Many aspiring homeowners want to buy a home primarily to have a place to live, with long-term financial security a secondary benefit. But what if a first-time homebuyer is more interested in the investment aspect?

Can a first-time homebuyer buy an investment property? For that matter, can a first-time buyer purchase a rental property? Which loan types and lenders allow it? And what types of investment property for first-time homebuyers can you buy?

Key Takeaways:


Investment Property Options for First-Time Homebuyers

There are many types of investment properties, but most first-time homebuyers looking for a property with investment potential are likely to get a mortgage to buy a single-family home, condominium, townhouse, or multiunit building with no more than four units.

Can a first-time buyer purchase a rental property or flippable home? The answer is yes. Here are three ways it can be done.

1. Buy a home and rent it out

The easiest way to turn your first purchase into an investment is to buy a home and rent it out for someone else to live in.

Your mortgage lender likely will require you to live in the home as your primary residence for at least 12 months before you can rent it out. After that, you can move out, list the property as a rental, and earn income from long-term rental revenue if you lease it, or short-term rental revenue using Airbnb or a similar service. However, you’ll need to rent or buy another place for yourself to live in, so weigh the pros and cons of renting vs. buying.

2. Buy a multiunit property

Another option for a first-time buyer buying rental property is what’s known as house hacking. You buy a multiunit property, live in one unit — your lender likely will require you do this for at least 12 months — and rent the others to tenants. Most types of mortgages allow buyers to purchase a building with up to four units.

“A duplex is a good entry point for a first-time homebuyer,” says Deborah Nyasha Peters, a real estate agent with Keller Williams NYC in New York City. A four-unit property would require a larger transaction, which may be overwhelming for first-time buyers, Peters says.

3. Buy and flip a home

Another way to acquire an investment property as a first-time homebuyer is to buy a fixer-upper, improve the home to increase its value, and sell it quickly — ideally for more than you paid for it. This is called house flipping, and it can result in significant financial rewards, provided you know what you’re doing.

Many pros advise against house flipping if you’re a first-time buyer. If you’re determined to learn the ins and outs of flipping, it’s a good idea to consult experienced flippers and knowledgeable real estate agents who can guide you through the process.

“Flipping properties requires careful market research, renovation budgeting, and knowledge of local real estate trends,” says Boris Dorfman, a real estate investor and founder of LBC Capital, based in Los Angeles. “Make sure you align yourself with (the) best industry professionals.”

Pros and Cons of Buying an Investment Property

There are advantages and disadvantages that first-time homebuyers should consider before buying an investment property.

“The potential rewards of becoming a homebuyer are giving yourself long-term financial security, having a hedge against inflation, tax benefits, rental income, and an opportunity to expand your real estate portfolio,” says Patrick Freeze, owner of Bay Property Management Group in Lutherville-Timonium, Maryland.

Pros of buying an investment property

The benefits of first-time homebuyers purchasing an investment property include:

  • Generating income. Owning a rental property can provide a source of income that offsets the costs of buying a home.
  • Long-term appreciation. Real estate generally appreciates in value over time, potentially leading to significant gains. This can be especially advantageous for younger buyers. “Just as with any investment, a person can generally earn more money on an investment over the long term by starting their investment portfolio sooner rather than later,” says Martin Skolnik, director of the University of Baltimore’s real estate and economic development program.
  • Growing home equity. As you pay down your mortgage, and as the property appreciates in value, you build home equity, which you can borrow against or turn into cash by selling the property.
  • Diversifying your investments. Real estate diversifies your investment portfolio and reduces your overall risk when compared with investing only in stocks and bonds.
  • Potential tax benefits. There can be tax advantages to owning investment properties, such as deductions for mortgage interest, property taxes, and depreciation.
  • Gaining management experience. Managing an investment property can help you develop valuable skills in budgeting, negotiation, and property management.

Cons of buying an investment property

Of course, putting your money into real estate is no guarantee of success. Among the biggest drawbacks? “Tenants can be demanding, and you can get a building that is a money pit that drains all your profits,” Peters says.

The risks of purchasing an investment property as a first-time homebuyer include:

  • Potential depreciation. Markets fluctuate, and sometimes property loses value over time. “Real estate markets can experience downturns, potentially leading to temporary decreases in property values,” Dorfman says.
  • Vacant rentals. Rental revenue can evaporate if your property remains vacant for extended periods, or if your tenants struggle to pay the rent.
  • Management responsibilities. You need to maintain your living space, as well as your tenants’ units. “Being a landlord involves responsibilities, such as finding tenants, handling maintenance issues, and ensuring rent is paid on time,” Skolnik says.
  • Financing risks. If your property’s value drops, you could face challenges if you need to refinance your mortgage or sell.
  • Legal liability. Being a landlord carries legal responsibilities, and there may be risks associated with tenant issues or property accidents — including the possibility of being sued.

