Is buying an investment property as your first home a good idea?

By Mark Rosanes

With property prices continuing to soar, housing unaffordability remains the biggest obstacle many first-time buyers face on the way to securing their dream homes. This is particularly evident in the nation’s capital cities where the price difference between renting and buying a home continues to be significantly high.

Enter rentvesting. This savvy investment strategy has been gaining popularity in recent years, especially for first home buyers who can use it as a stepping-stone towards obtaining the property of their dreams.

A recent survey by lenders’ mortgage insurance provider Genworth has found that one in six, or 15.5%, of prospective first home buyers plan to purchase an investment property as a means of getting foot on the property ladder.

The trend is more pronounced in capital cities with almost a quarter of aspiring home buyers in Sydney and about one in six in Melbourne planning to take the investment route to enter the housing market.

And while investing in property can be an effective way to build wealth and secure your financial future, it entails careful preparation and unyielding commitment to succeed. If you are a first-time home buyer planning to adopt this strategy, here are the things you need to consider.

What are the pros of buying an investment property as your first home?

Purchasing a home to rent it out, or what industry insiders refer to as rentvesting, presents several benefits, which include the following:

1. You can enter the housing market sooner

Instead of delaying your home-buying plans for several years to save enough deposit for a home in your desired suburb, you could be better off purchasing a less expensive house, which requires a smaller deposit, in a different location. This way, you can get on the property ladder sooner and start building equity and generating profit from your investment.

2. You can use your investment property to save for your dream home

Property investments typically provide a great opportunity to generate wealth, allowing you to save enough to purchase your dream home. If your investment property is generating profit, you can even use that income to cover your rental expenses.

3. You get to live where the action is

By renting out your property and being a renter yourself, you have the freedom to live in places where buying is not ideal due to skyrocketing purchase prices. And assuming the area that you want to live in has a relatively affordable rental price, then you will be able to take advantage of the location without having to commit long-term on a huge mortgage. You can also easily upgrade or downsize to a different home if ever your financial situation changes without having to worry about stamp duty or other legal expenses.

4. You get access to a range of tax benefits

The Australian Tax Office provides a range of tax deductions for property investors that can help minimise your annual tax bills. This can sometimes spell the difference between positive cash flow and negative gearing.

What are the cons of buying an investment property as your first home?

Just like any type on investment, however, the housing market has its share of disadvantages. Here are some of them:

1. You will be ineligible for several state-sponsored benefits

By getting into the property market an investor, you are essentially making yourself ineligible for the First Home Owners Grant (FHOG) and First Home Loan Deposit Scheme (FHLDS), which are both accessible only to those buying owner-occupier homes.

2. You have less security with your primary residence

One of the downsides of being a tenant is that there is less security with your primary residence. If your landlord decides to sell, you may need to make the property you are renting available for open inspections or even vacate it.

3. You will be responsible for homeownership costs

As a landlord, you will be responsible for the costs of management and maintenance of your investment property. This may cost you more in the long run, especially if your rental income is less than homeownership costs.

4. You incur capital gains tax liability

If you decide to sell your investment property, you are required to pay tax on capital gains, which is not applicable when selling an owner-occupier home.

What factors should you consider before buying an investment property?

Careful planning and due diligence are crucial when searching for an ideal investment property. Here are things you need to consider before purchasing one.

1. Location

A property’s location has a major impact on the rental demand, tenant quality, and rate of return. Some good indicators of a high-growth area include large and rising population, proximity to public amenities, vibrant job market, low crime rate, accessibility of public transportation, favourable taxes, and affordable insurance rates.

2. The property’s condition

It is advisable that you hire a specialist to conduct a thorough building inspection before purchasing an investment home. This way, you can be sure that the property is in a good condition and ready for tenancy. Unexpected repairs and maintenance expenses can eat into your funds and can have a huge effect on cash flow.

3. Number of listings and vacancies

A strong rental market is often characterized by a low number of listings and vacancies. Low vacancy rates can also allow you to raise rental prices to boost returns.

4. Positive cash flow

Your investment property should be able to generate a strong positive cash flow every month, meaning the income it generates is more than enough to cover everything that you put into it, including monthly repayments, management and maintenance, and taxes.

5. Potential for capital growth

Apart from cash flow, you should be able to generate profit from your investment property. The most common metric used to determine profit is cash on return because it factors in how the property is being financed. Experts say a good investment property can make cash on return of about 8% or more.

What the best suburbs for property investment?

The key to finding high-yield rental properties to look for suburbs that have both affordable property prices and relatively high rental returns. These areas are typically located outside major capital cities, which often have expensive housing and lower yields.

Openagent.com.au recently released a comprehensive list of the best suburbs for rental yield based on January to December 2020 data from CoreLogic. Here are the top five suburbs with high-yield rental houses from each state and territory, according to the real estate agency.

New South Wales

Suburb

Median price

Median weekly rent

Gross rental yield

Wellington

$170,000

$295

9.71%

Moree

$230,000

$280

9.68%

Cobar

$130,000

$250

9.12%

Coonabarabran

$217,500

$240

8.20%

Quirindi

$250,000

$275

7.95%

Source: Openagent.com.au

Queensland

Suburb

Median price

Median weekly rent

Gross rental yield

Mount Morgan

$114,500

$200

12.48%

Dysart

$115,000

$250

11.65%

Blackwater

$125,000

$280

11.46%

Moura

$147,500

$280

11.08%

Cloncurry

$155,000

$315

10.92%

Source: Openagent.com.au

South Australia

Suburb

Median price

Median weekly rent

Gross rental yield

Bordertown

$163,500

$235

8.71%

Elizabeth North

$174,500

$260

8.37%

Elizabeth Downs

$209,000

$255

7.86%

Whyalla Norrie

$172,750

$210

7.68%

Whyalla

$285,000

$275

7.54%

Source: Openagent.com.au

Tasmania

Suburb

Median price

Median weekly rent

Gross rental yield

Risdon Vale

$335,000

$380

7.35%

Ravenswood

$210,750

$268

7.16%

Upper Burnie

$260,000

$310

6.86%

Hilcrest

$235,000

$265

6.84%

George Town

$210,000

$270

6.53%

Source: Openagent.com.au

Victoria

Suburb

Median price

Median weekly rent

Gross rental yield

Redcliffs

$295,000

$300

7.74%

Morwell

$203,500

$250

7.26%

Kerang

$180,000

$250

7.13%

Hamilton

$275,000

$300

6.81%

Mooroopna

$257,000

$300

6.54%

Source: Openagent.com.au

Western Australia

Suburb

Median price

Median weekly rent

Gross rental yield

Merredin

$111,500

$280

13.83%

Newman

$240,500

$475

13.41%

South Hedland

$276,000

$450

11.46%

Derby

$115,000

$320

11.33%

Boulder

$230,000

$320

10.89%

Source: Openagent.com.au

Australian Capital Territory

Suburb

Median price

Median weekly rent

Gross rental yield

Belconnen

$405,000

$475

5.73%

Holt

$605,000

$540

5.24%

Ngunnawal

$546,000

$545

5.05%

Macgregor

$632,000

$490

4.95%

Bonner

$695,000

$560

4.82%

Source: Openagent.com.au

Northern Territory

Suburb

Median price

Median weekly rent

Gross rental yield

Katherine

$340,000

$473

8.24%

Sadadeen

$414,750

$500

7.01%

Braitling

$452,500

$550

6.83%

Gillen

$420,000

$500

6.76%

East Side

$452,500

$530

6.76%

Source: Openagent.com.au

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