I commonly get asked if “I should buy a house to live in first, or I should purchase an investment property with my one deposit?” So I thought we’d explore this scenario a bit more to give you some clarity.
Okay so it’s important to remember that your house is your home and acts as your base, but if you go and rush into buying a house, you may end up buying in an area that’s just not right for you. So I think if you’re relocating or trying to find a property in a gold mine area, it can be beneficial to rent first and get to know the area because what you might find is where you thought you wanted to live is not the right fit for you.
Now as a property investor and for those of you in the Progressive Property Community, it’s almost considered sacrilege to not own our own home on a road and the house I lived in before.
Now, if you’re looking to buy a home and comparing the cost to an investment property, you’ll need to get to know the town and the city, however, no town or city itself is a gold mine area, it is the suburbs within a town or city that can be a goldmine area.
So, in Peterborough for example, if you live on Thorpe Road, Thorpe Lee Road or in Longthorpe etc the property yields are going to be 3-4% max but if you live or invest in some of the PE3 postcode areas such as the Orton’s or the Bretton’s, the yields can be up to 7%. In fact, after the recession of 2009/2010, some of the yields rose to as high as 80% but of course, you would not know how to identify a property with such a high yield unless you really know and researched the area well.
We have even had some of the Progressive Property trainers end up moving to Peterborough, renting a property initially until they know the area and find the right suburb or gold mine area to invest in. It’s important to take your time to find the right place and area before investing. It doesn’t matter if it takes six months to find the right property as an investment property is going to pay you more than your own home. Now, your own home will likely double value every 10 years as most property to, so you’ll get a capital return but you won’t get an income return because you’re living in it and paying for the mortgage, so as a pound for pound investment, property will pay you an income and give you capital growth.
Okay, but if you put all of your money into a deposit for your own home to live in, how can you raise funds for an investment property? Perhaps you will then need to raise capital through a JV partner, a bank or take out a bridging loan. However, if you cannot raise funds through a bank then you may need to ask your family and friends or crowdfund the deposit so that you can afford an investment property as well as your own home.
And remember if you’re putting your initial deposit money into a house then you now have a solid home base where from which you can raise finance and find BMV investment property where you can add value, change of use or increase the property value to create an additional income stream to recycle your cash into another deposit.
But in order to do this successfully and roll your cash from one investment into a deposit for another, you need to look for opportunities. look for income, look for capital, look for loans, look for partners and learn how to raise and attract money, learn how to sell, market and convince people of your ideas and your vision. All things you wouldn’t have to do or learn if which you if you had just invested one lump sum into an investment property and then waited five years to get it back.
The next thing you can do which is really creative is to find a house that you want to live in and get a deal to do some kind of option or rent to buy or rent to own on it. This is where you don’t necessarily put all of the deposit into the property but you do a deal with the vendor to have an option to purchase it in 5 or 10 years time and you do what’s called ‘rent-to-own’ where you rent the property and pay a premium which goes towards the deposit.
All of these are creative ways of becoming a property investor and finding solutions to problems and bypassing the need for deposits or preserving deposits for investment properties and at the same time having a house that you love to live in.
Overall there’s no right or wrong answer when to comes to buying a house to live in or investment property first, but what I would say is you need to get to know an area first and there’s nothing wrong with renting before you buy because it can drive the result of acquiring the right investment property below market value once you know the area.
Now, often when happens is the market drives the result of your property search. So let’s say you decided to put money into your own home but it might take you 3 years to find your ideal home which may take 5 years for the market to produce so you end up putting the money into an investment property anyway. So whilst it’s important to have a clear strategy I think you’ve also got to be clear about letting the market decide what the best direction for you is at that time, investment property or your own property purchase to live in.
But no matter what the cycle the market is in it’s always wise to learn how to raise money, learn how to be a person of value and influence and learn how to find good BMV property deals, aswell as being able to pitch to JV partners and banks as more and more commercial banks are lending based on the invidivudal, rather than just the numbers.
And this could be the different in you securing finance for your investment project or even securing the funds for your dream home in the perfect area.
One of the key skills of a progressive long-term investor is the ability to sell a vision, to find good deals and to get other people to see the vision of that to reduce the risk and to be enthusiastic, to motivated and to solve problems. But these are not just skills that everybody knows, they are skills that are learnt as a result of being uncomfortable, as a result of needing to source finance and as a result of needing to learn the skills to become a creative property investor whilst also owning your own home.
Rob Moore
