Should You Buy A Home Or Investment Property First – So you’ve saved up some money and you’re looking to invest. Do you blow it all on a family home? Or do you get a rental property first? What’s the difference between each option and how do you decide?
In this week’s video I explain the pro’s and con’s on picking one vs the other. I looked into this myself in the past and have rental properties currently and am about to buy a family home in the coming months if all goes to plan!
There’s no right or wrong answer but I’ll share things to consider so you can make a more informed decision.
Pro’s of buying a home:
• Safety, security, peace of mind
• Can make changes to the home without asking for permission (may have to ask council for certain things though of course)
• No rent increases (although your interest rate may increase)
• Usually more space for yourself/your family compared to an apartment, backyard for the kids to run around etc
• Can get a better interest rate usually
• Don’t have to pay Capital Gains Tax when you sell
• Sometimes can get stamp duty exemptions
• Can use First Home Owners Grant (FHOG) & First Home Super Saver Scheme (FHSS) (assuming you’re eligible)
• Don’t have to deal with bad tenants if you don’t own a rental
Pro’s of buying an investment property:
• Rental cashflow
• Can buy anywhere you want
• Usually get better returns
• Diversification, don’t have to put all your eggs in the one basket
• LMI & Interest is tax deductible
• Zero (or minimal) maintenance costs
• Generate income outside of your main job/business income
• Don’t have to tie up all your serviceability in the one big family home loan
• You can buy where it’s most profitable to do so, and rent where you actually want to live
Questions to ask:
• How important is ‘owning’ where you live to you and your family?
• Do you really value having your own space, backyard etc that you can customise as you please?
• Are you okay with potentially having a lot of your money tied up in your PPOR?
• What kind of expected returns could you get buying a family home in your area? If it’s a crap place to buy, rentvesting might be the go
• Have you already claimed the FHOG or used FHSS scheme?
• What’s your existing tax situation, eg high income etc?
• What’s the rental market like where you want to live? (Ie. in some areas you can live in a nice place for cheap because of apartment oversupply. Rentvesting may make more sense here)
• Are you planning to have 25 kids and will need the room?
• Do you want to build major wealth with a big portfolio, or is just owning your own place the main goal?
• Consider land tax as well – can get taxed more if you have too much property in the one state
Hope that helps – More in the video, and feel free to chime in if I’ve missed any.
Ps. You can also do both of course, and you can take advantage of things like debt recycling but that’s a topic for another day.
Not a financial advisor and this is for entertainment purposes only.
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Transcription:
If you think that where you want to live locally, is not going to do that well, then it might make a lot more sense for you to buy investment properties where they’ll rise much faster and then you just rent where you want to live. Again, Ray Corcoran here. In this week’s video, we’re going to be talking about, should you buy a principal place of residence or should you buy an investment property? And it really depends on a whole bunch of factors. And we’re going to go through some of the different factors that are going to affect your decision. And then at the end of the video, you can make your own decision around what’s going to suit you because even between me and you, you might have a bigger deposit or a smaller deposit. You may want to live in different areas. Your working situation might be different. Your tax situation might be different. So there’s so many different factors that will help you decide whether to go one way or the other.
If you have any questions as always, leave them in the comments. If you’d like to subscribe, if you’re interested in learning how to make money, invest your money and save money, please consider subscribing. And with that said, we’ll get into video. And also, I’m not a financial advisor or an accountant or a CPA or anything like that. So obviously get professional advice for your own specific things. This is all for entertainment purposes only. So in terms of the benefits, we’ll start with the principal place of residence or PPOR. When you’re looking at buying this, obviously the big one is the peace of mind and security that you own your own home. You’re not paying rent to somebody else and you have that sense of security.
This is a big one for a lot of people. And for me and my wife, we’re currently looking at buying a family home at the moment. We already have a few investment properties, but we’re looking to buy a principal place of residence. We live in Sydney so, house prices are going pretty crazy at the moment. But it’s something that we thought about many, many years ago. We were like, “Well, should we invest? Or should we just buy a house?” Another key thing when you’re considering to buy a principal place of residence as well is, if you do sell it down the track and you do have some nice appreciation, if you’re so lucky, you don’t have to pay capital gains tax on that. Whereas if you have an investment property and it goes from a 500 K to 700 K, you’re going to have to pay capital gains tax. You just need to keep that in mind that when you do move from that house to the next house, you’re going to probably pay a pretty big amount of capital gains tax. So, that’s something to factor in.
Before buying a principal place of residence, a lot of people do use a buyer’s agent, but I would say the majority of people don’t use a buyer’s agent for their principal place of residence. Why is agents fantastic? I really like them and have used them multiple times, but I’ve used them for investment properties. That’s not to say you can’t use them for your principal place of resident, happens all the time. But usually people are buying where they live, they know the area. Whereas when you’re buying a pure investment property, sometimes especially if you’re buying in other states to where you live, like I have a few times, it makes a lot more sense to pay someone that really, really knows the numbers and the area and that sort of thing. So typically, at a general level, you won’t be paying the cost for a buyer’s agent in most cases for your principal place of residence.
