"Should I buy a house to live in or an investment property first"?

I get asked this question a lot from new investors. Maybe you only have one deposit and are in a transitional stage of your life? Maybe you want to make the most of your money but don't want to rent your whole life. Or have gone through a divorce, saved or received a small amount of capital and want to make the most of it? 

This isn't the most straight forward answer, because when it comes to people's personal lives, you have to do first and foremost what is right for you, and not just your money. The fact that you are thinking this way means you are ahead of most people who have a small cash nest egg. Here are a few options for you. 

When I bought my first house to live in, in my early 20s, my Dad helped me with the deposit. I then rented out my spare room to cover my mortgage cost. As a young, single person this worked well to get me on the ladder, to learn the fundamentals of managing a tenant, and covering my expenses. I was able to refinance the property 3 years later, pay my Dad back and I essentially had a free house, some capital profit and some start up investing knowledge. Had the house been 3 or more bedrooms I may have rented out more than one room. If you have a family you may not want to rent out the rooms and always check you get the right lending that gives permission to do this. 

There is a lot to be said for having a solid base. Somewhere you can call 'home'. A space you love to be in that is calming amidst all the crazy shit that goes on in the world. If you invest a deposit in an investment property and to live you rent a house you don't really love, never quite making it a home because you know spending on it is dead money, you never achieve that zen calmness you need to take on the world. 

From the profit and knowledge gained through my first home, I scaled up to a bachelor pad flat. I purchased with none of my own 'worked for/earned' money, by reinvesting capital growth and learning about creative purchasing to make up the shortfall. You are currently able to get capital gains relief by scaling up your home, and can essentially offset/leverage many of the costs of improving your standard of living. 

No sooner had I moved into my bachelor pad and I met my now wife. We soon needed a 'real' home, with more space to plan our family, and her clothes!. I knew the one street I wanted to live in; in fact I considered maybe only 15 of the properties, and none of them were yet for sale. So we rented on the street with a view to buying when the time was right in a year or so. This renting lasted 3 years, and whilst the house was nice, we never made it a 'home' and I never really felt settled. Once we bought our dream home, and I was able to put my stamp on it, I felt many other areas of my life became more secure and focused. 

Renting for 3 years actually saved me a lot of money, because I was able to wait, be patient, look for the right property to come along, and negotiate a great price because I had time on my side. Also, the prices had dropped a little, so I saved losing that capital value. Sure, I could have put that cash into an investment property, but since buying the house the value has gone up nearly 20% in less than 3 years. So renting for a while and biding your time can have benefits, because you can time the market (as much as one can) and get a better price. 

If you put your one deposit into a rental/investment property, of course in the long run that will serve you well. You might get 8-10% a year capital growth & 4-12% yield. But once you have invested that one deposit, you're then stuck with no cash for more investments, and nowhere to call a home. If you buy a home, you can live happily, reinvest the capital growth every 3-5 years (market dependent) via a refinance, and merge passion and profession by living well and building your investment portfolio. 

Another viable strategy is to put the single deposit you have into a flip project. Buy low, add value, look to double your pot, and then you have two deposits: one to start your investment portfolio and one to buy your next home. You can then leverage the investment property every 3-5 years to raise more deposits, or continue the 'flip one hold one' model for a few years to build both a cash-capital base and a portfolio with an income stream. 

Buying your own home and using the cash to live also then forces you to learn how to leverage time, knowledge, curiosity and creativity to invest in other ways such as getting private loans to buy property, joint ventures, refining your flipping skills, rent to rent, lease options and other strategies that don't rely on conventional deposits. Too many people think they can only buy property if they have cash. You mostly learn that there are other resources available, but most people only learn this when they run out of cash! Buying your own home might force this situation upon you. I only learned about Joint Ventures and levering other people's money when I had run out

So most people expect me to tell them to buy an investment property but I say consider buying a home, using your creativity, resourcefulness and persistence to find alternative ways to build your investment portfolio, and get the best of both worlds. And every 3-5 years scale up your own which as long as the market grows 5% a year on average, can end up being free living. 

I hope this is useful.

Feel free to ask any Qs & invest for freedom, choice & profit

Rob Moore