Is it a smart move to purchase a home before an investment property?
October 19th, 2013 • 2 comments
As Australians, we place a high importance on owning our own home. After a car, it is usually our next ‘big ticket’ purchase and is considered one of life’s major achievements – a symbol of a sound financial position.
But is it? Is buying a home as a your first property purchase really a smart move?
The old mantra of ‘rent money is dead money’ has been so entrenched in our culture that many of us fail to clearly assess the financial impact and consequences that can come with purchasing a home as your first property. The decision to purchase a PPOR first can weaken your financial position and servicing ability with banks, and increase your cost of living. More often than not, you will also find you have to live in an area that does not tick all your boxes due to affordability.
If you had the choice of purchasing your dream home in five years, or a lesser quality, poorly located home now – wouldn’t you wait?
A mortgage delays your wealth creation potential. Many first home buyers and beginner investors jump straight into buying a property to live in. In the vast majority of situations, it is going to cost you more to own your own home than to rent. To maximise your property investment potential, the best approach is to keep your living expenses as low as possible while you establish your investment portfolio; monthly mortgage payments on your PPOR will only hinder your borrowing capacity and slow your ability to grow a portfolio. Continue renting or live with family and resist non-essential spending while you improve your financial position.
How the living costs weigh up. An example of buying a PPOR versus renting and investing a $500,000 property in a positively geared market and continuing to rent:
- Deposit: $50,000
- Loan: $450,000
- Repayments (principal + interest, rate of 6%): $675/week
- Cost to you: $675/week
Positive investment property –
- Deposit: $100,000
- Loan: $400,000
- Rental income: $1,100/week
- Repayments (interest-only, rate of 6%): $461/week
- Profit: $639/week
- Rent a $500,000 property: $500/week
- Total profit: $139/week
All too often investors who choose to purchase a home to live in as their first property find themselves in a position where they have to wait a number of years to be able to purchase again.
While living in your own home may be tempting, the benefit of remaining in the rental market while you spend a few years developing your investment portfolio means you can fast track your portfolio growth and maximise your net worth.
A little sacrifice in the short term can mean a far better financial position and lifestyle in the long term!
I am confused re Land tax. I have a PPR in Sydney (currently being rented) it is worth $450k. I am keen to secure another property in NSW and want to avoid land tax (payable on properties of around $406k. I asked my accountant and he said Land tax would not be payable if it was a unit and as the tax is only on the land component.
I am happy to purchase interstate to avoid land tax. Can you pleas clarify.
Would you not have to compare with the PPOR being interest only? Other wise you are comparing renting against paying off the principle of the property. Also your PPOR may increase in value.