People look at real estate with many different ideas in mind. Some people look at a real estate purchase as simply a home. It is a place to live until you move on to the next one. Others look at it as an investment, either a place to make or grow your money. For many, real estate investing is a career or a great source of income. For first time home buyers, is it the best first investment?
Renting vs. Buying
When deciding on the right time to buy a first home, the first place to look is at your financial situation. While renting has a lower up-front cost, in many cases buying a similar quality home can have a lower monthly cost.
Be sure to include mortgage, property tax, and homeowner insurance when comparing, but if owning a home costs less each month, and you plan to stay long enough to make up the fees, buying a home for this purpose can be considered an investment, as it is saving you money you would have otherwise spent. Just make sure you don’t go overboard with home improvements.
Buying and Then Renting
The next logical step in investing in real estate is to buy a home to live in, and then rent it out as an investment property when you move on to your next home. Many real estate investors started building a portfolio of properties with this method.
To decide if this is a good idea, you’ll want to compare the monthly cost of owning the property to the market rent for similar homes in the neighborhood. If you can turn a profit each month after moving out, taking into account property management costs and expected repairs, this is a great way to start investing in real estate.
Fix and Flip
If you have extra cash you’re looking to invest, you may be able to find a property in bad shape that you can fix up and sell for a profit, commonly referred to as a fix and flip.
Fixing and flipping is generally not a great first investment, as it is high risk and takes a lot of money to buy and fix up the property before you’ll get your return. The transaction costs can also make earning a profit much more difficult, and only experience can guide you on making the best decisions.
Most first time home buyers hope to make their money through property appreciation. When you buy a home, you always hope that the value will rise over the time you live there. When I bought my first home, I was able to triple the amount I paid as a down payment when I sold it two years later, but that isn’t always common.
Over time, the vast majority of people see the value of their home rise. If you live in a popular city, you’ll likely see an increase faster than people in more rural areas, but that isn’t always the case. There is no guarantee that your real estate purchase will rise. The recent recession was a big wake up call for many homeowners that their home is a place to live first, and an investment second.
However you approach your first home purchase, the safest bet is to go into with a trustworthy real estate agent. With experience behind you, you are much more likely to end up with a profit from your first real estate investment.