Should your first property be an investment
The dream of owning a home has changed a little, with many first home buyers today buying an investment property before they buy a house to live in.
Australians increasingly want to live close to work and where the action is, which is why most people like to live close to the capital city centres, but with prices rising across most capital cities, purchasing property near or close to the city is becoming increasingly difficult for buyers – especially first home buyers.
The increasing appeal for younger generations to rent in desirable locations where they can’t afford to buy, and to buy an investment property where they can afford to but don’t want to live, is behind this sentiment shift to buying an investment property before their first home.
The following advice regarding this trend called ‘rent-vesting’ is from Michael Yardney, director of Metropole Property Strategists.
The trend described as ‘rent-vesting’ suits the lifestyle of many millennials, allowing them flexibility in where they live, giving them the opportunity to travel and at the same time allowing them to grow their wealth.
Buying an investment property first may have some benefits for you:
Rent-vesting is ideal for those not yet ready to settle down in the suburbs or those who do not have the job security needed to purchase in the more affluent areas. Renting also offers the flexibility to easily move, upgrade or downgrade without all the costs of buying a property such as stamp duty and legal costs.
Another benefit is people can live the lifestyle they desire today, in or near the areas they love, without having to make the long-term commitment to buying a property there – and all while still growing their property portfolio in another more affordable area.
Someone else pays the mortgage
Rent-vesting is also ideal for those who find a property they would like to live in but can’t quite afford to buy, as it allows them to initially rent it out so the tenant helps pay off the mortgage until the owners’ finances improve and they can move in themselves. In this case, tax benefits including depreciation and negative gearing may help to manage the home loan for those first few difficult years.
By using the rent coming in, plus any regular savings, the loan could be paid down much quicker than if you moved in straight away. Before adopting this strategy, make sure to get tax advice as your investment property could attract capital gains tax in the future, even if it becomes your main residence. Estimate how much you can save here.
The benefits of capital growth
If choosing between cash flow and capital growth as an investment strategy, capital growth is the best option. This is because wealth from real estate is achieved through long-term capital appreciation and the ability to refinance to buy more properties. Therefore, you should consider buying in a suburb that offers high capital growth potential, and this may not be where you’d like to live in the short term.
Other important issues to consider
Before you adopt rent-vesting, or any other investment strategy, you should: prepare a budget and get independent tax and accounting advice; understand the risks as well as the rewards of property investing; recognise that property prices can go down as well as up; understand your eligibility for your state or territory’s first home owner grants or stamp duty concessions if you buy an investment property first; and always keep a close eye on how your investment property is tracking in terms of cash flow and capital growth, but remember that property investment is a long-term wealth creation strategy.
First home buyer loan approvals are already on the rise, and agents are reporting a strong influx of inquiries from prospective first-time buyers.
“Already during the first two weeks of spring, visitors to our ‘buy’ section were up 25 per cent compared to the same period in June, and total visitors were up 18 per cent site-wide,” Mr Balazs said.