Buy an investment property or home first?
Is it better to buy an investment property or home first?
Have you been saving up for a long time and finally feel ready to get into the property market? Maybe you’re considering either buying a home to live in or investing in a property you can rent out.
Either way, it’s worth knowing some more about both options to ensure you’re making the best decision.
Buying your first property to live in
Some of the benefits of buying your first home to live in include:
- You may be eligible for the first home buyers grant
Depending on which state or territory you live in, a first home buyers grant could help you to finance your first home purchase.i Note though that this does not apply to investment properties, and in some states you’ll lose your right to this grant if you buy an investment property first.
- You get security and stability
As long as you can make your home loan repayments, you can stay in your home as long as you like.
- Your purchase is capital gains tax (CGT) exempt
Any home that is classified as your main residence, whether it’s your first place or not, is free from CGTii when you sell it.
And a few things to be mindful of:
- Expenses stack up and these are not tax deductible
Expenses with a first home include initial costs, such as stamp duty and legal fees, and ongoing costs, such as water rates, building insurance and repairs. When buying an investment property you’ll also be hit with these costs, but many will be tax deductible.
- You may have to make some sacrifices
Where you really want to live may not be where you can actually afford to buy. So whether it means choosing a place that’s smaller, further out from the city, or having less disposable income, you’ll probably have to make some trade-offs.
Buying your first property as an investment
With housing affordability now considered a real problem in Australia, buying an investment property to rent out may be a more viable option for many younger Australians.
Some benefits to consider when it comes to this option include:
- You can get a cheaper place
An investment property doesn’t need to tick all the boxes of your ‘dream home’. This means you can potentially get it at a cheaper price.
- It’s not an emotional decision
Your decision on what to buy should be based on investment potential, including forecast rental return and capital growth. So instead of walking into a place and having to love the look of it, you can walk in with your investor’s hat on.
- You can earn rental income
If you’re renting out your investment property, you’ll be getting money from someone else to contribute to your home loan, which means you could pay it off sooner. Bear in mind the rent may not completely cover your home loan and other costs.
- Tax advantages through deductions
Despite having to pay capital gains tax when you sell your investment property, negative gearing and other tax strategies could help you offset some of the property costs. Talk to your KRA Wealth Management adviser about the deductions you may be able to claim.
However, these benefits aside, it is important to be prepared for maintenance costs. Choosing a good property manager and good tenants is the key to keeping these costs under control. Just be careful you don’t buy a property that is too old and run down. There’s a fine line between buying a place that can have some simple cosmetic work done to improve rental appeal and investment return, and one that needs major repairs.
Some other useful tips
Before you buy a home or an investment property make sure you:
- Research how much it really costs to buy a property.iii
- Check your credit history. Make sure your bills and loan repayments are paid on time so you have a clean credit history.
- Talk with people who have already started investing to get an understanding of the financial journey.
- Think about whether a guarantor could help you protect your property in the event you can’t meet the repayments.
- Don’t fear debt – learn the difference between good debt and bad debt.iv
We’re here to help
Whatever your decision, the team at KRA is here to help you make sure your investment strategy suits your personal circumstances, your financial goals and make a well-informed decision.
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