Should I Buy an Investment Property or Home First?

Buying your Home First

Entering the property market for the first time and buying a home is a tremendous achievement, synonymous with the great Australian dream. Living in your own home means you can customise or renovate the property according to your taste or needs. You can also live there as long as you like – without having to worry about a landlord kicking you out.

There are also many incentives in place, such as stamp duty reductions or subsidies from the government for first-home buyers.

Also, the fact that your home is exempt from capital gains tax (CGT) when you decide to sell it down the track (i.e., if the asset increases in value, you won’t have to pay taxes on those earnings).

On the other hand, many people who decide to buy a home first will have to compromise on location, size, or type of property due to the constraints of their budgets.

Some people may feel like they have less freedom after getting a home loan because it might seem like they can’t travel as much or make other significant life changes like starting a business or working overseas.

Buying a home first also means missing out on potential tax benefits associated with owning an investment property.

Buying an Investment Property First

If you buy an investment property first, the first benefit is that it can be treated purely as a commercial asset. This means not getting emotionally attached to the property, nor having to purchase something in your favourite suburb. All you need to focus on is cash flow and long-term potential – which widens your pool of choices considerably, as you could even look at different cities or interstate.

With an investment property, you can take advantage of any tax benefits available to you, such as depreciation and negative gearing. And because banks are willing to lend up to 80%+, when you utilise the power of leverage, a higher potential return on your cash investment is possible.

With rentvesting, you also have greater freedom in terms of where you live, as you can take out a lease on a rental property in your preferred location – which may be in an area you couldn’t afford to buy in yet.

Correspondingly though, buying an investment property first means missing out on first homeowner grants, CGT exemption, as well as the potential lack of stability in having your own home to live in.

What about Cashflow?

While both options have advantages and disadvantages – what do the numbers look like from a purely cashflow perspective?

Let’s take a look at a very simple example:

Assume there are two new apartments in the same apartment building. Both sell for $500,000 each, with a weekly rent of $400 each.

John and Jane both have an annual income of $80,000 plus $100,000 in savings. Both borrow $400,000 from the bank to buy one of the apartments. Both take interest-only loans, paying an interest rate of 4%. John is a first home buyer, while Jane buys to invest. 

At the end of the year, First Home Buyer John, with no tax claims or rental income, will have paid $22,000 for the year overall in mortgage repayments.

Rentvestor Jane has a tax claim of $12,536 (out of which only $2,536 is an ‘out-of-pocket’ cost, while $10,000 is her depreciation deduction for the new property). As a result, she saves $4,074 in tax. If Jane rents the exact same property for $400 per week, Jane will have paid $19,262 for the year or $370 per week. That’s a $53 per week saving compared to if she’d bought the property as her home or $2756 savings for the year.

While this is just a simplified example, it demonstrates the power of thinking outside the box. Homeownership is conventionally seen as the first and only option, but there are other alternatives to consider.

Owning your own home feels great, but if your goal is to build wealth for the long term, it may be worth talking to a professional before choosing which path to take.

Ironfish is a national property investment services platform for astute investors, who want to build a successful portfolio of properties. We offer more than just insightful knowledge in the changing property market; we provide step-by-step guidance through our Portfolio Approach investment strategy, plus personalised assistance and tailored education so that you can make informed decisions every step of the way. If you are looking for a trusted advisor to provide expert advice on building your future investment portfolio, contact us.