Does an Investment Property Count as a First Home?

What Is an Investment Property? 

An investment property is real estate that has been bought to generate income.  

Primarily, this means a real estate investor who buys rental property to rent to a tenant to earn rental income. Although, it can also mean someone buying an investment property with the intent to sell quickly for a profit, otherwise known as house flipping. 

Buying Your First Home as an Investment (3 Reasons Why You Should) 

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 £250k for the first time ever in November 2021, getting onto the property ladder is becoming increasingly difficult for first-time buyers. 

However, the price of buying an investment property can be far cheaper, 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 finance 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. 

1. Monthly Rental Income – By buying an investment property, real estate buyers can enjoy monthly rental income, which was a record-breaking £1,061 PCM in late 2021, according to HomeLet. 
2. Capital Gains Potential – Capital gains, sometimes known as 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 59.22% or £100,401, according to data from 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 £269,945. 

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 are 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 2021/22 guide. Alternatively, if you want to learn more about buying property with RWinvest, you can check out our sales process. 

3. Tax Benefits 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 biggest tax benefit is the reduced surcharge on stamp duty. Here, 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 £300,000, and a 5% charge on the portion from £300,001 to £500,000. 

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

A normal buy to let investor securing an additional home will pay £14,000 when buying an investment property, while a first-time buyer buying rental property will pay no stamp duty. 

To calculate the latest stamp duty rates, be sure to use our stamp duty calculator for 2021. 

Is it Better to Rent and Buy an Investment Property? 

Buying a rental property before owning a home of your own may be something worth exploring, but it begs the question – where will you live in the meantime before purchasing your first home? 

For the majority of young investors, this may mean living in the family home.   

For others, however, including those who favour their independence or want to live in a different city or country, this may mean renting a home while investing in a buy to let property. 

But is it better to rent and buy an investment property, or try and live somewhere rent-free while you invest? Let’s look at some pros and cons of this option: 

The Pros 

• Depending on the cost of your rent and the rental income you can expect from your investment, you may be able to cover your own rental costs while still being left with extra cash each month. 

• You’ll benefit from all of the pros of owning a rental property before becoming a homeowner, such as the tax advantages and future financial security.   

The Cons 

• Finding a rental property with high enough rental yields to cover your own rental payments could be difficult. 

• Even if you are left with positive cash flow each month, your average positive cash flow returns are likely to be minimal compared to investors who aren’t paying rent.

To answer this question further, let’s look at an example scenario. In this scenario, the investor rents a property that they live in which costs them £500 per month.  

They buy a property that costs £100,000 and comes with a monthly rental income of £700.  

After the investor has made their own rental payment, they’re left with just £200 income, and that doesn’t factor in the additional costs that come with owning a rental property.  

If you’re questioning whether it’s better to rent a home while making an investment property your first property purchase, your best option would be to rent a room in an HMO to keep costs low, or find a housemate or two so you can split your monthly outgoings.  

Or, if you have the option to live rent-free in the family home, it’s definitely worth doing so for a while longer!  

How Much Money Do You Need to Invest in Rental Properties as a First Time Buyer? 

While investing in real estate can be an incredibly lucrative venture, you need to first work out if you can afford the costs involved if you want to buy investment property on the real estate market. 

Alongside potential mortgage payments (which we’ll discuss in the next section), you’ll also need to account for a series of costs and operating expenses required to invest in property. 

This includes: 

• Down payment on a mortgage – Usually 25% of the property price for a buy to let mortgage 
• Legal fees  
• Land Registry fees 
• Cash buffer – cash set aside to cover any surprise or unexpected costs 
• Ground rent 
• Property management company fees 
• Maintenance costs  
• Landlord insurance 
• Real estate agent fees 
• Property taxes like income tax 

Overall, we expect first time buyers to need roughly £28,000 at a minimum to find investment properties worth £100k in the UK real estate market. 

If you don’t have the finance available for this, real estate investment is likely not for you. 

For a full in-depth breakdown of the costs involved in real estate, be sure to check out our guide to how much money do you need to invest in property.  

Securing a Mortgage Loan as a First Time Buyer 

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. 

1. Buy to let mortgages require a bigger down payment, with a higher rate of mortgage payment each month. 
2. 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. 
3. To make a good investment, you’ll also need your rent payments high enough to cover your mortgage repayments and get a positive cash flow, 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.  

Can an Investment Property Be a Primary Residence? 

If you opt for a buy to let mortgage and finally secure your buy to let, you may feel tempted to make the property your primary home at a later date. But is this possible? Can you live in your investment property?

Unfortunately, if you finance your purchase with a BTL mortgage loan, you cannot live in an investment property. This is because BTL mortgages are designed specifically for landlords, meaning you will be breaking the terms of your mortgage by living there. 

This can have significant repercussions, including potential jail time.  

To learn more about this topic, be sure to read our guide to “how long can you live in an investment property?” 

Investment Property vs Primary Residence: Should I Make My First Home an Investment Property? 

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