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Should Your First Home Be An Investment Property?

By Laura Anderson

Can’t decide whether to buy your first property as your home or as an investment property? Here are some points that may help you make up your mind.

With property prices soaring in Australia’s biggest capital cities, the urge to buy a property is stronger than ever.

If you’re buying your first property, the first thing you need to do is decide whether to buy it as a home or a rental property. This decision will impact on everything else you do down the line.

It can be a difficult decision to make. On the one hand, you want that security of living in your own home without the hassles of dealing with a landlord. On the other hand, you want to start building your property portfolio to secure your retirement.

There are upsides and downsides to each option. The best way is to assess all of these and see what works best for you over the short and longer term.

Pros For Buying Your First Home

1. You may be able to access the First Home Owner Grant. While there are more restrictions and it is less generous now, the First Home Owner Grant is still available to first home buyers and could help you in a big way if you qualify. This assistance is only given to first-time buyers purchasing their homes.

2. You don’t have to pay tax when you sell. If you buy your first property as a home and live there for at least 12 months, you won’t have to pay capital gains tax when you sell, no matter how much the value has grown during that time. There are certain taxation rules that you need to meet, but essentially, as long as you’ve lived in this property for the whole time and haven’t earned any income from it, you’re entitled to full exemption. In contrast, you’ll have to pay capital gains tax on your investment property when you sell.

3. Potentially easier to get a mortgage. The recent crackdown on investment lending will likely make it more difficult for investors to get a loan, especially those who are just starting out. In contrast, lenders are often more willing to lend to borrowers who are buying their homes. There also could be scope to get a lower interest rate as a first home buyer, depending on your lender.

Pros To Buying An Investment Property

1. Cash flow. You could earn regular income that will help you better manage your cash flow. Essentially, your tenants are paying your mortgage repayments, provided you buy a property that’s earning enough to cover the interest payments.

2. You may pay lower repayments. Lenders often allow you to pay just the interest on your mortgage for a number of years. This can make it easier to hold your property and will likely put less strain on your budget. In contrast, you’re more likely to be obliged to pay principal and interest repayments for your owner-occupied loan.

3. You can potentially borrow more. You can potentially get more money from the banks, thanks to the rental income you’ll be getting from your investment property. While lenders will apply different criteria, generally they take about 60% of the rental income as a proportion and use this in their calculation of your borrowing capacity. Having this extra 60% added to your personal income could make a huge difference to your loan approval and serviceability.

4. You can claim deductible expenses. There are a range of expenses that you can claim as tax deductions in relation to your rental property. For example, in most cases you can claim interest payments, maintenance costs, and rates, among others. In contrast, you won’t be able to claim any of these if you buy your property as an owner-occupier.

5. You can take advantage of negative gearing benefits. Negative gearing means your investment property is earning less than the cost of holding it. You cover the shortfall in the hope that in the future your property will grow in value so you can recoup these losses. You can then claim these losses as tax deductions against your taxable income.High-income earners like this strategy as a way to reduce the tax they pay on their income. However, it can often be a big drain on your cash flow and could severely limit your ability to borrow more money.

Cons of Buying An Investment Property

1. You pay Capital Gains Tax on sale of the property. You pay capital gains tax when you sell your rental property, although if you have held the property for longer than 12 months you will get a 50% concession. The capital gain amount is added to your other assessable income and taxed at your highest marginal tax rate.

2. You have no access to federal and state government grants. Buying an investment property makes you ineligible for the assistance provided by the federal and state governments for first home buyers.

Best of both worlds

The good news is you can have the benefit of owning both a home and a rental property.

Here are a couple options you may want to consider:

  • Buy a smaller, less expensive property in your chosen area and live in this property for at least 12 months.
  • You can then look at turning this into rental property, meaning you move out and either rent or buy another property.

If you sell down the line, provided it’s within six years, which is the allowable time you can be away from your home, and provided that you haven’t declared a new main residence, you may still get the full capital gain exemption. You need to speak to an accountant for advice.

Property is a long-term play – you get the most benefit by holding over the long term.

The thing to remember is that buying and selling a property costs a lot of money. It’s something you need to consider carefully. Property is a long-term play, and you get the most benefit by holding over the long term. You should only consider selling if you think this property has achieved maximum growth and you could use your funds elsewhere.

While there are advantages to buying your first property as your home, many of these are one-off benefits. If you want to build your personal wealth, buying a rental property, ideally, should result in greater financial gain.

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