9/03/2015
With record low interest rates into the foreseeable future and lending criteria slightly easing, it’s a safe bet that more and more Australians are going to be asking themselves which option they should choose - an investment property or a PPOR (principal place of residence).
It may seem an easy enough question, however to answer it you’ve got to take a close look at where you’re at financially and what your goals are.
Let’s have a look at the pros and cons for each strategy. We’ll also discuss what you can do if you’re already on the “property ladder” and want to move up!
Buy a primary residence
PROS:
First homeowners’ grants & concessions
Many states offer generous first homeowners grants and concessions on land taxes, which can help to reduce the financial costs of getting into a home.
Typically, a homeowner must reside in the property for 6 to 12 months, depending on the location, to be able to claim the grant.
Emotional appeal
There’s no doubt that owning your home provides an emotional satisfaction that is very appealing.
When you own your own home you can make any changes, both structurally and aesthetically, to suit your individual tastes and this shouldn’t be discounted in your decision to buy.
Stability
You’re not at the whim of a landlord when you own your home.
Provided you are able to continue meeting your financial obligations, you and your family will have the security and comfort of familiarity by staying put should you choose to.
Exempt from CGT
Unlike with investment property, you won’t be required to pay capital gains tax when you sell your primary residence.
Cons:
No income
You aren’t being paid to live in your home - you’re paying to live there, so it’s a money “taker” not a money “maker”!
Only on the day you sell will you realise a return on your investment - hopefully.
Limited tax benefit
Aside from the CGT tax exemption there really are no tax benefits to buying a PPOR.
Buy an investment property
PROS:
Cash flow
Unlike a primary residence, a property that delivers an income will pay for itself - especially if it is positively geared.
Tax benefits
Three main tax exemptions include:
- Negative gearing
- Depreciation
- Maintenance costs
These deductions can significantly reduce your tax obligations.
Additional financing options
When purchasing an investment property you have the option of getting help from others towards the purchase (e.g. joint venture).
Equity
Using the income your investment property provides, you can pay off the mortgage on either your primary residence (if you already have one) or the loan tied to your investment property.
These funds can then be used to continue growing your portfolio.
CONS:
First homeowner grants & concessions
You won’t be able to take advantage of the first homeowner grant and concessions if you purchase the property as an investment.
This also means in many cases you may not ever be able to take advantage of these benefits because you will have already owned a property (obviously making the qualifier of ‘first’ home owner not applicable).
If you currently own a primary residence you can turn it into an investment property, effectively wiping out your bad debt (home mortgage) and replacing it with “good” debt (investment loan).
Capital gains tax
Unlike a primary residence, investment properties are subject to capital gains tax when you sell.
The choice of buying an investment property or a primary residence depends on where you’re at right now in your life, both personally and financially.
For example, if you’re single and just starting out you probably don’t have a lot of capital at your disposal. Buying an investment property through a joint venture - if done right - can be a good way to leverage your way into the real estate market.
As promised earlier, I’d like to share a couple of strategies you can use to continue growing your portfolio if you already own a home:
1. Sell your existing PPOR and rent where you want to live. Use the proceeds from the sale to buy one or more investment properties.
2. Draw equity out of your primary residence, move into a rental property and then rent out your current home. Instantly, your “bad” debt becomes “good” debt allowing you to reduce your debt and continue growing your investment portfolio.
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Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
Read more expert advice articles by Sam
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
