Build a property to live in or build an investment property?

You’ve heard about people creating wealth through investment properties and you understand the principle: get a property, have it grow in value and that growth is yours! You can use that growth (equity) to re-invest in another property and now you’ve got two growing for you, theoretically doubling the speed your wealth is growing. All good, but how to get started?

There are two options: 1) you first buy a property to live in and go from there or 2) you start with an investment property.

Let’s have a look at the pro’s and cons of these two options.

The pro’s of buying a first property to live in:

• The first home owners grant (FHOG) is still available ($10000 - March 2016) if you build a new property

• You are exempt from stamp duty (find an article on stamp duty here), saving you around $5500 on a block of land costing $200000 in WA.

• You could be eligible for low deposit lending (find an article on low deposit lending here) making it very easy to get into your first home.

The con’s of buying a first property to live in:

• You need to live in the property for at least 6 months in the first year to satisfy the rules to be eligible for the first home owners grant and low deposit lending.

• You could face a dilemma of wanting to live in a certain area and wanting to invest in a different area with more growth potential in the short term.

• You could face the dilemma of wanting to upgrade the house to your ideal standards, while that could mean giving your tenants more then needed and not getting the return for those spendings.

• In the first six months, while you live in the property, you can’t claim any losses back on tax as it’s not an investment property yet.

The pro’s of buying an investment property first:

• You can buy the property with solely investment in mind and leave emotion at the door. You can pick the area with the most growth potential, you can pick a home and specifications suitable for a rental property.

• You can keep living (renting) in an area you like and possibly can’t afford to own in, while you still have the benefits of owning an appreciating asset. You can use the growth in this property later on to get yourself a home which is, or is closer to, your dream home. You can also keep living with your parents or live in a share house if your lifestyle permits; reaping the rewards from cheap living, tax benefits and asset growth all at the same time.

• You can deduct the loss on the property from your income and get the tax benefits, keeping the out-of-pocket costs often very low.

• You can make the most of the depreciation on the home (read more about depreciation here) as you can claim the depreciation from day one when it’s the highest.

• In WA you can still get the benefits of the first home buyers grant later on, assuming they don’t change the criteria for the FHOG. As it is at the moment: you are still eligible for the first home owners grant if you have not lived in a property you own (ie, an investment property). The gamble is of course if the grant and stamp duty exemption will still be around by the time you want to buy to own.

The con’s of buying an investment property first:

• You don’t get the benefits of the FHOG, the stamp duty concessions and the option of low deposit lending on this first home. So you need to have more savings up front. As stated before: if you buy an owner occupied home later, you get these benefits then (in WA, if they’re still around). Over the course of buying both an investment and an owner occupied home, there is no difference.

• You will still be living in a home that is not your own - if you consider that a con.

In the end it’s mostly a combination of finance options, deposit and personal preference that determines what is the right way for you to go. If you want to have a chat to figure how things could work out for you and what your options are; contact me!

#investing