When you buy your first property, generally, you buy your primary residence. This means that you can afford to buy a place where you work, which is often hard to do if you live in a high cost of living area and are at the very start of your career, and also that you should be pretty sure that you will spend the next few years in said place, because if real estate prices go down, or simply if you move just a year after you buy, between the closing costs, realtor fees and the cost of moving in, you may lose money.
Another idea would be instead to buy a rental, so you can get the benefits of getting on the property ladder while at the same time keep the flexibility of renting a property fit for your needs.
Why would you opt for a rental?
Well as I said above, the first thing that comes to mind is that your local property market may not be ideal for home ownership if priced are on the rise. The rent vs buy calculations may not lean towards buying in overpriced housing bubbles. But you live there, so you still need a place to stay. What better way to have someone pay your rent while you build up equity on the property they live in?
You may not make enough to buy a place in New York, but already have savings that would represent a hefty deposit in Kansas City. And the rent would bring a better return on your deposit than the 0.1% your cash is bringing right now.
If you are living with a significant other, and not ready to put both names on the deed, it allows you to keep your place together while you start investing on your own.
And if you are just starting your career, you should not get tied to a property when your next job could be 3,000 miles away.
By buying a rental, you could move pretty much anywhere without worrying about having to sell your home before doing so. That is what I did with my UK property. I lived there for less than a year (with roommates) before putting the whole place up for rent and moving to Morocco. Now, I am still a continent away, and on top of that have put six time zones between my property and myself. And you know what? It works out just fine.
My tenants each rent a bedroom on separate contracts, and when one is about to vacate, they interview potential tenants to find the new roommate. I take care of bills and include them in their rent so they don’t have to fight about splitting them equally. The only little bumps on the way are generally about cleaning habits of some of them, so I am thinking about raising the rents and including a weekly cleaner. Other than this, if the washing machine or the heater breaks, I just send a handyman and wire them the money.
So I wouldn’t be worried about having a property two hours drive away, if one ocean away is doable.
What I thought before I left was that the rent I would get from the bedroom I used to occupy, around $1,000, would basically cover my rental needs anywhere in the world. Yes, $1,000 is pretty expensive for a room, but that is under market price when said room is in an affluent suburb of London. I have only had one week vacancy in one of the rooms over the past 5 years.
In Guatemala, $1,000 happens to cover my entire living expenses and the salaries of two staff, because I paid cash for my house, but it would more than cover my rent of a three bed luxury condo in a great neighborhood of Guatemala City. Even in Europe, aside from London, Paris and a few overpriced capitals, I could get a comfy two bedroom and live on my own. And if I felt like going back to Paris for a while, $1,000 would still get me an independent, albeit smaller unit.
I really like that the money from rent can be allocated to my living expenses, just like the time my motorcycle insurance company paid for some advertising on my blogs, enough to cover two years of bike insurance. You get the idea, getting a fixed source of income gives you the freedom of using that same income to cover the same category of expense for your flexible life.
Where should you buy a property?
If you have a nomadic lifestyle like I do, the world is pretty much your oyster. And if your career could take you anywhere in the country, buying next to where you live now may not be buying where your next job will be, so once again, you could look at your whole state, or your whole country. Some ideas include
– A college town. Students rarely buy a place during their college years, and you have a constant influx of potential new tenants. I am in a college town and my prices deter the freshmen so usually I get the PhD students or the recent graduates working their first job. They are serious, and often have mum and dad behind, which is extra consolation.
– Your hometown. While you may not live there at the beginning of your career, you may aspire to come back once you settle down and start a family. Plus your parents could keep an eye on the property, send their trusted handyman to do maintenance or chase payments face to face for you. You don’t want to be a burden but it gives you some peace of mind to know there is still a family member nearby if things go sour. You are also able to make an educated decision about each neighborhood without too much research, as you lived there for years.
– The highest yielding market. A quick online search will tell you which markets offer the highest rent in your region of choice.
