To buy a home or to buy an investment property

The great Australian dream to own your own home has been getting further out of reach for many Australians as rising housing prices make it harder and harder for new homebuyers to enter the market. This is especially the case in capital cities and in coastal towns. Australia is now one of the most expensive places to live, and with this, people are now looking at investment properties rather than first homes.

There are a number of reasons why more and more people are looking to build an investment portfolio: it’s largely due to the financial benefits of owning a number of investment properties but it’s also due to a changing cultural attitude about where we’re living. Many people no longer live their whole lives in the one house, and therefore if you’re buying the house you intend to live in, you may lose out when you sell to move to a different house. Many investors rent a property as their principal place of residence as it makes more financial sense to do so.

When you own an investment property you have greater flexibility in your lifestyle, as well as the option to move as you choose. There are also benefits to owning your own home, so let’s compare them and see how each stacks up against the other.

BUYING A HOME

1. Expenses:

There are a number of expenses that you have when you own a home. There’s mortgage interest, but when you take into account closing costs from the sale, repairs to the home, any improvements and renovations that you do, and tax and insurance, you’ll start to see that the costs of owning your own home go well beyond the initial sales figure.

2. Appreciation:

Appreciation happens, but it isn’t guaranteed, and if it’s inflation that’s the key driver, you’ll be in no better position than you were yesterday! Why? Because if your house is appreciating it means everyone else’s is too – which means you’re all still on level ground. What this means as well is that even if your property is technically worth more, it doesn’t allow you to upgrade – just to move sideways.

3. Financial Hardship:

As a homeowner you’ll have expenses that you have to cover, and without the security of other investments (if you don’t have them) you need to ensure that you’re covered for any possible financial hardship.

BUYING AN INVESTMENT PROPERTY

1. Expenses:

The great thing about renting a property out is that you get some financial benefits from your tenants. They cover a lot (if not all) of your expenses which means that you can possibly enjoy a cash flow positive situation. If not, you can also claim tax benefits to your property.

2. Appreciation:

If you’ve chosen well with your investment property and appreciation happens then that’s great. Capital growth is the overall aim of investing in property with a buy and hold strategy, but while the market may be in a low point of the property cycle you’re still are generating income through the rent (and letting the rental yield ‘catch up’ through annual increases).

3. Financial Hardship:

You get the same risks with investment properties as you do with owning your own home, but with an investment property, you can mitigate the risk with a cash buffer created from the equity difference in your property portfolio. It doesn’t matter if you own a home or you own investment properties – you need to have the financial structures in place to support yourself.

4. Tax Benefits:

Another popular reason for investing in property is the tax benefits which you’re able to seek out.  Investors can decrease their payable tax by claiming things like depreciation and benefits can be claimed for things like fridges, air conditioning units, stoves, and hot water systems. Owners can also claim building costs, construction, and structural costs, even if they were completed by the previous owner.

Is it better to rent or buy?

It’s a good idea to look at the options as purely financial, and consider the freedom and flexibility you have as a renter. If you’re building an investment portfolio and have some cash flow positive houses in your possession, then it makes sense for you to rent also, preferably somewhere that works for your needs while still being an affordable and financially sound decision.

It’s in your best interests to buy an investment property from a tax point of view as well, as without an investment property you can’t claim all of the benefits available to you through tax! Talk to your accountant or financial planner for more advice about the tax breaks available to you as an investor in Australia.

The importance of building a foundation, by focusing on investment properties, cannot be stressed enough. Your borrowing capacity will be stronger and you’ll be in a position where you will be able to buy more properties sooner. If you have a dream of owning your own home outright one day, then you should work with the options available to you and consider building up an investment portfolio.

The income you earn from these investment properties is going to help you to make more money, and when they appreciate, you can choose to sell one of your properties in order to pay for your dream home, while still keeping your other properties as a passive income stream.

There are fewer risks and more rewards to owning an investment property and building a portfolio than there are to saving like mad and paying off one house as a home. Investing allows you a vehicle to build your very own Australian dream.