First Home vs. Investment Property: Should You Buy a Home or Rental First?

Here's a question that divides personal finance communities like almost nothing else: if you have enough for a down payment and you're ready to buy real estate, should your first purchase be a home to live in — or a rental property to generate income?

The conventional wisdom says buy your own home first. But conventional wisdom doesn't always survive contact with a spreadsheet. In some scenarios, buying an investment property first and continuing to rent your own living space produces significantly better financial outcomes. In others, it doesn't.

Let's do the actual math for both paths, then figure out which one fits your situation.

The Two Paths, Defined

Path 1: Buy a Primary Residence First

You purchase a home, live in it, build equity, and potentially buy investment properties later when you've accumulated more capital.

Typical terms:

Down payment: 3–20%
Interest rate: Market rate (currently 6.0–6.75% for well-qualified borrowers)
PMI: Required if less than 20% down ($50–$200/month on a $350,000 loan)
Mortgage interest deduction available (if you itemize)
[Capital gains exclusion](/blog/home-sale-exclusion-guide): Up to $250,000 ($500,000 for married couples) when you sell, if you've lived there 2+ of the last 5 years

Path 2: Buy a Rental Property First

You purchase an income-producing property, rent it to tenants, and continue renting your own living space.

Typical terms:

Down payment: 15–25% ([investment property loans](/blog/best-dscr-lenders-2026) require more)
Interest rate: 0.5–0.75% higher than primary residence rates
No PMI option — most investment property loans require 20%+ down
Rental income offsets (or covers) the mortgage
Full depreciation deduction available ($350,000 property → ~$9,100/year in depreciation)
No capital gains exclusion when you sell (unless you convert it to a primary residence first)

The Detailed Comparison: Real Numbers

Let's model both paths over 7 years using identical financial starting points.

Your Financial Profile

Annual income: $85,000
Savings for down payment: $50,000
Monthly rent (current): $1,600
Credit score: 740
Target market: Mid-range metro (median home price ~$350,000)

Path 1: Buy a $350,000 Primary Residence

Purchase Details:

Down payment (14%): $50,000
Loan amount: $300,000
Interest rate: 6.25%
Monthly P&I: $1,847
Property taxes: $350/month
Insurance: $150/month
PMI (until ~20% equity): $125/month
Maintenance reserve (1% annually): $292/month
Total monthly housing cost: $2,764

Versus your current rent of $1,600:

Additional monthly cost: $1,164
That's $13,968/year more than renting

Year-by-Year Equity Building:

Year	Mortgage Balance	Est. Home Value (3% appreciation)	Equity
0	$300,000	$350,000	$50,000
1	$296,200	$360,500	$64,300
3	$288,100	$382,600	$94,500
5	$279,100	$405,700	$126,600
7	$269,000	$430,000	$161,000

Tax Benefits (Years 1–7):

Mortgage interest deduction: ~$18,000/year in early years (only beneficial if you itemize, and only the amount exceeding the standard deduction of $15,000 for single / $30,000 for married filing jointly matters)
Realistic annual tax benefit: $1,000–$3,000 depending on your other deductions
Property tax deduction: capped at $10,000 combined with state income tax (SALT cap)

7-Year Net Position:

Equity accumulated: $161,000
Tax savings (estimated): $10,000–$20,000
Additional housing costs vs. renting: $97,776
PMI paid (approximately 4 years until PMI drops): $6,000
Net wealth gained: approximately $67,000–$77,000 compared to renting and investing nothing

Path 2: Buy a $300,000 Rental Property + Continue Renting

Rental Property Purchase:

Down payment (20%): $50,000 (leaves $0 additional reserves — we'll address this)
Loan amount: $240,000
Interest rate: 6.75% (investment property premium)
Monthly P&I: $1,557
Property taxes: $300/month
Insurance: $175/month (landlord policy costs more)
Property management (10%): $180/month
Maintenance reserve (1.5% — rentals need more): $375/month
Vacancy reserve (8%): $144/month
Total monthly expenses: $2,731

Rental Income:

Market rent for comparable property: $1,800/month
Monthly cash flow: -$931 (negative)

Wait — negative cash flow? Yes, and this is the reality check most "buy rental first" advocates skip. In the current rate environment, a rental property purchased with 20% down in a mid-range market is unlikely to cash flow positively from day one when you account for all real expenses.

But your total housing cost picture is:

Your rent: $1,600
Rental property net loss: $931
Total monthly housing cost: $2,531

That's actually $233/month less than Path 1's $2,764.