In terms of the cons of buying a principal place of residence, for a lot of people, generally they’re… And this is a big generalisation and it might not be true for where you live. But say for where I live, a principal place of residence, it’s probably going to cost a lot more money than what most people would invest in. For example, like we’re looking at houses that could be between 1.8 to two million in Sydney where we live. Whereas our investment properties were around 400, 450 K when we got them. So, if you can get into the market saving up a deposit for a decent house, it’s not even that nice house in Sydney unfortunately. To save that deposit up, it does take a while. And one of the cons of buying a principal place of residence when it is much more expensive, is that the deposit is going to be a lot bigger. And if you can’t set up a big deposit of at least 20%, you’ll have to pay Lenders Mortgage Insurance, which on a decent sized property can be as high as 80 grand and higher.
Another con is, where you want to live, it’s usually unlikely to be the area that will grow the most in value. What are the chances that where you happen to want to live is going to be the top five or top 10 areas in your entire country to invest? It’s just unlikely statistically. So with that in mind, there’s probably better investments in other areas, but if you want to live there and you want to buy that house, your chances are, you’re probably missing out on some growth and appreciation on that particular property because other areas perform better. And you don’t get that flexibility that you would get with being able to pick a property anywhere in the country that you live in based on the numbers and which one stacks up the best.
The next thing in terms of cons for a principal place of residence is, you generally don’t get as many tax write-offs compared to an investment property. So that’s something you need to consider if tax write-offs are a big priority for you, for whatever reason, based on your income, that’s something to think about. You won’t get as many. You’re also not as diversified. So say, if you spent say $1.8 million on one house, or you spend 450,000 times four on four different properties, in all different areas of the country potentially, you’re not going to be as diversified. So if you happen to buy and you pick this area that you like for lifestyle reasons or whatever, if that area goes bad, you’ve got all your eggs in one basket, essentially. So, that’s something to keep in mind.
The next is a big one. You don’t get cash flow, obviously. So, that’s going to be an important thing for you to keep in mind. It’s going to be taking money out of your pocket every single month. And yes, you’re going to be paying down the house, but you got to understand that if you don’t pay it off, it’s not going to get paid off. Whereas an investment property, if you buy smartly, like for our properties, we don’t put a dollar into them at all. They get paid for, by the people that are renting there. And then we make a profit on top of that.
Another con is, you’ve got limited choices to buy. So where you want to live and where your family wants to live, they’re going to be very narrow bunch of areas. And the problem with that is, like I said before, it might not be the best place to invest even if lifestyle wise, it might be fantastic. It could be close for your work. It could be close for daycare or where your friends live or family live. There’s going to be so many factors about why you want to live there, but that isn’t necessarily going to be the best place to invest. Whereas with an investment property, you can pretty much buy wherever you want, and you can focus all your effort onto, after you run the numbers on the absolute best property that will get you, or you think will get you the best return.
The final main thing that I wanted to mention in terms of cons for buying a principal place of residence is like I said, it not always, but generally it’s going to be a more expensive purchase than an investment. And usually, people spend a bit more on their family home because they want it to be as nice as they can afford. And the problem with that as well is that you kind of chew up all your serviceability. So your serviceability is how much the banks will lend you based on your financial situation. How much money comes in, how much money goes out, your credit history, all that sort of stuff. So, if you buy a big, expensive family home, the biggest one you could afford, the chances of you being able to take out another investment property loan shortly after, you might still be able to, depending on your income, but you’re going to use up a lot of your serviceability for that house, which means that you’re going to be limited in buying more properties most likely.
Now, if your income keeps increasing and the numbers keep looking better, then that might be okay. But for a lot of people, they make a pretty steady income for their lifetime, using up all your serviceability on that maybe a problem if you wanted to build a portfolio outside of your principal place of residence. Moving on now to the benefits of an investment property. Obviously it’s going to be basically the flip of the cons for the principal place of residence. So obviously you get the benefits of flexibility. You can buy pretty much anywhere you want. There’s also going to be diversification if you bought, instead of buying one big principal place of residence, you could buy multiple properties in different regions with different economic drivers.
The next one is the tax write-offs. Obviously, we never encourage people to but stuff just based on the tax write-offs but, the tax write-offs are an important benefit of buying an investment property. You get the depreciation, you get also the interest, there’s so many different things you can claim. And you can generally claim a lot more than you can claim for a principal place of residence. Another good thing about buying an investment property instead of a principal place of residence is that you get obviously the cashflow. So you’re getting rent every single week, every single month from the tenant. And that is a fantastic thing. Anyone has an investment property knows the feeling of getting that money coming through, regardless of how hard you work that week in your main job or business is definitely nice. I’m kind of addicted to that. We get that money coming through regardless, and it’s pretty much going to come through for the rest of your life.
