I remember a lot of comments from readers and also from people I meet in person who tell me that they are just looking for a place to live and are not really looking for a real estate investment.
My default answer is “Why not treat your first home as an investment?”
In reality, once you buy a property, you become a real estate investor. Buying a home is often considered to be the biggest investment one can make so it’s best to treat it as a real investment — one which will give you reasonable returns if you do decide to turn it into a rental property or if you sell it further down the road.
What are reasonable returns?
Normally, when a person buys a house which he intends to live in, he does not consider how much rent he would earn if he decides to rent the property out, and whether the possible rental income would be more than his monthly amortization. It is not uncommon for a homeowner who moves up the corporate ladder or improves his situation to move to a better home but keep his first home for sentimental reasons.
Thus, if in the future, the homeowner decides to move to another house and converts his first house into a rental property, the rentals are often not enough to cover the monthly amortizations, thereby producing a negative cashflow situation.
Had the homeowner considered his first house as a real investment, he could have dedicated more time to finding a property that would fetch better rental rates which could cover the monthly amortizations, thus giving the owner a nice positive cashflow.
More often than not, factors that may affect market values and appreciation are not given too much attention by a home buyer as the primary goal is just to have a place to live in. When the time comes to sell the property, it is very likely that there is little or no room for significant profits.
At times, the homeowner may even have to sell at a loss. This situation could have been avoided had the home owner considered buying a property that was way below market value*.
*-”Market Value” is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
Buying a property below market value would be in alignment with what Robert Kiyosaki often says, which is “You should make money when you buy, not when you sell”.
Money is made in the form of equity* at the time the property is bought and the profit is realized when the property is sold. Robert Kiyosaki is the bestselling author of Rich Dad Poor Dad.
*- Equity is the difference between a property’s current appraised value or market value and the loan principal balance
The opportunity is there so don’t waste it
Everyone at one point or another will really have to buy his or her own home so why not make the most out of the opportunity? If done well, one could gain passive income in the form of positive cashflow, or a significant profit, or both. At the very least, the education one can gain from treating his first home as a real estate investment is priceless.
It is virtually risk-free
Since initially the goal of the home buyer is to have a place to live in, he would not really be concerned with holding costs associated with properties that take time to lease or sell. He/she lives in the place anyway so this makes it virtually risk-free in my opinion.
In fact, I apply the same strategy to all of the deals that I have done this year as my last fallback would be to live in the property just in case I am unable to sell or rent it quickly.
The challenge in deciding to live in one’s investment property
If one decides to live in his/her own investment property, chances are one will have the tendency to fall in love with the property and over-improve it. I guess that’s the only risk that one should manage. Falling in love with a property can cloud one’s judgment and introduce costly improvements that one might no longer be able to recover.
If your first home is good investment, it can lead to more investment properties
If one buys his first home as an investment and not just as a place of residence, it can help ensure that more real estate investments would follow or at least it won’t prevent the homebuyer from buying more investment properties. Believe me when I say that buying a home that costs too much and is considered to be a liability can really hinder one’s ability to build enough capital to buy the next investment property. This is based on first-hand experience.
Ready to buy your first home? I wish you successful investing!