Year-by-Year Position:

Year	Mortgage Balance	Property Value (3%)	Equity	Cumulative Cash Flow
0	$240,000	$300,000	$60,000	$0
1	$237,200	$309,000	$71,800	-$11,172
3	$231,200	$327,800	$96,600	-$30,516
5	$224,400	$347,700	$123,300	-$44,860
7	$216,700	$368,700	$152,000	-$52,204

But Rent Increases Change the Picture:

If your rent increases 3% annually (typical in most markets):

Year 1 rent: $1,600/month
Year 3 rent: $1,698/month
Year 5 rent: $1,804/month
Year 7 rent: $1,916/month

Meanwhile, if you raise your tenant's rent 3% annually:

Year 1 rental income: $1,800
Year 3: $1,910
Year 5: $2,029
Year 7: $2,155

Your rental property's cash flow improves by roughly $155/month by year 7 as rental income grows but your mortgage stays fixed.

Tax Benefits (Path 2 is significantly better here):

Depreciation: The building (not land) can be depreciated over 27.5 years. On a $300,000 property where the building is worth $240,000, that's $8,727/year in paper losses — even when the property is appreciating.
All expenses are deductible: mortgage interest, property taxes, insurance, management, repairs, travel to the property
Paper loss: In years 1–3, your rental property likely shows a tax loss of $5,000–$10,000/year after depreciation, which can offset your W-2 income (if your adjusted gross income is under $100,000; phases out between $100,000–$150,000)
Annual tax savings: $2,000–$4,000

7-Year Net Position:

Equity accumulated: $152,000
Cumulative negative cash flow: -$52,204
Tax savings (estimated): $14,000–$28,000
Net wealth gained: approximately $114,000–$128,000

Path 2 Wins the Wealth Race — But There's a Catch

On pure numbers over 7 years, the rental-first path generates approximately $40,000–$50,000 more wealth. But the comparison isn't complete without considering:

What you're giving up:

Housing stability (landlords can sell, raise rent, or not renew your lease)
The ability to customize your living space
The $250,000/$500,000 capital gains exclusion on a primary residence
Peace of mind that comes with owning your home
Potentially lower overall stress

What you're taking on:

Landlord responsibilities (even with property management)
Vacancy risk, tenant risk, and maintenance surprises
Two housing payments to manage simultaneously
No cash reserves after the down payment (dangerous)

The House Hacking Middle Path

There's a third option that combines the best elements of both paths: buy a small multi-family property (duplex, triplex, or fourplex), live in one unit, and rent the others.

The House Hack Numbers

Purchase: $450,000 Duplex

Down payment (FHA, 3.5%): $15,750
Loan amount: $434,250
Monthly P&I: $2,674
Property taxes: $450/month
Insurance: $225/month
MIP (FHA): $254/month
Maintenance: $375/month
Total monthly cost: $3,978

Rental income from second unit: $1,700/month

Your effective monthly housing cost: $2,278

That's less than both Path 1 ($2,764) and Path 2's combined cost ($2,531), and you're building equity in a property you live in while earning rental income.

Why House Hacking Often Wins

FHA financing available: 3.5% down on up to 4 units, as long as you live in one
Rental income counts toward qualification: Most lenders count 75% of projected rental income, increasing your purchasing power
Owner-occupied tax benefits: Mortgage interest deduction on your unit, plus rental expense deductions on the rented unit
Lower down payment than investment property: $15,750 vs. $50,000 in our examples
Live-in management: No property management fee, and you can respond to maintenance issues immediately
Conversion flexibility: After 1–2 years, you can move out, rent both units, and buy your "real" home with primary residence financing

The House Hack 7-Year Model

Assuming you live in one unit for 2 years, then move to a primary residence and rent both units:

Years 1–2: Owner-occupied duplex

Your housing cost: $2,278/month
Equity building: ~$25,000 (mortgage paydown + appreciation)

Year 3: Buy a primary residence, convert duplex to full rental

Duplex now generates $3,400/month in rental income (both units)
Duplex expenses (mortgage, tax, insurance, maintenance, management): $4,350/month
Monthly cash flow: -$950 (but improving as rents increase)
Primary residence mortgage: $2,200/month (using equity and savings for a down payment)

Year 7 Position:

Duplex equity: ~$180,000
Primary residence equity: ~$60,000
Total real estate equity: ~$240,000
Net cumulative cost above renting: similar to Path 1
Net wealth gained: approximately $140,000–$160,000

House hacking potentially outperforms both standalone paths.

The Decision Framework: Which Path Is Right for You?

Buy a Primary Residence First If:

Stability is a priority. You have kids in school, a partner who needs location certainty, or you simply want the security of owning your home.
You're not interested in being a landlord. Rental properties require active management even with a property manager. If that doesn't appeal to you, it won't magically become appealing after you buy.
Your market has strong appreciation potential. In markets where home values are climbing 4–6% annually, the capital gains exclusion on a primary residence (up to $500,000 for married couples) is enormously valuable.
You qualify for [first-time buyer programs](/blog/first-time-homebuyer-grants-2026). [Down payment assistance](/blog/down-payment-assistance-programs), below-market rate programs, and FHA loans with 3.5% down make primary residence purchases accessible with less capital.
Your rent is high relative to ownership costs. If buying costs only slightly more than renting (or less), the investment case for renting and buying a rental weakens.

