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Should My First Real Estate Purchase Be An Investment Property or a Home?

Written by Posted On Thursday, 01 June 2017 02:40
Should My First Real Estate Purchase Be An Investment Property or a Home?

This is an interesting question and on the whole will be different, depending on each individual’s circumstances.

Listed below are things that need to be considered before making this very important decision:

1. You may be able to apply for the First Home Owners Grant if it still exists in the state where you reside

While many states have wound back the First Home Owners Grant, there are still some opportunities for First Home Buyers in some states. In Queensland for example, the First Home Owners Grant of $20,000 is available until July 1, 2017. First Home Buyers who purchase a new Unit, Townhouse or Home will be eligible for the Grant. This does not apply to those buying established dwellings (i.e. Properties that have previously been occupied by tenants or owners).

It is important to contact the State Government in your state to find out if a First Home Owners Grant still exists and if it does, what are the conditions that you have to satisfy in order to be eligible for the grant..

2. There can be tax benefits when you sell

If you reside in the premises for a period of time and then move out, you can still claim the Capital Gains exemption for a period of up to 6 years from the date you moved out of the property. This is assuming that the asset becomes income producing (e.g. if you put a tenant into the property) and that the property remains your only Principle Place of Residence over this period.

3. It can be easier to get a mortgage

With the latest crackdown on Investor Home Loans, especially Interest Only Loans by the ACCC and ASIC, getting finance to buy an investment property has become both more expensive (i.e. higher interest rates are being charged on these loan products) and more difficult to acquire. In direct contrast, many financial institutions are more willing to lend to first home buyers and often at a lower interest rate..

The Pros Of Buying An Investment Property First Include

1. Stronger cash flow

By putting a tenant into your investment property, the asset becomes income producing, so your tenants are essentially paying some or all of the mortgage. Regular income in the form of rental payments will help you better manage your cash flow in most instances. In saying that, you will still have to live somewhere, so if this is your only residence, you will have to rent a property. The trick is to ensure that your cash flow is positive (i.e. that the income generated from renting your investment property exceeds the weekly, fortnightly or monthly repayment to the financial institution you borrowed the money from). In saying that, many investors negatively gear property so as to capitalise on the generous tax benefits, so any costs associated with holding the property can be off-set against your taxable income, which brings us to the next point.

2. Potentially lower mortgage repayments

 Many financial institutions allow borrowers to make interest only payments on their mortgage. The benefits of this are lower mortgage payments for the interest only period of the loan. This can make it easier to hold the property and benefit from any capital growth. Generally, the interest only period is limited to 1, 2 or 3 year periods. In comparison, an owner occupier will likely have to pay principle and interest payments on the loan..

3. Your ability to borrow more may be increased

When financial institutions assess your borrowing capacity, the income derived from your rental property may assist with your ability to service the loan. This may make a big difference to whether your loan is approved or not. Different lenders apply different criteria to borrowers, but as a rule of thumb, they will allow approximately 60 – 70% of the rental income to be added to your personal income when assessing your borrowing capacity and ability to service a loan.

4. Some expenses are tax deductible

There are a host of expenses that are tax deductible with regards to your investment property. These are not available to owner occupiers. Some of these expenses include interest payments on your loan, repairs to the property, management fees, council rates, strata payments etc. The best person to speak with regarding what expenses are tax deductible is a (CPA) Certified Practising Accountant.

5. You may be able to take advantage of generous tax benefits

This generally comes in the form of negative gearing, a very controversial peace of taxation policy. Essentially, negative gearing allows you to write of some of the expenses associated with holding an investment property against your taxable income. This will reduce your overall tax liability to the (ATO) Australian Tax Office..

The Cons Of Buying An Investment Property First!

1. You may be liable for Capital Gains Tax

If you purchase an investment property then you are liable for Capital Gains Tax. This is assuming that the property appreciates over time and is worth more than you had originally paid for it if. If you hold the property in excess of 12 months then the GCT is reduced by a half or 50%..

2. You won’t be eligible for any Grants

Although many State and Federal Grants are no longer available for first home buyers, where they do still exist (e.g. Queensland first home buyers receive a $20,000 grant if they purchase a new property before Jul1, 2017) precludes investors from accessing them.

Please Note: In Australia, you are able to be absent from your Principle Place of Residence for up to 6 years. This is a great option for first time investors in the sense that they can purchase a property, live in the property for a period of time and then rent it out for a maximum of 6 years, without incurring any Capital Tax Gains liabilities. In essence, if you explored this option you would essentially get the best of both worlds.

Before embarking on your property investment journey, please consider the following points. Buying and selling property is expensive. The longer you hold a property the greater chance that you have of making a profit. You should only consider de-investing if you believe the property has achieved maximum growth and you need the funds for some other activity.

The benefits of buying property as an owner occupier are primarily one of benefits. The benefits of buying an investment property in most instances are greater financial freedom and an increase in your personal wealth over time.

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Lynda Arbon

Lynda Arbon is a passionate and enthusiastic health blogger. She likes keeping herself updated with the health trends and blogs. Her favorite past time is learning history and solving crossword puzzles.

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