How Is Buying a Rental Property Different from Buying a Primary Residence?

In This Article

If you’re new to real estate investment, we know you have plenty of questions. Buying your first property is a big deal, a huge step, and one of the best things you can do for your financial future. 

Of course, you might think that buying a single-family rental (SFR) is no different from buying your personal residence. A house is a house, after all.

However, the process of buying an investment property, though similar, comes with a handful of variations and unique considerations you should be aware of. Be prepared before you start the process, and you’ll avoid costly mistakes.

Six Ways Buying an SFR Diverges from Typical Homebuying

1. Property criteria

• Investment property: Focus on potential rental income, location, market trends, and overall returns. It’s not about the property’s aesthetic appeal or your preferences—it’s about function and potential. An investment property doesn’t have to tick all your personal boxes to be a good investment.
• Personal residence: Emphasis shifts to personal preferences, lifestyle needs, and the property’s suitability for the buyer’s family. A pool may be an asset rather than a liability (as it is for an investment property). What you look for solely hinges on the kind of home you want to live in.

2. Market analysis

• Investment property: In-depth market research is crucial to identify areas with strong rental demand, potential appreciation, and favorable economic conditions. Investors carefully investigate and choose their market based on long-term prospects for earning stable rental income and reliable property appreciation.
• Personal residence: While market conditions may be considered, preferences and immediate neighborhood appeal often play a more significant role. Where you buy depends on job obligations, family needs, and your desires. Long-term financial gain is usually a secondary consideration.

3. Lending standards

• Investment property: Lenders often have stricter criteria for investors, requiring a higher down payment. They might even look at a property’s income-earning potential. Some lenders are inexperienced in dealing with investors, and their standards may be extra high to reflect that. Keep your financial house in order—your credit score included.
• Personal residence: Requirements may be more lenient, and down payment options might be more flexible. Many first-time buyers benefit from programs that reduce down payment demands and negotiate interest rates.

4. Loan types and terms

• Investment property: Loans for investment properties usually come with higher interest rates and may have different qualification standards than residential mortgages. That said, investors also have nontraditional lending options to consider. 
• Personal residence: Residential mortgages may offer lower interest rates and more varied financing options. Almost all homebuyers will utilize traditional lending to secure their home.

5. Negotiation strategies

• Investment property: Negotiations may revolve around potential rental income, property conditions, and terms that affect the return on investment. Investors will negotiate primarily based on satisfying their chosen metrics and KPIs, which will start their investment in a more favorable position.
• Personal residence: Negotiations may involve personal factors such as furniture, appliances, or specific terms related to the buyer’s needs. Sure, there will be some maintenance and property conditions issues to negotiate. However, traditional buyers may be more content with letting the seller do the repairs. An investor would be wise to ask for credit and get their own contractors to address any issues because they will know exactly who did what and what the warranty is.

6. Inspection priorities

• Investment property: In-depth inspections may focus on potential rental-related issues, property conditions, and the feasibility of generating rental income. There will be specific deal-breakers in play, but buy-and-hold investors aren’t after perfection. Many will go on to do extensive renovations if they’re not already buying a turnkey property. Any issues will be a bigger deal if the property is advertised as turnkey.
• Personal residence: Inspections may prioritize factors affecting the buyer’s immediate occupancy and comfort. While many of these standards remain the same, a buyer may be willing to forgo addressing certain things, preferring to deal with them down the line. Most investors don’t want to kick the maintenance and repair can down the road—but traditional buyers don’t have the same priorities.

Final Thoughts

At the end of the day, the actual process of buying an investment property is almost identical to that of purchasing a personal residence. The differences are in how you think about the properties and what you value. As you buy your first SFR, be mindful of this mentality shift.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.