Probably the most frequently asked question we’ve had over the years is: “Should I buy a home or an investment property first?“. It’s such a big decision and it can really affect your future financial success and ultimately your peace of mind.
The decision-making process in buying a home to live in vs buying an investment property Is likely to be very different.
Why? Because most people prefer to live in a property that they like. Aesthetic and location considerations of the property will be a major factor, as well as personal lifestyle preferences.
The decision will be emotional.
Buying an investment property on the other hand should be more of a business decision, where market fundamentals and other benchmarks should override any emotional considerations or personal taste.
Therefore, it’s very likely that you could own a great investment property that you wouldn’t necessarily want to live in yourself.
The initial clue as to whether you should buy a home or an investment property first is your budget.
Can you afford to finance a property in the area where you want to live? The best way to find this out is to ask your mortgage broker, who is an important member of your property team.
If your mortgage broker says that you can’t borrow enough to buy an owner-occupied property where you want to live – and your finances aren’t likely to enable this any time soon – then it could be a good idea to buy an investment property first.
In this circumstance, you can simply continue to rent where you like living, and then buy an investment property that’s within your borrowing capacity and cashflow needs.
This is sometimes called rentvesting and it’s a great way to get onto the property ladder.
Remember, there are hundreds of property markets in Australia – and while this sounds like a cliché – at any given time there is always a good area to invest in Australia.
However, if you’ve always wanted to live in your own property and your mortgage broker (or lender) tells you that you can afford one in your desired location, then you should probably do this first, rather than buy an investment property.
Here are a just a few reasons why:
- With lending conditions getting tighter, the decision to buy an investment property first may hinder your ability to secure finance for a subsequent owner-occupied property. This could mean that you would have to sell your investment property before buying your home.
- Your Principal Place of Residence (PPOR) is an asset that is free of capital gains tax. That means that you get to keep any gain in value on this asset, tax free.
- If you’ve always wanted a principal place of residence (PPOR) and you can afford it, the question of ‘when’ never goes away. It can be a psychological burden until you go ahead and do it. Buying an investment property first may just add unnecessary stress.
Importantly, keep in mind that reducing the debt on your home loan as fast as you can, will free up equity. This equity can be used to enable you to buy an investment property in the future.
A favourite quote of ours is from respected financial planner and author Noel Whittaker, who once said:
“Bite off more than you can chew and chew like hell.”
Initially this sounds frivolous – and even a bit reckless. But considering the low interest rate environment that we’re in – presumably for the foreseeable future – this is a golden period to reduce debt on your home.
Of course, if the bank says that you can borrow a maximum ‘X’ amount of dollars to buy a home – or even an investment property – it doesn’t necessarily mean that you should. Firstly, you need to carefully assess your particular circumstances including your cash-flow position and any upcoming life events that can change your ability to keep up with loan repayments.
So, let’s answer the original question. If you really want to live in your own home and can afford to live in an area that’s acceptable to you, then that’s probably what you should do first.
However, if you can’t afford a home you want to live in – or you don’t have the need – then you should buy an investment property first.
And If you’re still not sure, please don’t hesitate to get in touch with us on 1300 077 766 or email us on info@adviseable.com.au We would be more than happy to help look at your options to determine what’s best for you.
The information provided in this article is general in nature only. It has been prepared without taking into account your objectives, financial situation or needs, and should be in no way deemed as personal financial or financial product advice. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and circumstances.