Buy a Rental Property First If:

You're comfortable renting and your rent is affordable. If you're in a rent-controlled apartment at $1,200/month, the opportunity cost of giving that up for a mortgage is real.
You understand landlording. You've researched tenant law, property management, and maintenance costs — and you're genuinely prepared to handle it.
You have reserves beyond the down payment. A rental property with no emergency fund is a disaster waiting to happen. Keep 3–6 months of both your rent and the rental property's expenses in reserve. That's $15,000–$30,000 beyond your down payment.
Your market has strong rental demand. Low vacancy rates (<5%), growing population, and rent growth above 3%/year make rental investment more viable.
You're in a high tax bracket. Depreciation and rental expense deductions are more valuable when your marginal tax rate is higher.

House Hack If:

You're flexible on living situation. Living in a duplex or triplex isn't for everyone, but for those willing to do it for 1–3 years, it's a powerful wealth-building strategy.
Your market has affordable multi-family properties. In some markets, duplexes are priced reasonably; in others, they're as expensive as single-family homes, eroding the advantage.
You want to learn landlording with a safety net. Living next to your tenant gives you hands-on experience with lower risk.
You have limited savings. FHA's 3.5% down payment makes this accessible with far less capital than an investment property purchase.

Common Mistakes on Both Paths

If You Buy a Primary Residence First

Buying the maximum you qualify for. Just because a lender approves you for $400,000 doesn't mean you should spend $400,000. Leave room in your budget for future investing.
Treating your home as your only investment. Your primary residence is shelter first, investment second. Continue investing in retirement accounts and building savings.
Waiting too long to buy investment properties. If your goal is [real estate wealth](/blog/equity-vs-appreciation), start planning your second property purchase within 2–3 years of buying your home.

If You Buy a Rental Property First

Underestimating expenses. The "1% rule" (monthly rent should be at least 1% of purchase price) is increasingly hard to find in most markets. Run realistic numbers including vacancy, maintenance, and capital expenditure reserves.
Skipping reserves. You need 3–6 months of expenses for the rental property and your personal living expenses. This is non-negotiable.
Ignoring the lifestyle cost. Continuing to rent while owning an investment property means landlord decisions affect your life without giving you housing stability.
Forgetting about Fannie Mae's 10-property limit. If you plan to build a portfolio, know that conventional financing becomes harder to get after 4 financed properties and is capped at 10.

Running Your Own Numbers

Here's a simple framework to compare the two paths for your specific situation:

Step 1: Calculate Your True Cost of Owning (Primary Residence)

Monthly mortgage + taxes + insurance + PMI + maintenance (1%/year) + HOA = Total Monthly Ownership Cost

Subtract your current rent = Additional Monthly Cost of Ownership

Step 2: Calculate Your True Cost of a Rental Property

Monthly mortgage + taxes + insurance + management (10%) + maintenance (1.5%/year) + vacancy (8%) = Total Monthly Expenses

[Monthly rental income](/blog/best-cities-for-cash-flow-2026) – Total expenses = Monthly Cash Flow

Add your current rent = Total Monthly Housing Cost

Step 3: Project 7-Year Wealth Accumulation

For each path, calculate:

Total equity accumulated (mortgage paydown + appreciation)
Total tax savings
Minus total additional costs above current rent
= Net Wealth Gained

Step 4: Factor in Non-Financial Elements

Rate each path 1–10 on:

Housing stability
Lifestyle quality
Stress level
Flexibility for life changes
Learning and growth opportunity

The path with the best combined financial and lifestyle score is your answer.

The Bottom Line

There is no universally correct answer. The rental-first path often wins on pure financial returns. The primary residence path often wins on stability, tax benefits, and lifestyle. The house hack path often wins on everything — if you're willing to live in a multi-family property for a couple of years.

What matters most is that you're buying something. The biggest wealth gap in real estate isn't between those who bought a rental first versus a home first. It's between those who bought real estate and those who kept waiting for the perfect time.

Run the numbers for your market, your income, and your life situation. Then make the move.

[[Rental Property Depreciation](/blog/depreciation-real-estate-guide) Guide: How to Maximize Your Tax Deductions in 2026](/blog/depreciation-rental-property-guide)
[Using a HELOC for an [Investment Property Down Payment](/blog/investment-property-down-payment): Smart Strategy or Risky Move?](/blog/heloc-for-investment-property-down-payment)
Using a HELOC as a Down Payment for Rental Property

First Home Vs Investment Property

Key Takeaways