Another thing as well is you can get… A lot of people choose interest only loans to improve their cash flow even further. You can get a good outcome and you can build a portfolio quite quickly. And the good thing about investment properties is if you can stack up a bunch on the side, if you can get two, three, four, five. In Australia, I think the average property investor only has one or one point something properties if you average it all out. So most people never get more than one basically. But if you can get a few on the side, it can become quite powerful especially if you have capital appreciation happening, multiple properties, and you’re getting positive cashflow from them every single month from multiple properties, it really does add up. And this is on top of anything that you make in your day job.
In terms of downsides to buying investment properties, obviously everything has its positives and negatives. One thing can be, in terms of, if you do a spreadsheet of all the costs for a principal place of residence versus an investment property, one of the big ones that can be a thing is buyer’s agent fees. So for us, for our first two properties, we did pay a buyer’s agent, 13 and a half thousand dollars per property. And there’s no discounts for buying multiple properties, unfortunately, with these particular people. But the thing is, people are probably generally less likely to do it for their family home. Often, they know the area, they know what they want to buy, that sort of thing. They might want to negotiate themselves, for example. Whereas, if they’re investing, especially interstate, they don’t know the market, they don’t know as much about the investing process so they’re more likely to use a buyer’s agent for that.
But those fees can add up quite quickly if you were to buy, say, in the example I used before, if you got a $1.8 million house, family home you want to buy, and you’re considering say four smaller investment properties at 450,000, and obviously this is all relative, you can do small numbers if you want. Four properties at 13 and a half thousand, that’s $54,000 in buyer’s agent fees. And some of them do discounts for buying multiple of course, and some have lower fees than that. They might have a $10,000 or $9,000, but either way, that’s a cost you need to keep in mind that you will be paying, which is more on top of what you would if you were just to buy your own principal place of residence by yourself.
In terms of other disadvantages, obviously you get capital gains tax if you sell, which is obviously not fun. If you never… Like I personally don’t plan on selling our properties. I want to accumulate a big financial fortress if you will, and just keep accumulating assets more and more and more until I’ve got a stupid amount of assets and they pay me a large amount of money for me doing pretty much nothing. That’s my personal goal. But if you do buy properties and you do plan to sell them, keep in mind that you will be paying capital gains tax on that. And it can be quite a hefty amount potentially depending on how much the gains are. And obviously with investment properties, if you’re doing rentvesting, where you’re renting where you live and you’re investing elsewhere, it can be a great idea. But you also don’t get that peace of mind, that ownership feeling. For some people that’s very, very important, for me, I didn’t personally care about that early on but…
So which one should you go with? So it’s going to depend on a bunch of things. You need to have a think about where you are looking to buy a family home, hypothetically, and put it all in a spreadsheet and have a look at how much would you realistically pay for this family home? If you Google stamp duty calculators and that sort of stuff, and purchasing costs calculators, it will help you calculate how much will it cost to buy a property that’s worth say $1.8 million, in this example. If you think that where you want to live locally is not going to do that well, then it might make a lot more sense for you to buy investment properties where they’ll rise much faster, and then you just rent where you want to live. The next thing is the time or the cost of investment properties. Say if you were to buy multiple smaller investment properties, the time for you to research all that is going to be pretty substantial if you want to do it properly.
And also, if you do choose to use a buyer’s agent to help you save time, they’re going to cost you 10, $13,000 a pop Australian or whatever it is in your country. So, you’ve got to keep that in mind that that cost is going to be for every single property typically. So, that’s going to be a factor that you need to consider. If tax deduction is really, really important to you, then investment properties would be a bit more favourable in that regard. You’ll obviously get less with the principal place of residence so, that’s something to keep in mind. If that peace of mind is such an important thing to you and your family, maybe your husband or wife really, really values that then, principal place of residence might be better.
And another thing to consider is, especially if you’re buying a principal place of residence that’s quite expensive relative to your smaller investments, you’re going to have a lot of money tied up in this one property and all your eggs in one basket or most of your eggs in one basket. So, that’s something really, really important to consider. And also it’s going to be taking money out of your pocket every month. So if cashflow is a big priority to you, you may consider either buying a cheaper house or B, you may consider rentvesting where you can rent somewhere cheap. Like say for where I live at the moment, this place would have been 1.1, 1.2, but we can rent for 650 a week, which is super cheap. And it’s terrible investment for the owner, but for us, it’s a great deal. So you need to take that into consideration.
In your area, if you can rent really nice houses or big apartments for cheap, then that’s a really, really good option for rentvesting because you can get that value and you can allocate all your money elsewhere, where it can multiply much faster. And obviously just take into consideration your tax situation and your income and your deductions and all that sort of stuff, and it’s worth chatting to your accountant about this to say that, we’re looking at buying either a house worth about this much, or one or more smaller investment properties for around this much and put some hypothetical numbers. You might put 5% capital appreciation every year as a starting point, and you can obviously adjust these numbers and maybe do a few different scenarios and you can make a decision from there.
So hope you found that useful demystifying the main pros and cons of a principal place of residence versus an investment property. If you liked the video, give it a like. If you have any questions, please let me know below. Is there anything I’ve missed that you think I should have mentioned, please let me know below. I’m always interested to hear. And other than that, I’ll see in the next video. Cheers.