Should you invest or buy your own home?

Whether to buy an investment property (IP) or permanent place of residence (PPOR), is really a question about the goals of the individual.

Do you want to own your own home right away, start paying it down and perhaps consider investment options later? Or do you want to create long term wealth and a passive income stream, so that you are able to purchase your dream home later in life?

The case for a PPOR

Pros

-Buying your own place of residence comes with a number of benefits. First of all, you may be able to access government grants for first home buyers, especially if buying off the plan or a new build property. Benefits differ state by state and depend on the value of the property and how long you are planning to live in it.

-You will get access to better interest rates, discount periods and more flexible loan features from lenders than if you were a property investor.

-If and when you decide to sell your PPOR, you will be exempt from capital gains tax, which will be a big bonus if you hold the property through multiple growth cycles.

-You can truly make the home your own. You can renovate and put permanent changes in place to add to the home’s appeal, without having to ask a landlord first. Not answering to a landlord also means you won’t face suddenly being made to move out.

-The money you pay goes towards your own long term wealth, while if you were renting, you’d be financing someone else’s goals.

Cons

-Your location will be governed by your first home buyer’s budget and you therefore may not be able to afford to live where you really want to. This could mean long commutes to work or being a long way from friends or recreational favourites. This is one reason some people buy IPs in areas they can afford and then rent a home (usually cheaper than mortgage repayments) in their ideal suburb.

-Aside from the CGT exemption, there are no other tax deductions or benefits to be had from a PPOR. You are also the one paying the bank, so your home is not creating an income like an investment property might.

-Putting all your savings into buying the best PPOR you can afford will often mean your borrowing power is all used up. It could be some time before you can create enough of a buffer to borrow money for investment or other purposes. Being stretched like this can also cause financial stress.

The case for an investment property

Pros

-You can make your decision based purely on what stacks up financially, without the emotional attachment of needing to purchase something you really want to live in.

-If your investment property generates good rental return and you are able to rent where you want to live for less than a PPOR in that area would cost to buy, your borrowing power will not be so tied down. You can therefore use your cash flow to sink into further investments.

-You will be able to claim various associated costs as tax deductions. Interest paid on the loan, management fees, insurance costs, depreciation, educational expenditure, buyers’ agency fees and advertising/marketing costs are all examples.

-Making savvy investments can mean accumulating enough equity to buy a better PPOR later in life.

Cons

-If you are renting where you live you will be at the whims of a landlord, lease agreements and strata regulations. You may struggle to find a rental that allows pets or fulfils your other needs.

-You won’t have access to any government help or grants that first home buyers enjoy and will usually have to pay more interest as banks are tasked with dissuading investors from dominating entry level markets.

-If you have to sell investment properties, you will pay CGT, which is hard to take if your strategy is to invest for growth!

-Non-savvy investments might make it even harder to get a good PPOR down the track than it is now.

So what’s the verdict?

It’s really up to the individual. Both sides of the coin have their ups and downs. You need to figure out which path suits you best and then make a start. Independent financial planners and advisers can explain everything in clear terms, to help you make the right decision.

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