Jarrod McCabe and guest Stuart Wemyss, owner and Director of ProSolution Private Clients
A question often asked by first time buyers is whether to purchase a home or a pure investment property, and continue renting – commonly referred to as ‘rentvesting.’
It’s not just a property decision, but is also dependent on current and future financial considerations.
Chartered Accountant and Financial Planner, Stuart Wemyss is owner and Director of ProSolution Private Clients, and has spent more than 20 years providing clients with holistic financial wealth creation advice.
Stuart believes a person’s first property purchase is typically the most important in their lifetime, so it’s crucial they get it right.
“If you make that first decision, and it works out well financially, it really does leapfrog future financial decisions and capability,” he said.
“It’s the reverse, if you completely mess it up, and end up losing money. That’s a very costly exercise and puts you behind the eight ball.”
Stuart and I spoke about the key factors first time buyers should consider when deciding whether to purchase a home to occupy, or a pure investment.
Apply an investment lens to all buying decisions, irrespective of whether you’re purchasing a home or pure investment property.
Buying a home will involve some lifestyle considerations, but typically an investment grade property, by definition, has to have a relatively wide appeal, with good livability and amenities. So, quite often, the elements we’re looking for in a home are similar to the attributes that make a good quality investment property.
Does the property meet investment grade? It’s a question that all prospective buyers must ask themselves. If it comes to the crunch, it’s much better to buy an investment grade property that you don’t want to live in and rent somewhere else, than fall into the trap of buying a dud home that will produce poor capital gains.
Prioritising investment returns – capital growth – from an asset, makes sense across the board, and is a major factor in wealth creation.
Don’t be seduced by the shiny and new, particularly apartments, which may have slick marketing and fancy amenities, but typically don’t make great investments, due to poor capital gains.
If you’re buying something new or off the plan, particularly if it’s an apartment, the bulk of the value is in the fresh and modern fit-outs, features and fixtures – and the bulk of that value depreciates in value.
While a slightly tired looking Mid-Century apartment might not have the flashy foyer, or latest gym equipment, if it has a strong underlying land value component, it will deliver superior capital growth.
Making lifestyle compromises now, is often important to create investment wealth in the future.
While it’s nice to live in a brand new home, owning and occupying an older style investment grade apartment, although perhaps a compromise from a liveability perspective, is a smarter move when it comes to future wealth creation.
The sooner you buy an owner-occupier home, the better. We typically can’t out-save the market. If we desire to live in a particular location, and it costs ‘x’ amount today, it’s likely to cost a lot more in ten years, and more again in 20 years.
The sooner we can get into the area we want to live in for the longer term, the less we need to borrow from a non tax deductible perspective, and that has compounding benefits.
That’s one of the problems with ‘rentvesting.’ At some point, everyone wants to occupy their own home.
You might not be able to do it with the initial purchase, which reiterates the importance of ensuring that first purchase delivers strong capital growth. That can leapfrog you sooner rather than later into a desired location.
How much can I borrow vs how much should I borrow? This is an important question buyers must ask themselves early on in the process.
The former is obviously dictated by the banks and their credit policies. The advantage of applying for an investment loan, rather than a home loan, is that banks include the prospective rental income from the property, as well as any negative gearing tax benefits that might arise in their loan consideration.
So typically, holding everything else equal, a person’s borrowing capacity is going to be higher if it’s for investment purposes, rather than if it’s for an owner-occupier home.
How much you should borrow depends on your personal cash flow. If you’re still living at home, or in a shared house, and rental expenses are nil or very small, you might be better off using that first property as an investment property. That’s because from a cash flow perspective you’ll generate more rental income than the mortgage repayments.
However, if someone is paying substantially more rent than they are receiving from an investment property, then an owner-occupier situation is likely to be a better option..
Grants and stamp duty concessions are worth exploring. Most are available to first home buyers, not investors. Bear in mind, if you don’t use these concessions for your first purchase, they typically become void for any future purchases. So, utilise them whenever you can.
Take a long term view. While it can sometimes be difficult to plot out life plans in our 20s, having some sought of longer term strategy can help provide context and direction for your early purchasing decisions.
For example, it’s not not always possible for people to buy their ‘forever home’ as their first purchase. Maybe they’ll need to trade up a couple of times to get to that level. But if they understand where they are heading, it contextualises the first purchase within those longer term goals. Hence making it easier to prioritise the long term financial benefits, rather than present lifestyle or personal taste considerations.
Tax implications can play a considerable role when deciding whether to buy a home first or an investment property.
For example, if someone buys a home and lives in it, they don’t have to pay capital gains tax, because they can take advantage of the main residence exemption.
On the flipside, if it’s a home, they can’t deduct the interest as a tax deduction, as they can with an investment property.
Take home message
Whether you decide to go down the pure investment route or become an owner-occupier, ensuring your first property purchase is successful is vital for your future wealth creation goals.
Give yourself the best possible chance to succeed by conducting rigorous homework and due diligence, so you can determine the optimal approach to realise your present and future aspirations.