Buying a home now as an "investment" property

With the collapse of the Real Estate market and numerous Federal and State Government tax incentive for individuals to buy a home, there are a lot of things a first time new home buyer should watch out for.  The loopholes and "gotchas" I describe may not apply to everyone but these are things that I have discovered with my own personal experience.

Because of these incentives, there are people I know who may not be ready to buy a home yet who are pushing to purchase their first property.  Although this may not be the right thing for them at where they are with their lives, they feel like they need to do it now or never.  Many, in fact, are even looking at these properties as investment properties where they will in turn rent the property out -- sometimes because they cannot afford to live in the home themselves.  

Here are a couple things I would suggest a first time home-buyer in this new market at least think about before diving into the fray.  

1. Will you be living in the home or treating it as an "investment property"?  This does not apply to most homes in Texas or Arizona where property is dirt cheap, but in California, especially in the Bay Area, you get significantly more benefit living in the home vs. renting it out.  As an investment property, there is a cap of $25,000 per year you can deduct in interest, taxes, etc. This easily can be surpassed with the average home in the Bay Area reaching $1,000,000 or more.  Yes, an investment property can be depreciated and you can count numerous expenses towards your outstanding taxes.  But with the cap of $25,000 per year, you will never realize these gains until you either move back in or sell your home.
2. Owner occupied exemption.  There is usually a $7,000 exemption in California and the Santa Clara County that you can take on the value of your home if you occupy the property vs. renting it out.  This actually does not really affect the overall taxes you will have to pay much here in the Bay Area.  I pay over $10,000 per year in property taxes and the $7,000 exemption may save me $70 bucks in taxes, but in this economy, every dollar helps.
3. Maintenance and repairs.  Unlike living in a rental unit, you are personally responsible for any expenses to upkeep your home.  This includes additional expenses like homeowners insurance, both for the external and internal aspects of your home.  These expenses are sometimes required by your mortgage lender.  After all, they want to make sure their investment is safe if any "acts of God" occur.  
4. HOA.  Almost all condos/townhouses, and even some single home developments have HOA.  Make sure to understand and read the HOA documents in detail.  Sometimes month HOA fees can be as much as 1/4 of your total mortgage payment.  These fees cannot be deducted and is out of pocket for most owners.

For those who are stuck between "a rock and a hard place", the only solution is to claim that you live in your property while renting it out and trying to pocket the income, which essentially in California is barely enough to cover your mortgage payment.  Problem with that is it's illegal, and it is very easy for you to set off "red flags".  You will need to have your mail still sent to your place of residence, even though you no longer live there and also have most of your important documents sent there as well.  Let's be honest with ourselves, the IRS will ask questions if all of your bank, work, and mortgage is addressed to this apartment in the city while you are claiming on your 1040 that you're living in a house in Santa Clara. 

Renting to the appropriate tenants is also very important.  Unfortunately, most tenants are a pain in the ass.  So you will inadvertently create additional headaches.  Would you really want to have all of your important documents mailed to them?  

End of the day, my suggestion is this is not a sprint, or 400-meter dash, but a marathon.  An investment in Real Estate should be for at least 10-years or more.  Ignore the Government incentives, the sound bite propaganda on the television, and buy a home in a price range you can afford when you are ready, and live in it and enjoy your time there.