Should I buy a home or an investment property first? We look at the pros and cons

If you’re thinking about getting into the property market, then you know there are mainly two types of buyers out there: investors, and owner-occupiers. They’ve each got different goals when buying property, and each go about it in different ways. However, if you’re deciding to get into property but haven’t put your foot in the door before, so to speak, then deciding which decision to make isn’t that easy.

Luckily, we’ve bought together the pros and cons about choosing to invest first or buy a home first.

Buying an investment property first: Pros

Where you want to live isn’t a financial option yet

Let’s face it: everybody has got a dream house, and most people have a dream suburb that meets all their requirements: close to work, good for the kids, extended family is close (but not too close), etc. Unfortunately, buying in your dream suburb isn’t always possible, especially when you’re a first home buyer in Australia. For this reason, you might decide to rent in your ideal suburb, and then invest elsewhere to ensure that you can begin to build a financially stable future through property.

You can increase your borrowing capacity in the future

If you decide to buy an investment property before you buy a home that will be your official residence, then you will continue to rent. If you’re able to rent a property that is comparable to one you would choose to purchase, for a significantly cheaper ongoing cost, the excess cash flow will allow an increased overall borrowing capacity position. This means you can use the extra equity to invest in other properties/stocks/etc., or put that money towards a deposit to eventually buy that ideal new home for yourself.

Buying an investment property first: Cons

Exhausting your borrowing capacity is an option

By choosing to grow your investment portfolio first, you may exhaust your borrowing capacity. This means you could be unable to buy your first home even if you wanted to, which can be very restrictive and place a lot of financial pressure on you. It may mean missing out on work promotions, or getting your child into a certain school, which can have further complications down the line.

If this happens, then you might need to sell your investment property(s), which can mean getting rid of quality, long-term investments. Buying and selling property involves significant transaction costs, so you really want to limit how many times you do this. The best option is to buy and hold, however if you choose to invest first. selling this investment property so you can afford the ideal first ‘home’ home may be a necessity.

Buying a new home first: Pros

You can stop renting

One of the biggest reasons people choose to buy a home they will live in over an investment property is stopping weekly rental payments. Of course, you still have to deal with a mortgage, but rent is often considered ‘dead money’ because it’s not going towards something beneficial to you in the long run, like a mortgage repayment is.

Low interest rate environment

The current low interest rate environment should enable you to free up additional cash flow which can be used to pay down the loan faster, freeing up cash and equity for further purchases down the line. This means you could potentially afford an investment property in the near future (if you manage your funds correctly), essentially allowing you to have your cake and eat it too.

A new home doesn’t have to be a forever home

It’s important to remember that after you’ve bought a new home (and especially if you use a grant from the government to do so) you do have some legal obligations regarding how long you live in it. However, in most cases, you can move out after a year of the new home operating as your primary place of residence. This means the space is open for you to rent out, while you move to a location that may be better for you due to work, family or personal reasons.

Buying a new home first: Cons

You’re locked in

When you buy a new home — especially if you do it with a government grant like the First Home Owner grant — there are certain rules and stipulations you must legally follow in the lead up to signing the final settlement, and after. This means that depending on what you buy, you must live in the home for a specific amount of time, or you have to pay grant(s) back to the government. If you got a job offer in another area/state/country that required you to move, this could be very limiting.

Of course it also means physically moving becomes a little more complicated. Perhaps owning a home may make you less inclined to chase the overseas promotion, or even to explore new opportunities in other locations. It shouldn’t, as you can easily rent your home out, however it can without doubt be a psychological hand brake if you let it be.

Your borrowing capacity may be exhausted

You might find that after you’ve borrowed the money to buy your dream home, your borrow capacity is exhausted. This means that you may be unable to make any purchases thereafter, until you have paid down a certain percentage of your debt, your credit score increases, or you/your partner reach a more financially stable position. This will make borrowing for the next overseas trip or a new car harder, and perhaps impossible. Be prepared to hunker down and focus on repaying the mortgage and sacrificing some luxuries you may have come accustomed to.

Buying your first home, whether it is an investment or somewhere to live, is a big decision. Make sure you consider all your options before making the leep. There are industry professionals out there who can lend a hand, and you’re sure to know other people who have bought homes or investment properties, so make sure you ask for their advice. But remember to take action first and foremost. Whilst buying a property seems complicated and financially burdensome, the sooner you jump into the market the sooner you will benefit from appreciating property prices so you can build equity.

Written: 5 January 2020

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