First home or investment property?

Coke or Pepsi? Pancakes or waffles? First home or investment property? These are some of life’s great dilemmas. And although some answers come down to personal taste, others come down to budget and your financial goals.

Buying your dream home to live in or rentvesting (where you rent the home you want and buy property as an investment in an affordable suburb), are two ways to enter the property market. Both can come with risk, and great financial reward. But if you’re not sure which path to take, looking at both sides of the coin can help.

Buying your dream home – the pros:

1. First Home Owner Grants.

Depending on which state or territory you live in, you could be eligible for the First Home Owner Grant (FHOG) . This grant can save you up to $20,000 and does not require you to pay it back. You may also be eligible for stamp duty reductions and other concessions.

2. No more rent.

If you become an owner-occupier, you’ll be paying off your mortgage, not your landlord’s. There is a great sense of accomplishment watching your loan go down – and not being held ransom to rent hikes.

3. Lower interest rates.

Buying your own home, over an investment property, gives you the best interest rates possible, which helps your overall returns. ME’s range of low home loan rates can help you buy your dream home sooner.

4. Home improvements galore.

Put simply, if you want to paint a wall pink, you can. If you want to knock down a wall, install a pool or a fancy marble breakfast bar, you can. As the homeowner, you don’t need permission to renovate your property. However, any major structural works will often require a permit and council approval.

The cons:

1. You may live further out.

The suburb you rent in may not be the suburb you buy in. When it comes to buying your dream home, many first-time buyers invest in property in suburban areas as it’s more affordable and it means they don’t have to downsize. However, if you don’t mind compromising on size, you can still live in or close to the CBD.

2. Maintenance costs.

As the homeowner, you are responsible for all repairs. Whether it’s a burst water pipe, a cracked ceiling or the dishwasher has a hissy fit, it’s up to you to organise and pay for the repairs.

3. Fewer tax benefits.

Unlike rentvesting, you can’t claim things like depreciation on fittings and fixtures which helps increase your tax savings – or take advantage of other money-saving schemes such as negative gearing (when the income from your investment property is less than the expenses that go into owning and managing it).

4. You miss out on cash flow.

One of the best parts of owning an investment property is that you can rent it out. And if you can charge enough rent to cover your expenses, you are effectively getting someone else to repay your home loan.

Renting out properties – the pros:

1. Enter the market sooner.

Investors can get their foot on the property ladder sooner with a smaller deposit. This is because you’re not buying your dream home, so you can invest in a cheaper suburb or a smaller house.

2. Tax benefits.

Unlike owner-occupiers, you can claim depreciation and take advantage of negative gearing. Other costs such as maintenance, advertising for tenants and loan fees can be tax deductible too.

3. Rental income.

One of the beauties of rentvesting is having someone else pay, or contribute, to your mortgage repayments. This can financially free you up, and help you pay off your loan sooner.

4. Flexibility and choice.

When you’re renting, you can live in different suburbs, upsize or downsize, and continue living your existing lifestyle. You may even have enough in the bank to travel and tick things off your bucket list.

Cons:

1. You’re not eligible for concessions.

Unfortunately, the First Home Owner grant is for owner-occupiers only. So, if you were banking on those extra Gs, you may need to re-crunch the numbers.

2. You’ll incur capital gains tax.

If you decide to sell your investment property, you’ll need to pay capital gains tax (CGT). Capital gains is the difference between what you paid for the property (less any fees incurred during the purchase) and what you sold it for.

3. Unexpected costs.

As a property owner, there can be lots of ‘hidden’ costs. These can include body corporate or strata fees, council and water rates, property management fees and insurance. Be sure to factor all of these costs into your initial budget to ensure you don’t bite off more than you can chew.

4. A vacant property.

Rentvesting works well if you have tenants in the property – but what happens if there’s no demand? If you don’t have tenants, you’ll need to pay not only your mortgage repayment, but your monthly rent too ­– ouch.

Life’s great dilemmas don’t need to be complicated. So, if you’re ready to invest (or still undecided) a ME Mobile Banker can help you make the right decision for your lifestyle (Pepsi and waffles).