Nila Sweeney

If you are deciding whether to buy your own home or an investment property first, there are a few important questions to answer. Patrick Bright, real estate author and buyers’ agent with EPS Property Search, guides you through the process.

It can be difficult for property buyers to work out whether to purchase an owner-occupied home or invest in property. In many cases people want the security of living in their own home, and therefore base their decision on emotion. It can also depend on their lifestyle priorities and what they can afford at the time.

When property prices are reasonably low and interest rates are on the decline, it gets people thinking more about buying a home or investment property.

Add some government buying incentives into the mix, such as the First Home Owner Grant, and those who are eligible to benefit start to feel that they need to get in now to make sure they don’t miss out.

If you are unsure of what to do, the best idea is to evaluate all the options so that you make the right choice for you and your family. Here are a few things to work through to make sure you select the best option for you in the short and long term.

1. Financial benefits
There are significant differences when evaluating the purchase of a home versus an investment property if you look at it from a purely financial perspective. The main difference is that in most cases, it is more affordable to rent where you want to live than purchase and pay off a comparable home –particularly in a capital city.

In comparison, an investment property allows you to have the tenant and the government assist you in making loan repayments with rental income and tax breaks.

The amount of tax deductions you will receive is partly dependent on your income, so the name the investment property is purchased in is important.

Many people recommend that you purchase a brand new property, as this will deliver the highest tax deductions. Be cautious with this advice though, and make sure that you always buy quality real estate. Do not just purchase a new property because it has extra tax deductions. If the property stacks up as a good investment, then any additional tax benefits are an added bonus – not a reason to purchase.

Some of the deductions for an investment property include rates, strata fees and maintenance expenses. In comparison, homeowners will need to pay the full amount of these costs out of their own pocket.

If you really want to buy a home, and you are happy to forgo the financial benefits of an investment property (and you can afford to buy the right property in your chosen area) then you are set. However, this is not often possible and compromise is necessary.

2. Loan structure
Your mortgage terms and conditions will vary depending on your purchase. The property investor’s loan is usually an ‘interest only’ loan, which means that you only make repayments on the interest on the money borrowed (rather than on the principal). In contrast, homeowners need to pay off both the interest and the principal on their loan. Consequently, the investor repayments can be significantly lower than those of the homeowners for a comparable loan amount, allowing investors to use their additional funds to further their financial position.

3. Interest rates
There is a line of thought at the moment that suggests property buyers would be better off purchasing their own home rather than continuing to pay the current high rental rates in many capital cities. The reasoning here is that the interest rates are so low that the repayments on your own home would be similar – or in some cases even lower – than rental repayments. While this may be the case, it does not take into account the full financial picture.

I believe that if you continue to rent and purchase a quality investment property you will come out in front financially. Even at the current rental rates, you will be better off doing this than buying your own home. This is because of the tax breaks mentioned above. It would be foolish to think that interest rates are going to remain at historically low levels for many years. The banks are already offering five-year fixed rates at around 1.5% above today’s standard variable rate which is a strong indication of where they think interest rates will be in a few years time.

4. Value adding
Both homeowners and property investors can add value to their property through a renovation strategy that is designed to increase the property’s capital value. If done properly, there will be financial benefits in both scenarios. There are also other benefits for property investors. They will be able to increase their rental yield after the renovation, and add to their tax deductions by obtaining a depreciation schedule on the new fixtures and fittings.

5. Capital gains tax
There is a financial benefit, which favours homeowners when it comes to selling a property. If you decide to sell your primary residence twelve months after you purchased the property, you will not pay capital gains tax. In comparison, capital gains tax applies to all sales on investment properties.

My philosophy is to buy and hold property for the long term, as the ‘in-and-out’ costs of buying and selling real estate can dent your bank balance. The highly successful stock market investor, Warren Buffet, often asks the following question: if the market closed tomorrow would you be happy to own that share forever? If you apply this questioning to property purchases and take the time to evaluate what you really want for the long term, then you can avoid paying these unnecessary in-and-out costs.

Overall, if structured correctly, property investment allows you to move ahead in leaps and bounds financially compared with buying your own home. From my experience, people who invest wisely in a property are often able to reinvest and build a real-estate portfolio, resulting in what I call “the six-figure income indexed-to-inflation for life strategy” down the track.

6. The lifestyle factor
Once you have had a hard look at your financial options, it is important to examine how purchasing an investment property versus a home will affect your lifestyle. Purchasing a home provides you with a long-term financial base, but decreases your flexibility. It is important that you take the time to make sure that you will be happy living in the property for the medium to long term, because you can easily blow $100,000 in selling and buying costs if you decide that the property does not suit your lifestyle or growing family in a few years.

A big factor in your decision will be determining what you can afford to buy so that you can comfortably make your loan repayments. I always encourage my clients to do two things:

  • Put down at least a 20% deposit.
  • Factor in repayments at 2% higher than the current rates, so that you have a buffer if rates rise.

If you can afford to make payments at this higher level, then why not get ahead on your loan from the start? This way you have some room to move should you encounter a period that is more of a financial struggle.

Once you have worked out what you can comfortably borrow, you can start to determine what sort of property you can buy and the suburbs that are in your price range. There is no point starting your search before you go through the process of determining your budget, complete with a pre-approved loan. Carrying out a search without financial approval will usually end in disappointment.

Two good options:
  1. Buy a smaller, less expensive property in your chosen area by trimming your wish list down from the ‘like to haves’ to the ‘must haves’.
  2. Buy outside your chosen suburbs in an area that is affordable given your budget.

Make sure that you evaluate these options carefully rather than making a spur of the moment decision. You do not want to be trying to sell the property after six months because you cannot cope with the extra transport time – or because you have realised that a two-bedroom apartment simply will not work for a family of four.

If you decide to go down the investment property road to capitalise on the financial gains, you should focus on finding a quality property in a good investment area – while renting in a location that suits your lifestyle. In this case it won’t matter too much if you decide to move due to family or work commitments, as you can easily pack up and relocate to a new rental property in a new location without tearing up tens – if not hundreds – of thousands of dollars in stamp duty and other selling and buying costs.

What makes a good investment property purchase
When searching for a quality investment property, it helps to think like a prospective tenant. In general terms, a rental property should be close to public transport, amenities and an employment hub – particularly in the busier cities.

Investment properties will also be more attractive if they are in proximity to entertainment outlets such as restaurants and shopping areas. Other factors such as a secure building, a pleasant outlook and a balcony are highly desirable for tenants. Off-street parking can be a deal maker or breaker, particularly in the very busy suburbs close to the city centre.

It is important to note that not all property is attractive as a rental proposition to the wider market place. This is particularly important to understand if you have decided to buy a home that may not suit you or your family’s needs in a year or two, and your plan is to turn it into an investment property and rent it out. If you want to go down this ‘have your cake and eat it too’ approach, then you need to evaluate it from a rental perspective before you buy.

After evaluating your options, make sure that you conduct thorough market research to ensure that you purchase quality real estate regardless of whether you have decided to buy a home or investment property.

As always, you need to evaluate all of the options and include all the information in order to make a sensible financial decision for you and your family.

Patrick Bright is a real estate author and buyers’ agent. He has recently released another book from his ‘Insider’s Guide’ series titled The Insider’s Guide to Buying Real Estate.

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