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SHOULD I BUY TO LIVE IN OR BUY TO INVEST?

An increasing number of Aussies are buying an investment property as their first ever property

But is it a good strategy for you? Let’s take a look at some of the positives, negatives and considerations:

POSITIVE: LIVE WHERE YOU WANT, NOT WHERE YOU CAN AFFORD

Many buyers are priced out of the market in the suburb or location they want to live in so have to end up compromising. As an example of this let’s say it costs $1,500,000 to buy in the suburb you want to live in. That’s a mortgage payment roughly of around $2,000 per week depending on prevailing rates and your situation. However, renting in the same suburb might be only $500 per week, leaving you surplus cash flow and the ability to utilise it to buy other properties for investment.

 

POSITIVE: A SMART OPTION WHEN BUYING WITH A FRIEND OR FAMILY MEMBER

If you have saved some deposit, but not quite enough to buy a property on your own, you have the option to pool funds and buy with a family member or friend to get a foothold in the market. As the property would be for investment, it is a numbers based decision based on facts and figures with no emotional attachment meaning the strategy is more clean cut than if any of the parties where to be living in the property. An investment plan is much easier to create when there are no emotions involved.

 

POSITIVE: GET AHEAD FINANCIALLY

In most cases it is actually cheaper to continue to rent and own an investment property than it is to own your own home. And as interest rates increase, the better the numbers start to look. Let’s look at a really quick and simple example. Weekly repayments on an owner occupied home purchased for $600,000 (assuming 5.2% interest rate and borrowing $550,000) is $700 per week plus add the cost of council rates or body corporate the total outgoing would be about $750 per week in the owner occupied scenario or continue to pay rent at say $500 per week plus about $50 per week (after tax) the cost to hold an investment property. That’s a total of $550 per week. $200 per week financially better off. Obviously these figures are just a guide and will vary dependent on your income, area you are looking to purchase etc. however they are a good reason to think through the numbers.

 

POSITIVE: FREEDOM

Many singles, downsizers and young couples have no idea where they want to settle long term or what their plans may be in the coming years. They may want to travel for an extended period, live in another state, country or city, have children, get married, the list goes on. If they buy an owner occupied property now, it may not suit them in a few years or it may not be the dream family home they had in mind. You are handcuffed to a certain degree if you buy an owner occupied home whereas you can be more transient if your property or properties are for investment, as they don’t rely on you living in them.

 

POSITIVE: BORROWING DEPOSIT FROM PARENTS

For the young ones out there – in my experience, parents are more likely to assist their children with a deposit to buy a property if they see their kids wanting to invest and get ahead financially. Many parents will have a plan to leave their kids the family home or other assets as their inheritance, however if you put a clear investment strategy together and work on how much deposit you need in order to borrow from the bank you might be surprised about how willing your parents are to assist now by using some of the equity in their own home to help you get ahead. An early inheritance option!

 

NEGATIVE: CGT (CAPITAL GAINS TAX)

An investment property incurs CGT when you sell it. If you buy an owner occupied property it is Capital Gains Tax free (meaning when you sell it – you don’t pay any tax on the profits).

 

NEGATIVE: THE HASSLES OF RENTING

Obviously in this scenario you are bound by renting and the perceived hassles or inconveniences that may come with it. Having to move regularly, not being able to renovate or improve your property etc. It’s all about deciding whether the benefits outweigh the hassles!

NEGATIVE: IMPACT ON YOUR FISRT HOME BUYERS GRANT

Most states have some version of a first home buyers grant that only applies to properties that you intend to live in. If your first property is an investment property this may exclude you from obtaining a first home buyers grant for the property you want to live in. So check your states current rules for first home buyers and think about how this might apply to you. 


CONSIDERATION: YOUR STAGE OF LIFE

You must consider where you are at in life. If you plan on having children in the coming years it might be important to set yourself up in the family home now. Or, if you are ceasing full time work soon, it might be wise to buy the property now that you plan on retiring in over the next few years.

 

CONSIDERATION: WHEN WILL YOU NEED A DEPOSIT FOR YOUR OWN HOME?

If you decide to buy for investment first, your deposit and savings will need to be contributed to the purchase so you will more than likely have no cash left over. If you want to buy an owner occupied property within 12-24 months it may be difficult. Not impossible, but certainly more complex. On the positive side if you buy a $450,000 investment property, at conservative growth of 5% per annum, that’s an increase to your property value of about $22,500 per year. Not many people have the ability to save that amount of money over that period of time. So after the 24-month mark you might just have enough equity in the first property to draw on and assist you buying your owner occupied home.

 

CONSIDERATION: TALK TO ONE OF OUR GENIUSES FIRST

Before you make any decisions talk to one of our home loan geniuses first about your options. We can help run the numbers for you on different scenarios so that you are armed with all the information you need to move forward.

Sure, buying to invest and paying off someone else’s mortgage while you rent may seem a little outside the square (especially when we have all grown up being told “rent money is dead money!”) however it is a strategy that many have used to build wealth and it might just be a better option for you too.

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