There are three main categories of buying homes as a real estate investment:
- Cash flow investing — for people whose primary goal is rental income.
- Equity growth investing — for people whose primary goal is property appreciation.
- Lifestyle investing — for people whose goals include cash flow and equity growth, but who may also want to use the property when it’s not rented and perhaps eventually live in the home. Vacation homes may fall in this category.
Since the objectives for lifestyle investing are more complex, review some tips to help plan a more successful effort.
Set your lifestyle real estate investing objectives
You don’t have to own a primary residence before owning investment property, but you do need to establish your lifestyle objectives.
Here’s a common lifestyle scenario for city dwellers: you live in a city where your income is high but home prices are too high for your taste, so you choose to rent your primary home and buy another home in a cheaper market.
In this example, your objectives probably aren’t solely cash flow or equity growth.
Lifestyle plays a big role because you may want to use the property when it’s not rented (this scenario also applies if you already own your primary residence and want another home to use and rent).
Understand financing and tax options on investing
Next you need to determine the best financial structure for your lifestyle objectives. There are three options:
Primary residence
Primary residence loans are for buying a home to live in. Right now you can buy for as little as 3 percent down (if the loan doesn’t exceed $417,000). Mortgage rates are the lowest they can be, and you get significant homeowner tax benefits. You must live there for at least one year, then you can rent it out.
Does it meet objectives? Not likely. If you live/work in one city and buy in another, it’s very hard to justify to a lender why you’re buying a primary residence in the other city.
Second home
Second-home loans are for buying a vacation home for personal use only. You can buy for as little as 20 percent down. Mortgage rates and tax benefits are the same as for primary residences.
But lenders won’t let you rent the home.
Does it meet objectives? No. You’re not allowed to rent the property as long as you have the loan.
This financing choice works if your objective is purely to own a second home with no rental income, in which case your investment benefits are to have an optimal tax benefit yearly and equity growth longer-term.
Investment property and vacation homes
Investment property loans are for buying a home you want to rent out. You can use it when it’s not rented, as a vacation home for example, and rental income can help you qualify. Rates are 0.25 percent to 0.375 percent higher than second-home rates, and down payments often start at 30 percent.
Does it meet objectives? Yes. The trade off for meeting all lifestyle objectives is that you need a larger down payment, and you’ll pay more to carry the property because of lower rental income (due to your own use) and slightly higher mortgage rates. Investment benefits are equity growth over the longer term, plus various tax strategies specific to home investors.
Execute your plan
To get proper advice on your lifestyle investing strategy, it’s best to find local real estate agents and lenders.
Your agent will clarify local transaction fees, taxes and commissions, and advise on local zoning rules to make sure you’re buying in an area that allows short-term rentals.
Your lender will ensure a local appraiser is assigned to the property, and will also know title and escrow officers, insurance agents, inspectors and other specialists associated with your lifestyle purchase.
Hiring professionals in the community in which you plan to buy a home helps smooth the buying process and avoid potential obstacles. When you’re ready to jump into lifestyle investing, select your agent and lender carefully to ensure you’re setting yourself up for profitable, long-term investing.
This article courtesy of The Zillow Team.
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