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It can be difficult for some buyers to work out whether to purchase an owner-occupied home or an investment property first.

In many cases, people want the security of living in their own home and base their decision on emotion. For others, the decision depends on their lifestyle priorities and what they can afford.

When property prices are reasonably low and interest rates are on the decline, it can make people more confused when weighing up between buying a home or an investment property.

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 yourself.

What to consider when deciding between buying a first home or investing

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 an investment, as this will deliver the highest tax deductions. However, be cautious with this advice and make sure that you always buy quality real estate. Don’t 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 and 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.

You can accomplish this strategy if you are still living with your parents or you employ the “rentvesting” strategy. Rentvesting is when you purchase an investment property in an affordable location (somewhere you do not necessarily want to live in) while renting in an area that is most convenient based on your lifestyle. More on rentvesting later in this guide.

Still, if you really want to buy a home and 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.

Loan structure

When you apply for a home loan, the mortgage terms and conditions will vary depending on your purchase.

Typically, when you borrow for an investment property, it 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.

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. This holds true only during the interest-only period, which typically lasts for up to five years.

Interest-only loans allow investors to maximise their tax-deductible expenses. Furthermore, the lower repayments with interest-only loans free up extra money that they can use to fund investment.

When you borrow with the intention to live in the property, the arrangement is also different. Usually, you will end up getting a principal-and-interest loan where repayments will go to the interest and the principal amount of the loan.

Lenders offer useful features for owner-occupier loans that can help you save on interest. These home loans also have lower interest rates compared to investor loans.

Interest rates

There is a common perception suggesting that it would be better for buyers to purchase their own home instead of 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.

To some degree, if you continue to rent and purchase a quality investment property, you will come out in front financially. This is possible even at the current rental rates and you could potentially be better off doing this than buying your own home.

Value creation

Renovation strategies can both help homeowners and investors add value to their property. If done properly, there will be financial benefits in both scenarios. However, there are 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.

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.

The 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.

Overall, if structured correctly, property investment allows you to move ahead in leaps and bounds financially compared with buying your own home. People who invest wisely in property are often able to reinvest and build a real-estate portfolio.

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. While it is typical for a homebuyer to save for the 20% deposit requirement, there are arrangements with lenders and even government support schemes that will allow you to enter the market earlier.

Still, you will need to 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 in 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.

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 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.

It is important to note that not all property is attractive as a rental proposition to the wider market. 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. On another note, if you ever need to decide between renting and buying a home, use our rent or buy calculator tool.

Rentvesting

There are several advantages to taking the rentvesting route, the primary one being that you can enter the property market sooner and start building wealth as an investor.

Because the property is cheaper, the deposit needed may be lower (but obviously you would need to check with your lender) and you thus do not have to spend years saving, which can only be a good thing.

A large number of potential homeowners get caught in the trap of renting and being unable to afford a deposit for a home of their own, so by lowering the deposit goal, more people would be able to reach their savings goal while they are renting.

Buying an investment property first also means you don’t have to compromise on location and price when buying, as you don’t have to buy within your ideal area. The focus is solely on affordability and the value of the property as an investment that can help you save for the property you really want.

The key drawcard for Aussie homebuyers is the fact they don’t have to sacrifice the lifestyle they want in order to work towards buying their dream home – they can live near the city or beach or the good social amenities while using this investment property to save.

If it is an option for you, buying several cheaper investment properties can potentially be a way to build wealth quicker than buying one more expensive home.