For many first home buyers, the decision whether to purchase a home to live in or an investment property can be difficult. There are many benefits and drawbacks to either option. This article seeks to explore some of the key considerations, pros and cons for buying an investment property, before buying your own home to live in.

The pros of buying an investment property

Cost of Getting into the Market

When looking at buying your first property, most people are largely restricted by budget. If you were to be buying a property to live in yourself, you will most likely need to make a number of sacrifices and concessions based on your budget.

This can have a significant impact on your overall living standard, however, when purchasing an investment property this impact is significantly less day to day. An investment property is just that, an investment and doesn’t need to tick all the of the boxes that you would ideally like if you were to live in the property yourself. As long as the property is rentable, the quality of finishings or exact layout shouldn’t matter as much to you personally.

Expenses for Income

Servicing a mortgage and maintaining the upkeep of a property can be a significant financial commitment. When you choose to purchase an investment property however, these expenses are largely offset by the opportunity for you to make an income from renting the property out. For many, this makes purchasing a property an achievable goal, as they are not 100% exposed to a new set of expenses including mortgage repayments, insurances, renovations and upkeep, council rates etc.

Tax Advantages

When purchasing an investment property, you are adding both taxable income and expense deductions to your overall financial position. Depending on the value of the property, and the rental income earned, you may find that the income earned in rent is outweighed by the expenses incurred in owning and maintaining the property. In this case, the net amount you are out of pocket becomes 100% tax deductible. This concept, also known as negative gearing can be a great way to minimise your tax liabilities and redirect this additional money into investments.

Low Emotional Investment

As we said before, buying an investment property is far more clinical than purchasing a home to live in. An investment property should be purchased for the sole opportunity it presents to either earn income on the investment or provide significant value appreciation over a course of time (this could be a number of years). This means that the decision-making process should be strictly financial, not emotional, which often makes it very easy to identify the right property and negotiate within the limitations of your investment plan.

Earn Rental Income

If you’re renting out your investment property, you’ll be getting money from someone else to contribute to your mortgage, which means you could pay off your loan sooner. Bear in mind however that the rent you receive may not completely cover your home loan repayments and additional costs.

The cons of buying an investment property

Increased Time Investment for Administration

Even if you choose to have a managing agent for your investment property to take care of the day to day undertakings, you will still need to consider the amount of time it will take personally to manage your property. From marketing for tenants, through to approving maintenance requests, an investment property can be a time drain. Make sure you understand the impact before jumping in to ensure you aren’t caught off guard.

Property Proximity

Depending on your investment strategy, you may choose to purchase a property that is not located close to your current work or home. Often, there are great bargains to be found in regional areas or other states. Buying an investment property means you can widen the search to include any area of the country, but remember that not being located close to a property may cause extended travel requirements if you are needing to physically attend the property either for inspections, dispute resolution or to take care of repairs or renovations.

Capital Gains Tax Applies

Remember that if you purchase an investment property and you make a profit on its sale, that you will incur capital gains tax liabilities. Whilst owning an investment can be lucrative, this fact doesn’t escape the watchful eye of the tax man. On the flip side, your main residence is not subject to CGT. This can have significant impacts on your long term investment strategy so make sure you fully understand what you are getting into, and what will happen when you are wanting to get out.

In summary, these are just a few of the pro’s and con’s when it comes to purchasing an investment property as your first home. Whilst there is a lot to consider, purchasing an investment property can make very sound financial sense over purchasing your first property to live in. If you would like to arrange an obligation free discussion about your options, please reach out to one of our highly experience lending consultants.

Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au