixing it up and selling it for $175,000 you may be unpleasantly surprised to find that there are at least $30,000 worth of repairs which need to be made, and don't forget the back taxes which may need to be paid before the title can be officially transferred.  This turns an experience, which was supposed to be profitable into an experience which will wind up costing you more money in the long run.  You need to be sure that you know what you're getting yourself into.  Just because a home goes into foreclosure and is sold at a price lower than its market value doesn't mean that it will always be a profitable venture.

Don't get in over your head.  You may find that you have the gumption needed to either be a landlord or to fix up houses and sell them for a quick profit.  Just don't let dollar signs cloud your vision of how much you can handle, both financially and with regards to your lifestyle.  You don't want to get in over your head with financial obligations, but you surely don't want to wind up in a position where you are making a good profit but you are exhausted from all the upkeep and administrative duties associated with purchasing investment properties.  Try to maintain a nice balance so that you can still enjoy the process without going broke or wearing yourself out.

It is a rare occasion when a person declares, "Hey! I'm going to go buy a house!" and then stumbles upon the perfect house immediately.  There are so many different factors to consider when purchasing a home, and especially for first-time homebuyers there can be a dizzying amount of details to comb through before deciding upon an ideal situation.  It is best to be as detail-oriented as possible and to take as much time as you need to make an informed decision before committing to a home purchase.

On the next page we talk about factors that make up The Ideal Neighborhood.