Saving a deposit and buying your first property is a dream held by many Australians. But that first property doesn’t have to be one that you move into and live in.
There are of course many benefits to living in your own home. Being able to renovate to suit your tastes and needs, having the security of ownership, and feeling a sense of pride in your home are important factors to many people.
In reality, often you will need more savings in order to purchase a house to live in without sacrificing much of what you want for your home. This may cause a delay in getting into a market, which will often mean the financial opportunity cost. One alternative is to buy an investment property first. This can help you get a foot on the property ladder while you continue to rent or live at home.
There are many reasons you may want to consider investing first.
Where you want to live is not always affordable
Let’s face it, everyone has a dream suburb they’d like to live in. Maybe you’re not keen to commute for more than 20 minutes, or won’t compromise on great café culture. Whatever the case, if the area you love is too pricey and living further out is unpalatable to you, then continuing to rent while owning an investment property may be your alternative option for getting onto the property market without further delay.
The area you want to live in is not the best investment area
Even if you are interested and able to buy in the area you live in, this doesn’t necessarily mean you will do well financially to purchase. Being a first-time investor allows you to pick a growing area, benefit from time in the market and keep your lifestyle as you would like it to be. Remember that you have more freedom and choices available in all states and territories across the country when it comes to an investment property as you don’t need to move physically.
You want flexibility in your lifestyle
For some prospective buyers, the prospect of being tied to a mortgage and unable to change location when wanted isn’t necessarily attractive. While some home buyers will welcome the stability that living in the same place provides and not needing to answer to a landlord, those who currently rent and perhaps need to travel or move for work may appreciate the flexibility of short-term leases. Owning an investment property ensures you maintain some of that ability to move and change the address at will but also provides you the future growth and stability that is attractive about homeownership.
The opportunity to minimize your living expenses
If you are currently renting cheaply and keeping bills to a minimum, either by renting out a room, living with your parents or choosing a cheaper area, you can continue saving funds by purchasing an investment property rather than a home for yourself. Sometimes, purchasing a house can create extra prohibitive bills – such as larger electricity bills for a bigger home. If a tenant is paying those costs, while paying rent, then this will assist you in keeping your expenses low and allow you to move to a bigger property whenever needed with the growth of family size for instance.
Possible positive cash flow on your property
If you choose a property that sees a high amount of rent for a fairly low-priced home, then you may see your investment teeter into neutral or positive cash flow territory. In this situation, the tenant is paying your purchase off and possibly providing you extra funds. While there are outgoings that may erode this income, rental yields can be useful in paying off your home quicker. If you are purchasing an investment with a high amount of cash flow, this may also make lending easier for the mortgage in the first place. Often, lenders will take your potential rental figure at least partially into account.
Your investment can help you leverage into your home later
Owning an investment property doesn’t necessarily mean that you won’t be able to afford your actual home. Nor does it mean that you won’t buy it at some point. In fact, wisely purchased investment properties that grow in value can provide you a substantial amount of equity and wealth. You do want to consider the effect of capital gains tax on your eventual profit. However, those that pick well may see themselves into their dream house in a shorter timeframe than those that rush. You may also be able to refinance the home and use the equity, rather than needing to sell out straight away.
While purchasing an investment property may come with some tax benefits, these need to be discussed with an accountant or financial planner.
Choosing between a home and an investment property will depend on your personal circumstances and the property you’re thinking about buying. Just don’t get stuck in the idea of getting a property to live in before the investment property as you can reverse the idea from the very beginning of your property journey if this suits better for your circumstances. When searching for an investment property, rather than looking for a home that you want to live in, you should search for a property that will be popular with the type of tenant in that area. Transport links, proximity to good schools, and rental demand for that area are often important considerations. Instead of looking in a suburb, you might want to live in yourself, consider a suburb that offers the potential for good capital gains and/or high rental returns. Conduct research on demographics, rental yields, capital growth trends as well as the information on new listings, auctions, recent sales, and suburb profiles.
A good finance broker can save you time and money, and give you peace of mind. But, remember, only work with a finance broker who is a member of MFAA - they are the Essentials of Borrowing.
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