Here is why:
1. You get to enjoy relatively low financing costs for your investment property when it is converted from your primary residence. This is because the mortgage of your existing house is financed as your primary residence and that has lower interest rate than if you have a new property financed as investment property to begin with.
2. You get to pay less for your overall income tax. Your rental property produces business income. When you have a business, you are entitled to certain tax write-offs, such as costs associated with your property management, property maintenance, insurance, business related expenses, and etc. This usually reduces a significant amount of tax that you would have to pay for the profit from your investment. Other kinds of investment, such as stocks and mutual funds, don't have this flexibility to reduce tax. What could be better than that?
3. You are likely to run your rental property well, because you have been living there before, you know the neighborhood, the property condition and you can better manage your rental property and get good tenants. This is especially helpful for first time landlord.
4. You have more equity in your rental property than if you would buy a new one based on the fact that you will never again be able to buy the same type of property for the amount you paid for originally. Real estate prices have always been closely related to inflation and the value of your rental property has increased. That is what an investor would consider a bargain in the current market.
5. Higher rate of return. The rent you can charge for your house is based on the current market. Rents have been gone up but the cost of your house is still what you originally paid for. You are getting higher return of investment. In the current market you would have to spend a lot more to get the same rental income.
6. You could get 100% tax-free capital gain. Thanks to the Taxpayer Relief Act of 1997; when you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes. The exclusion must meet the IRS use and ownership tests: You own and live in the home for two out of the five years prior to the sale.
Think long and hard before you forgo your existing home to upgrade or buy a new one. It could be the best foot forward for you to begin your real estate investment!