– The best house you can afford on a high down payment. Things may not always go the way you planned and your property may sit empty for a while, and having low repayments will make life much easier. You could look for a place that is affordable right now, and put a 30-50% deposit on it, so the rent is only a fraction of the repayments. That will also allow you to live on the surplus should you lose your job, to pay off the rest of the mortgage early as well, or to set aside a good chunk of money for future renovations.
– A duplex. When you live a nomadic lifestyle, you often want a base to come home to. Buying a duplex or a triplex allows you to have renters pay most of the housing costs while you still keep a small unit as your own to store your stuff and re-energize when you are tired of traveling. Plus they serve as free house sitters!
If there was anywhere anywhere I’d buy a rental property it would be a college town. The demand would seem to always out-weigh the supply.
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And if you have bad tenants you can replace them quickly the next term.
Only problem with college towns are students can trash your unit. I’m a huge advocate of property, for those with limited income start with a duplex. Here in Hawaii those go for a premium, but not in the mainland.
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Living nearby is always a plus. I rent to mature students only and never had a problem. They stay less time, 12-24 months instead of the full 4-5 years.
Brian @ Luke1428 says
Wherever my firstborn goes to college, I will consider buying a property for her to live in and renting out the other rooms of it to college students. That would work for four years then I could either keep it or sell it once she leaves. I’d have the added benefit of having someone living in it who would also manage it for me.
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That sounds like a great idea if she chooses a low cost of living area.
I would love to buy a rental in a college town when my kids begin attending college. It would be cool to let her roommates pay the mortgage =)
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If it is a cheap college town you can pay a big part of it over the 5 years your kids stay in.
FI Fighter says
Sounds like you made a very good investment decision with the property in London. I like your approach to investing and I’m following in a similar path — invest in rental properties in areas where the cash flow makes the most sense.
I also want to travel in the near future, so when I factor that in, it really makes no difference whether I buy a place in Kansas City or New York. I’ll still be too far away to manage anything.
It is definitely important to buy right though. For my next purchases, I want to buy in high demand, easy to rent neighborhoods. One week vacancy in five years is amazing. I would gladly take that any day of the week!
Thanks for the reference as well 🙂
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yes, that’s pretty good, the student market keeps a high demand in my college town.
Anne Rayla says
If you opt for rental, don’t forget to protect your rights with a lease. A written lease will help each party understands their rights and obligations.
Jeff @Project Ikonz says
Now this is a million dollar blog. Thank you for your wisdom Pauline. You have good management skills managing your apartments/houses. I have my parents apartment here not making money/ empty for a year now, such a waste. Passive income from renting out apartments is a really good retirement option. How do you know if there is a Bubble?
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Tara @ Streets Ahead Living says
It’s not hard to find a low-cost college town in this country in which you can buy a house if you have the down payment. I would pay for a property manager but I also like your idea of paying for all bills and just making the rent flat. I also agree that adding a cleaning lady weekly probably would be a good idea. I had three friends living in a three bedroom, three bath house and having a weekly cleaner really alleviated any roommate conflict.
When it comes to buying a home with someone you’re not married to, I strongly suggest NOT doing so unless you get a strong contract drawn up that you get notarized. At least in the states, there is only one state, California, that gives any rights to non-married co-habiting couples and spending a chunk on a big property is not something I’d do lightly without a good lawyer-drawn-up contract or the defacto contract of marriage.
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Daisy @ Prairie Eco Thrifter says
We have considered travelling for an extended period of time when our jobs will allow it and renting out our house in the meantime. I am not nomadic; I love Canada and will leave here hopefully my whole life, but I do want to see more of the world and that’s difficult when you have a house and full time jobs.
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Sonia Woolley says
All the tips are very nice for rental property and also for buying property. Thanks for the tips. I will suggest my friends to read this article before doing any investment. These are very helpful, when anyone want to make money in realestate.
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Erick Brunet says
Thank you for sharing. It’s very useful. Hope to hear more from you.
My father is thinking to buy a property to establish his new business office. I will share this article with him. Hope it will very helpful to him.
I would also opt buying a property in a college town. Here in the Philippines, Universities are just a walk away and having your property rented by students is the best idea you could ever make! Thanks for sharing!
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