Should I buy an investment property before my first home?

13 May 2022

| Home Loan

With property prices high, many first home buyers are struggling to get into the property market, much less buy their dream home.

That’s why some first home buyers are now changing tactics and asking, “should I be buying an investment home instead?” a practice that has now been coined rent-vesting. This way they can buy where they can afford and rent where they want to live or even stay at home for longer (sorry fam).

But is it a good idea? Mark Marshall our Home Lending Team Manager, explains some of the pros and cons of buying an investment property as a first home.

Let’s dive in.

Pros

Locking down a great asset

One of the greatest benefits of an investment-first strategy is that you can get your foot on the property ladder. By the time you’re ready to buy your own home in the future, your investment property should be a valued asset and should allow you to go shopping for a home in your preferred location or with a higher value.

But it’s important to remember, property prices can go down in value if the market turns volatile.

Buying with your head

An investment property doesn’t need to ‘tick all the boxes of your dream home. Because you’re not buying a house to live in yourself, you can get something cheaper in an area that isn’t where you want to live. Buying with your head and not your heart lets you focus on securing good rental growth and an increased future sale price.

Extra freedom

Renting out your investment property while you rent somewhere else, could give you the freedom to live in a more desirable location or in a better home than you could afford to buy. Renting not only gives you the opportunity to experience different areas and lifestyles but also allows you to easily upgrade or downsize to a different home without having to worry about stamp duty or other expenses that come with selling and buying a home.

Rental income

As well as getting you onto the property ladder, your investment property should be generating enough rental income to cover most, if not all the mortgage so that you don’t need to dip into your own savings.

Tax benefits

Owning an investment property could provide tax benefits, such as:

  • Deductions for costs of owning a rental property like council and water rates, insurance, repairs and maintenance and real estate agent fees.
  • Depreciation deductions for things like furniture, the building and fixed structures on the property.
  • Reduction of your taxable income through negative gearing (lowering the amount of tax you pay).

It’s a good idea to discuss your circumstances with your accountant or financial advisor before taking any action as tax implications vary.

Backup

The time may come when things change, and you decide to move out of the family home or stop renting. Moving into your investment property and making it your home offers an easy solution and could take some of the stress out of the decision. Plus, you’ll already know how much the repayments will be and what to expect from the area and property.

Cons

Potential risk

Like with any investment, there’s risk involved. Your investment property could be vacant for a long period of time, you could get a lower rental yield than you expected or there might be continuous issues with the property that need ongoing repairs, etc.

There’s also the risk of a property downturn and the chance of rising interest rates on your mortgage.

Buying and selling costs

Unfortunately, you still need to pay for things like stamp duty, legal fees and other government fees when purchasing an investment property.

And when you sell your investment property, you’ll also need to pay real estate agent fees, and more than likely, capital gains tax.

Capital gains tax is required if you sell your investment property for a profit.

But the good news is, you’ll only have to pay tax on half of the net capital gain if you own the property for over one year. So, it’s a good idea to hold onto it for at least 12 months, if you can.

Paying off a loan and renting

If you rent at the same time as owning an investment property, you could be putting yourself under financial stress, especially if there’s a shortfall between your rental income and your loan repayments.

It’s important to know what you can afford to pay in rent so that you can still make your mortgage repayments and live comfortably.

Homeownership costs and managing tenants

Managing tenants and paying for repairs and maintenance on your property can quickly add up to one big expense. You’ll need to factor in costs for things like screening tenants, advertising your property, appropriately lodging the bond, collecting rent and maintaining the property or paying a property manager to do all these tasks for you.

This article is intended as general advice only and has been prepared without taking into account the personal financial situation, objectives or needs of the reader. Before acting on this information, you should consider its appropriateness, having regard to your objectives, financial situation and needs. 
 *Lending criteria, fees and conditions apply. Offer is current as at 23/04/2018 and is subject to change. Minimum loan $250,000 to purchase or build a first home with a loan to value ratio over 80%. All loans that are eligible for the First Home Buyers Grant will be subject to paying Lenders’ Mortgage Insurance. To be eligible, applicants must not have previously owned residential property in Australia. Available to natural persons only (i.e. not a trustee or a company).

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Call us on (08) 8202 7777 or visit us at 400 King William Street, Adelaide

FREQUENTLY ASKED QUESTIONS

Yes. The Credit Union SA First Home Buyers Grant* is available for anyone purchasing their first home, regardless of whether they are buying it as an investment or to live in, as long as the eligibility criteria is met.

Well, no and yes. The government’s First Home Owner Grant is typically only available if you’re going to live in your first home. However, in some states you can still get the grant if you live in your property for at least six to 12 months when you first buy it – after that, you can then rent it out as an investment property.

To see if you are eligible for the government’s First Home Owners Grant visit: Firsthome.gov.

The same rules apply for LMI whether you’re buying a property to live in or as an investment. If you borrow more than 80% of your property’s value, you can expect to pay LMI.

However, the full LMI premium, including stamp duty and GST, could be tax-deductible as a borrowing cost depending on your circumstances. So, make sure you discuss this with your accountant or financial advisor.

Ultimately, it really depends on your overall goals, the housing demand and supply trends in the market, the location of the property and what you can afford.

The most important thing is to do your research and consider speaking to as many people with relevant experience and expertise, such as real estate agents, accountants and seasoned property investors, as you can.

Whether you’re buying an investment property or an owner-occupied property, we can help you. Make an appointment with one of our friendly Mobile Lending Managers who can come to your home or office at a time that suits you. You can also visit us at 400 King William Street, Adelaide or call us on (08) 8202 7777 between 8am – 8pm weekdays or 8am – 2pm Saturdays or if you’re 100% ready apply online today.

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