Buy a home to live in or an investment property first?

First home buyers are usually in an enviable position. This is because they can often have lower levels of debt than those already on the property ladder. Yet, they may also have lower levels of available upfront capital and savings. This doesn’t necessarily mean that choices should be limited. In fact, first home buyers are in prime position to make good choices about their financial future.

So, is it best to be a first home buyer or is it better to be investing instead?

First time investors tend to buy a rental property first while continuing to rent themselves. First home buyers instead buy their home and live in it until they may be able to afford an investment property.

There are many reasons you may want to consider investing first.

Where you want to live is not always affordable

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 a 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 ladder.

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.

Even if you pick wisely as a first home buyer and approach it with an investment mindset, it’s unlikely that you will be able to up and leave to live in a different state or territory across the country where prospects are possibly better. Similarly, sometimes the property ‘type’ will not suit you. If you currently live in a one bedroom apartment and minimise your bills, but the area that has strong fundamentals is primarily houses, then you may also want to consider investing.

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 address at will but also provides you with the future growth and stability that is attractive about home ownership.

The opportunity to minimise 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.

Another option is to purchase a home and rent out the other rooms while you live in it yourself. This may incur some tax and you will be required to declare this income, so make sure you seek out the advice of your accountant before buying on this basis.

Tax benefits

Purchasing an investment property does come with certain tax benefits, such as the ability to claim back your expenses – including on paper costs, such as depreciation. These can bring down your tax at the end of the year and provide substantial savings, particularly for higher income earners with large amounts of tax.

While tax reasons should never be your sole reason to invest, they should be considered as part of the financial equation.

Consider that upkeep on the property, repairs and maintenance as well as interest on your loan can also be claimed – when it is your own home they are just outlays that you must pay.

There are, however, also other tax implications to consider. Capital Gains Tax that might not have been charged on your primary place of residence may suddenly be applicable on an investment property. Ensure you speak to your accountant about the implications.

You receive 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.

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