Loan Options for Buying an Investment Property

Seeking a first-time homebuyer loan for investment property? Here are four options.

Conventional loan

A conventional loan is a mortgage that conforms to government requirements that allow the lender to sell it to Fannie Mae or Freddie Mac. These loans are most suitable for borrowers with favorable credit scores and a down payment of at least 3% of the property’s cost. Conventional loans offer the flexibility of either fixed or adjustable interest rates.

With a conventional mortgage, you can purchase between one and four units, and live in one of the units while renting out the others.

Jumbo loan

You’ll need a jumbo loan if you’re buying a more expensive property that requires you to borrow more than the conforming loan limit. Jumbo loans are not backed by any government agency, so the terms and conditions of such loans are completely up to the lender. Since the lender is taking on all the risk of making the loan, requirements such as the minimum down payment, maximum debt-to-income ratio, and documentation needed can be extensive and strict.

FHA loan

The Federal Housing Administration insures private mortgages that meet its requirements, reducing the risk for lenders in making loans to borrowers with lower credit scores and down payments as low as 3.5% of the purchase price. While FHA loans can be more expensive than conventional loans for borrowers with higher credit scores and down payments in the 10% to 15% range, they often are the most affordable option for first-time buyers.

FHA loans can be used to buy properties with as many as four units.

VA loan

If you are an active-duty military service member, a veteran, or the surviving spouse of one, you may qualify for a mortgage backed by the Department of Veterans Affairs. VA loans have no minimum down payment or mortgage insurance premiums, and offer competitive interest rates and cheaper closing costs.

You can use a VA loan to buy a property with up to four units, but you must live in one of them.

USDA loan

If you’re buying a home in a rural area, you may qualify for a no-down-payment loan backed by the Department of Agriculture. To get a USDA loan, your household income must not exceed 115% of the median household income of the area in which you’re buying the home.

While you must occupy the home as your primary residence, a USDA loan is an option if you plan to flip the home, which this type of loan allows.

How To Buy an Investment Property as a First-time Homebuyer

The process of buying an investment property as a first-time homebuyer is essentially the same as buying a home to live in, though you likely will need to borrow more money to buy a multiunit property than a single living space. Here’s a rundown of what is typically involved with successfully buying an investment property as a first-time buyer.

1. Assess your finances

First, check your credit score and take steps to increase it, if needed. Review your finances to determine how much you can afford for a down payment, closing costs, and the monthly mortgage payment. Be sure to factor in expenses such as property taxes, homeowners insurance, private mortgage insurance, homeowners association fees, and maintenance.

2. Research the market

Work with a real estate agent who has experience with investment properties, and research property prices, home types, rental demand, and housing trends in the area you plan to buy in.

3. Shop for a mortgage

Research your loan options — including conventional, jumbo, FHA, VA, or USDA loans — and compare mortgage offers and interest rates from different lenders.

4. Get mortgage preapproval

Seeking mortgage preapproval when you’re ready to start shopping for homes will help you know your budget, and show agents and sellers that you’re a serious buyer.

5. Find and make an offer on a suitable property

Start touring homes, and look for properties that match your objectives and budget. Consult your agent when you’re ready to make an offer on a house. Be prepared for counteroffers and the possibility of rejection.

6. Conduct your due diligence

Once a seller accepts your offer, be ready to vet the property carefully. Order a home inspection to learn about any problems, flaws, or safety concerns with the property. Get a home appraisal to verify the property’s value. Review the property’s history, and estimate your prospective rental income. Order a title search, and hire a real estate attorney to review documents and contracts.

7. Close the deal

If all goes well, you’ll close the deal on your investment property. On closing day, you’ll need to make your down payment, pay closing costs, and sign documents to fund your loan and transfer ownership of the home to you.

“Work with your real estate agent and mortgage broker to navigate the closing process,” Dorfman says.

FAQ: Buying an Investment Property as a First-Time Homebuyer

Here are answers to some common questions about buying an investment property as a first-time homebuyer.

Can first-time buyers purchase investment property?

First-time home purchasers can buy a residential property to rent out or flip, but specifics may vary depending on the jurisdiction the home is in and the type of financing used, Dorfman says. Your mortgage lender may require you to occupy the property as your primary residence for a minimum period — often one year — before renting it out.

Who should avoid buying investment property as a first-time homebuyer?

You might want to avoid buying an investment property if you lack job security and steady income, can’t afford to hire an outside property management company, don’t have the time to effectively manage a rental property, don’t want to deal with tenants directly, or aren’t prepared for the risks and difficulties of property ownership and management.

The Bottom Line on Buying an Investment Property as a First-Time Homebuyer

Buying your first home is an exciting prospect. But if you also want to be a landlord, or upgrade and flip your home for profit, be prepared for a steep learning curve. You’ll need to understand the market and how to be a successful real estate investor, so give yourself time. Also, work closely with an experienced agent, lender, and attorney — and ask questions about anything you don’t understand.