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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 and it is expected that this trend will continue. In 2015, Mortgage Choice revealed that 22% of first home buyers purchased an investment property before an owner-occupied property, up from about 10% in 2009. But is it a good strategy for you? Let’s take a look at some of the positives, negatives, and considerations of buying a property to live in or invest.

Positives

Live where you want, not where you can afford

Many buyers can’t afford the suburb or location they want to live in, so have to end up compromising. I am a perfect example of this. I live (rent) in Albert Park. If I was to buy the type of house that I live in now I would need to spend around $1,500,000 (that’s a mortgage payment of almost $2,000 per week). However, I pay less than $500 per week in rent, leaving me surplus cash flow and the ability to utilise it to buy other properties for investment.

A smart option when buying with a friend or family member

If you have saved some of a 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 an investment, it is a numbers-based decision centered on facts and figures with no emotional attachment meaning the strategy is more clean cut than if any of the parties were to be living in the property. An investment plan is much easier to create when there are no emotions involved.

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. As interest rates increase, the better the numbers start to look. Let’s look at a quick and simple example. Weekly repayments on an owner-occupied home purchased for $600,000 (assuming 5.2% interest rate to be on the conversion side and borrowing $550,000) is $700 per week, plus with the additional council rates or body corporate costs the total outgoing would be about $750 per week. In the owner-occupied scenario or when paying rent at say $500 per week plus about $50 per week (after tax), the cost to hold an investment property is a total of $550 per week. That’s $200 per week you could be financially better off. Obviously, these figures will vary depending on your income, the area you are looking to purchase etc. however they are very realistic.

Freedom

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. 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. You may want to travel for an extended period, live in another state, country or city, have children or get married, the list goes on. If you buy an owner-occupied property now, it may not suit you in a few years or it may not be the dream family home you had in mind.

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!

Negatives

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).

The hassle of renting

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

Considerations

Your stage of life

You must consider where you are at in life and where you see your life heading. 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.

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. So 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 should have plenty enough equity in the first property to draw on and assist you in buying your owner-occupied home.

Talk to an expert first

Before you make any decisions talk to an expert about your options. At Inovayt, 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 I have used to build my wealth and it might just be a better option for you too.

Need help deciding if this strategy it right for you?

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The information contained on this website is general in nature and is no way intended to be legal, financial or investment advice. The information provided is not intended to be taken as, or relied upon as financial advice or providing recommendations in relation to any financial product. You should seek independent financial advice from a licenced financial services advisor to check how this information relates to you and your circumstances. Inovayt Pty Ltd and Inovayt Wealth Pty Ltd does not accept any liability for injury, loss or damage incurred by the use or reliance on the information provided on this website.

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