Does an Investment Property Count as a First Home?

For most young people, the idea of buying a home to live in as soon as possible is one of the biggest driving factors behind building wealth.

However, an increasing number of property owners are instead looking to buy an investment property early and wait for their first home.

This may seem like an odd choice, with it common for rental property owners to already own a home before investing in the housing market.

Although, dig a little below the surface, and you’ll find some big reasons real estate investors are becoming younger and younger.

To learn more about the benefits of buying an investment property or real estate investing, check out our full guide to why invest in UK property.

1. Build Your Finance for the Future With Monthly Rental Income and Capital Gains

With the average UK house price surpassing a record-breaking £290k for the first time ever last year, getting onto the property ladder can seem to be increasingly difficult for first-time buyers.

However, the price of buying an investment property can be far lower, with the potential to find lucrative investment apartments or student accommodation for around £100k.

Instead of saving up for several years until they build up enough wealth to buy their dream home, young property owners are now deciding to invest the cash they’ve got to build their personal finances for the future.

While still young, buyers have the opportunity to spend several years earning and saving money before buying their first home.

By doing this, real estate investors can earn two forms of income if they decide to rent their investment property, one of the biggest benefits of buying an investment property.

• Monthly Rental Income – By buying an investment property, real estate buyers can enjoy monthly rental income, which was a record-breaking £1,199 PCM in April 2023, according to HomeLet.
• Capital Appreciation Potential – Capital appreciation is the increase in the market value of an investment property over time. In the last 10 years, the average UK house price has increased by 69%, according to the Land Registry. This means you could earn a huge profit by selling the property, which you can then use to buy your first home.

2. Real Estate Investments Can be Lucrative and Affordable If You Know Where to Look

According to the UK House Price Index from the Land Registry, the average UK home is valued at £285,009.

Naturally, this is a huge price tag and can be highly prohibitive for young people. You might even be wondering, can I afford an investment property if I can’t afford a typical residential property purchase? However, with the right research, you can find investment properties with a far more accessible price tag.

In the UK, there is a huge regional variation amongst house prices, with the likes of Liverpool, Manchester, and Birmingham all far below the UK average while also offering huge returns upwards of 8% per year through rent.

To get the highest returning rental property at the lowest prices, targeting student accommodation or city centre apartments is a smart choice, as they generate some of the highest tenant demand.

Another way of getting affordable investment properties is by buying off-plan real estate with an investment company.

Off-plan real estate is property that hasn’t been completed but is available for purchase at a below-market rate.

By buying off-plan property with an investment company like RWinvest, you can get:

1. Exclusive property you won’t find elsewhere
2. Competitive payment plans that allow real estate investors to buy property without needing the total cash upfront.
3. Some properties offer assured rental returns for a set number of years.

To learn more about the best places to invest in property, check out our full guide.

3. Tax Benefits are Available

Another example of the benefits of buying an investment property and why you might want to consider getting your first investment property is the tax benefits available.

While real estate investing has attracted more hefty property taxes in recent years, including the likes of capital gains tax and income tax, first-time buyers get some beneficial tax implications when buying real estate.

Likely the most significant tax benefit is the reduced surcharge on stamp duty. In the UK, those buying a second home pay an additional 3% charge when buying properties.

However, as a first-time buyer, you will pay reduced rates on stamp duty on real estate, allowing those buying an investment property to save thousands.

In fact, for those buying their first home, you will not pay any stamp duty on properties up to £425,000 and a 5% charge on the portion from £425,001-£925,000. Those who already own a home will need to pay a 5% charge on the amount paid from £250,000 instead.

So, let’s say you’re buying a home worth £300,000.

A normal buy-to-let investor securing an additional home will pay £2,500 when buying an investment property, while a first-time buyer buying rental property will pay no stamp duty.

So, let’s say you’ve decided buying rental property and investing in real estate is the right investment for you, but you can’t completely afford the entry cost of a home on the UK market.

While you can spend time and save money to afford your venture, many potential buyers instead opt to buy property with a home loan through a mortgage.

However, home buyers purchasing their first property may encounter some issues when securing a mortgage for rental properties.

This is because buy-to-let mortgages work slightly differently than traditional residential mortgages.

• Buy-to-let mortgages require a bigger down payment, with a higher rate of mortgage payment each month.
• They’re also mostly interest-only, which means you will only pay the interest each month without touching the overall debt. You’ll need to pay the total amount of debt owed at the end of your mortgage term, either by selling the home, paying the cash another way, or borrowing money again by remortgaging.
• To make a good investment, you’ll also need your rent payments high enough to cover your mortgage repayments which may be difficult depending on what type of property you purchase. The lender may even calculate a debt-to-income ratio to see if your monthly earnings can cover the cost of mortgage payments – usually asked to be around 20-30% higher than monthly mortgage repayments in the UK.

However, likely the biggest stumbling block for first-time home buyers is that some mortgage lenders will be unwilling to loan due to the higher risk involved.

Without buying a home already, you may have a lower credit score, too, which is something that may prevent you from securing a sizeable loan.

While this doesn’t mean it will be impossible to secure a loan with a low credit score, it does mean you may have a more limited choice, with potentially higher interest costs.

The answer to this question can be complicated, as it will heavily depend on your personal circumstances.

If you’re young enough and are starting to build wealth, it can be a good idea to buy property as an investment as long as you properly research and have enough money.

However, home buying as an investment isn’t for everyone. It can impact your current lifestyle if you opt to become a landlord, adding extra responsibilities to make the living experience ideal for your potential tenants.

Things can get even more complicated when factoring in mortgage payments, operating expenses, mortgage insurance, debt-to-income ratio, and more. While we aren’t trying to deter you, it’s important to accept that buying property is a big responsibility, and it’s a bad idea to rush into it.

The bottom line is some home buyers will focus solely on buying their dream home, while others are more willing to invest their earnings for a brighter future.

To decide if investing is right for you, be sure to seek expert advice by talking to a financial advisor.