Choosing between an investment property or first home

The basics of first home vs. investment property

Buying property can feel overwhelming, especially if it’s your first time. There are multiple stages involved in the process including doing research, planning, borrowing and buying. Plus, it involves making a number of decisions, often starting with this fundamental question:

Should I buy a home to live in or an investment property to rent out? 

We’ve put together this guide to help you understand the differences and financial implications that come with each type of purchase. Here’s a breakdown to help you weigh your options.

Principal place of residence

Your principal place of residence (PPOR) is your home, the place where you live most of the time. It’s personal, emotional, and more than just an asset – it’s where life happens. It offers stability, comfort and security and is typically funded with a higher focus on affordability over financial return.

Investment property

An investment property (IP) is purchased with the intention of generating income or capital growth. You’ll own the property but won’t live in it. Instead, you’ll rent it out. Buying a rental property is often considered taking on good debt, because, when managed wisely, it can appreciate in value, generate income and also offer tax advantages.

Financial considerations

Your decision to buy an investment property or a home will ultimately depend on your personal circumstances, life goals, and your ability to make repayments. Here’s a look at some of the financial factors that can influence your decision making.

Interest rates and repayments

• Interest rates for owner occupier loans tend to be lower than investment property loans, making the former more affordable. You’ll repay the principal and interest, ensuring you own the home outright over time. 
• An investment property loan may come with a higher interest rate, often due to added risk for the lender. However, there is opportunity for rental income to offset some of those costs. Interest-only loans are usually popular with investment properties, as they tend to maximise initial cash flow by keeping repayments low.

Ongoing costs

• When you buy your first home, you’ll need to factor in upfront and ongoing costs like utilities, council rates, insurance and maintenance. 
• For your investment property, you’ll incur similar upfront and ongoing costs with the addition of property management fees, potentially higher insurance premiums and higher upkeep due to tenant wear and tear.

Cash flow

• If you’re thinking about buying a home to live in, keep in mind that this is a personal expense. You’ll need to rely on your personal income to cover all costs. 
• Buying a rental property that’s positively geared will help generate surplus rental income and positive cash flow. A negatively geared property on the other hand, will rely on your income to cover the shortfall. There may also be periods of rental vacancy which may impact your ability to repay your loan.

When it comes to getting a home loan for either property type, it’s important to remember that at any given time, there could be unexpected changes to your repayments or your circumstances. For instance, with a variable rate home loan, the cost of repayments is likely to vary over the life of the loan and is impacted by the economic climate. That’s why it’s always a good idea to be mindful of saving with discipline and having an emergency fund handy to support any sudden changes to your cash flow.

Government grants and incentives

• Government initiatives like the First Home Owner Grant (FHOG), First Home Guarantee (FHBG), First Home Super Saver Scheme (FHSS) as well as incentives like stamp duty concessions/exemptions are usually available to first home buyers. 
• Investors can claim tax deductions on property depreciation, as well as offset property-related losses against their taxable income, reducing their overall tax liability.

Tax considerations

• You don’t pay capital gains tax (CGT) when selling your PPOR, provided it’s your main home. However, you also can’t claim any deductions for interest, utilities, and maintenance. 
• Any rental income is taxable, but you can claim deductions for expenses. CGT will apply when you sell, but you’ll benefit from a 50 per cent discount if you’ve owned the property for over 12 months.

Lifestyle considerations and long-term goals

• For stability and security, a PPOR may make more sense– it’s your own space, tailored to your needs.
• If there is low affordability in your area and you would rather continue renting where you live, an investment property can help you get your foot on the property ladder while allowing you to maintain your lifestyle. This is also known as rentvesting and is a popular investment strategy used by a number of first-time property buyers.
• You may also consider converting your investment property into a PPOR in the future, which is something to factor in when buying property.

Ultimately, you’ll need to think about your long-term goals and how you see yourself in 5-10 years. For example, is the goal to build a family home or create wealth through property investment? While you’re weighing your options, it’s also worth using the right tools to help you get a clearer picture of your current financial situation. Whatever you choose, ensure it aligns with your vision of the future.