A home or an investment property: Which do you choose?

A home or an investment property: Which do you choose?
Jennifer DukeDecember 7, 2020

It’s an increasingly common debate – do you look to buy an investment property first, or a home?

Here are some easy pointers to steer you quickly through the maze of indecision.

Tradition says that when you have enough saved a deposit, you’re serviceable, and you’re prepared to take on debt, then you take the leap into buying your own home. However, this doesn’t necessarily need to be the case.

A debate is emerging around whether first time buyers should choose a home or an investment property first. It’s a fair question to ask – particularly when we’re seeing many decide to opt for this arrangement.

However, it will come back to one simple question: Why were you buying in the first place?

If you were buying to escape your parent’s house, or the irritating situation of renting and being unable to paint your walls or have a pet, then it’s unlikely buying an investment property will suit your goals. If, however, you are looking to buy for primarily financial reasons – rather than for lifestyle reasons – then asking yourself whether an investment property is a good option is a fair question.

While all properties should be treated with careful planning, and considered as a financial decision, it's worth noting that ignoring the "owner occupier" aspect of buying opens up many locations and opportunities across the country to consider where to place your money.

Mortgage Choice previously discussed the benefits of dabbling in the market through an investment first.

“[After buying] They then rent the property out and use the life lessons, possible tax benefits and any financial gains to put them in a better position to buy their first home," a spokesperson explained.

“This occurs especially with younger people who want to get into the property market but may have been priced out of buying a home in the area they want to live in. A clever investment property purchase and a little patience could see these home buyers-to-be residing in their desired suburb sooner than expected."

“While affordability has improved of late, it is not uncommon for first time property buyers to dip their toe into the market by purchasing an investment property first. They then rent the property out and use the life lessons, possible tax benefits and any financial gains to put them in a better position to buy their first home.   - See more at: https://www.mortgagechoice.com.au/fairien.azeem/blog/fallen-for-your-first-home-but-unsure-if-you-can-commit-buying-your-first-investment-property-before-your-first-home-may-help-15620#sthash.74PwQJBa.dpuf

Let’s unpack the debate a little more.

THE PROS AND CONS

Source: Cameron McEvoy - property investor, Property Spectator

Owning your own home, investing later

Pro: The security of not being asked to leave after six months of tenancy.

Pro: You can personalise the space you live in and have greater freedom to decorate.

Con: You cannot claim any of the tax benefits of living in your own home unless...

Pro: You rent out bedrooms to a boarder, entitling you to apportioned tax deductible expenses (effectively making your own home partially an investment property).

Pro: The advantage of being able to live in the area/suburb/street where you want to be. Renters are often at the mercy of accepting less than their ideal locale.

Con: You are at the mercy of paying the additional costs involved in home ownership (strata for units, council/water rates, house maintenance, repairs, etc) without any of the tax deduction allowances, making owner-occupying very expensive when coupled with mortgage repayments.

Investing while renting

Pro: Cash flow month to month - it's easily considerably cheaper to split bills and rent rate.

Pro: Probably the biggest one – you free up cash flow to save harder for a deposit on an investment property.

Pro: Many options exist within this: couples moving in together to split costs; friends can flat or house share to split costs; or simply living with parents and paying a little board can keep costs down.

Con: Insecurity of long-term tenancy. Owners can sell/move back in/even demolish the property you're renting.

Con: Costs aren't fixed; leases tend to hike up in rent at the end of one lease and the start of another one.

Con: Depending on whom you're living with, the challenge of personality clashes or inconvenient lifestyle issues with accommodation sharers.

Con: Lack of freedom in personalising your home.

LIFESTYLE AND CIRCUMSTANCE

This part is largely personal.

Renting doesn’t suit everyone – particularly if you do not want to be forced to move at the end of your lease agreement. There are thousands of gripes that tenants have with their landlords and property managers. Many of us would love to be able to paint our walls, buy a pet or just not put up with inspections.

If you’ve come to the end of your tether, and that is why the property market is looking attractive, it seems that buying a home is for you.

However, if you are not sure about what the next seven to 10 years holds for you (how many of us really are), then renting might suit perfectly. Herein lies a lifestyle debate that sees many retain their tenant status. You might not know what you want to live in down the track – perhaps your lifestyle will change, you may have children or you’ll need to move for work. Remaining flexible, by renting, may be the best solution for you – particularly bearing in mind hefty in/out costs when it comes to transacting property.

Lifestyle is also heavily affected by affordability.

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AFFORDABILITY LEVEL AND LOCATION

Let’s be honest – affordability is largely about location. If you can’t afford to buy in the location you’re renting in and that you love, then you will be required to look elsewhere. Similarly, growth might be forthcoming elsewhere than in your current city – for instance, Sydney has recently gone through a cycle and it’s debatable as to the levels of growth still expected over the year (although recent estimates have suggested 10% growth to come).

Do you actually want to live where you can afford to buy? If you love your current location (for instance, some upcoming first time buyers we know of cannot contemplate not living in Melbourne’s Prahran or in Sydney’s Newtown or Glebe) and can’t afford to buy there, but still want to be getting onto the property ladder… well, it might make sense to retain your current lifestyle and hold an investment property elsewhere.

If your budget is $350,000, not a huge amount given the median prices of our capital cities, and you live and work in, say, Sydney CBD – then it might be worth looking to see what the regional areas can offer up at your budget.

It may even be worth looking interstate.

Choosing an investment property and location means that you can get onto the property ladder, while remaining in the same area, and potentially choose something that is neutrally geared, or close to it. This essentially means you will be paying out minimally each month.

Compareyour rent to the mortgage repayments you would have if you were buying a home, as well as the investment property required pay-out. It’s worth considering which is the most viable for you.

In some areas it’s cheaper to buy than rent, based on repayments. Don’t forget that there are other costs you need to be paying as well (for instance, council rates or strata) that often make this not strictly true.

Even so, not every area is lucky enough to fall onto the list.

Similarly, investing in property allows some significant tax breaks – particularly if you are on a higher income. Things like depreciation can be claimed, as can your property-related expenses. While it is never worth investing in property for a tax break, it does affect your overall bottom line and should be factored into the equation. You also want to consider the future effect of capital gains tax.

If renting a room as a single in a lower-cost area, you can significantly keep your own costs down. Having a home is going to be a pricey enterprise.

FIRST HOME BUYER GRANTS

The government doesn’t give out a huge number of handouts to those looking to buy property; however first home buyers are often in luck.

Some states and territories require you to live in the property for a period of time. Others say that buying an investment doesn’t affect your ability to get the grant in future, provided you don’t live in it.

Be clear on the rules to ensure you’re not missing your personal benefits by buying an investment property. If you are, then weigh up the lost opportunity.

MATURITY

Let’s be frank. You won’t hear this point much, but if you become an investment property owner – and therefore a landlord – you’re going to need to be able to handle a group of professionals. You will need the maturity and sensitivity to deal with tenants. These may be model tenants but, as we’re all human, there is always the possibility of them causing damage. If you can’t handle this – and it’s regardless of age – then you’re unlikely to be suited to a lifetime of landlording.

It’s also about being in the right frame of mind to invest over buying a home. Investing is about leaving emotion out of the picture and potentially buying something ugly, or in an area you do not personally deem charming, to secure future growth.

You are likely also going to need to hold onto this property for a period of time. How will it affect your future plans?

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

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