Real Estate fundamentals
April 17, 2024

Key Differences: Investment Property vs. Primary Residence

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Want to build wealth in the US? Investing in real estate can be a smart move for foreign nationals.

While market fluctuations exist, historical data suggests that US real estate offers the potential for steady rental income, with national averages hovering around $1,800 per month. Additionally, property appreciation has shown a long-term trend of growth. 

When exploring real estate investments in the United States, you might find a lot of information about buying a house to live in (known as a primary residence). But as of June 2023, investors have purchased nearly one out of four (26%) single-family homes in the U.S. Many homes are purchased for investment, not just for living, so it’s important to understand the difference between the two.

In this blog, we’ll clear up the confusion around purchasing an investment property versus purchasing a home to live in. Investment properties are about making money, not creating your dream home. Just like stocks, you don't need to love a company's products to benefit from its success. You also don't need to be emotionally attached to a property to profit from owning it. Keep scrolling to learn more about the key differences!

The Purpose of Your Purchase

The fundamental difference between buying an investment property and a home to live in lies in the primary purpose of acquiring the property. 

Investing in real estate is all about generating income and long-term capital appreciation. Here, every aspect of the decision-making process revolves around maximizing financial gain. Rental income potential, the chance for rent to increase in the future, and overall return on investment (ROI) become your guiding stars. Location trends, property features, and even maintenance costs are all evaluated through the lens of maximizing your financial benefit over time.

In contrast, purchasing a primary residence fulfills a more personal need. Affordability, convenience of location, and your personal preferences take center stage. The ideal home might have a spacious backyard for your children or a gourmet kitchen for your culinary passion, even if these features don't necessarily translate into greater asset value down the line.

Financial Considerations

Investment properties come with a different set of financial considerations compared to a primary residence.  

First, securing financing for an investment property usually requires a larger down payment and comes with higher interest rates on your mortgage. Unlike primary residences, there are no government-backed loan options available for investment properties. 

However, there's a potential tax benefit to consider. Owning an investment property allows you to deduct certain expenses from your rental income, which can significantly reduce your taxable income.  A tax deduction lowers the amount of income you're taxed on by the government. In simpler terms, some of your ownership costs, like mortgage interest, property taxes, and even repairs, can be subtracted from your rental income, potentially lowering your tax bill.

For a primary residence, the down payment requirement is typically lower, ranging from 3% to 20% depending on the loan type. (However, it's important to note that these requirements may be stricter for non-citizens.) Additionally, you'll benefit from lower interest rates offered on mortgages for primary residences. While you won't enjoy tax deductions or rental income with a primary residence, owning a traditional home allows you to build equity over time. This gives you greater ownership stake in the property as you pay down your mortgage.

Location, Features, and Maintenance

Finding the right investment property isn't the same as picking your dream home. The most important thing for investment properties is to make money. You’ll want to target locations with high rental rates, low vacancies, a stable local economy, and a growing population. You should also shop for homes with in-demand features. In-unit laundry, off-street parking, and pet-friendliness can all boost your rental income. Maintenance is also a key concern for investment properties. Opt for investment properties that require minimal upkeep to protect your rental income and long-term investment value. 

When choosing a primary residence, personal desires take center stage, often outweighing purely financial considerations. Location goes from attracting tenants to catering to your lifestyle. For example, you might crave a suburban oasis with a finished basement, regardless of whether this type of home will command top rental income.

Maintenance also becomes a matter of personal pride, not profit. You might embrace a charming fixer-upper with character, knowing you're creating your dream home, not maximizing rental income.

Tax Considerations

Investing in US real estate offers exciting opportunities, but it's essential to be aware of the tax implications. 

The IRS considers rental income taxable, just like a salary. But you can offset that income with several deductions: mortgage interest, property taxes, depreciation (spreading the property's cost over time), repairs, maintenance, and even some property management fees. These deductions reduce your taxable burden, making investment properties even more attractive. All of this can be more easily accomplished with a Limited Liability Company (LLC) for your real estate investments.

Owning a primary residence has different tax implications compared to investment properties. One benefit is the mortgage interest deduction, allowing you to deduct a portion of your mortgage interest from your taxable income. There's also a capital gains exclusion for primary residences. When you eventually sell your primary residence, you can generally exclude capital gains up to a certain threshold from taxes, provided you've lived in the home for at least two of the past five years. This exclusion can impact your after-tax profits from the sale.

Waltz is Your Trusted Partner in Achieving the American Dream

Investing in US property as a foreign national unlocks exciting opportunities, but navigating the process can be complex. Waltz simplifies your journey with a digital platform and expert guidance:

  • Streamlined Investment: Get started with a few clicks. Form a US entity in 20 minutes and explore financing options tailored to your needs. Leverage your investment with a loan-to-value ratio of up to 70%.
  • Ongoing Services: Waltz takes care of you every step of the way, offering secure US banking with FDIC insurance, experienced property management services, and seamless foreign exchange transfers.

Waltz helps you invest in US real estate with confidence! Fill out an interest form and we’ll be in touch with you soon.

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