Buying an investment property while renting: The pros and cons
BUYING AN INVESTMENT PROPERTY AND RENTING
- CASH FLOW
An income-generating property, if managed properly, can pay for itself (literally). If cash flow positive, the rental income you receive could cover outgoing costs and your mortgage payments (including interest). If it’s generating a healthy rent, it could even cover your own rental payments.
Not all investment properties will be positively geared, particularly if they’re recent purchases. As your investment property is an income generating asset, you can claim interest payments as tax deductions if your property is negatively geared. If you back your property to appreciate and generate capital growth when you sell it, and your taxable income is considerable, this could be a worthwhile strategy.
- TAX EXEMPTIONS
Beyond negative gearing, an investment property has many other tax benefits. Outgoings including maintenance, improvements and repairs can be claimed as deductions, as can depreciation. Speak to your accountant before making an investment to see what you will be able to claim.
- FLEXIBLE PURCHASING ARRANGEMENTS
If you’re purchasing a home to occupy, it’s unlikely many people, beyond your co-inhabitants, will be willing to contribute. But if you’re buying an investment property, you may be able to work with family members, or friends, splitting the income generated. If you’re considering this option, make sure you know the potential draw backs.
If your investment property is positively geared, you can use the income to pay off your mortgage, building equity faster than you may be able to if you were paying off the mortgage of your own home using just wages.
That equity can then be used to expand your property portfolio.
- FIRST HOME OWNER GRANTS
Many grants and concessions will not be available to you for your first purchase if it is not your primary place of residence. Even if you do buy a home to live in later on, you may find that you are no longer eligible for a first home owner grant due to your first purchase.
Some first time investors choose to live in their newly acquired property for six or 12 months to get the first home owners grant before moving out and renting the home. However, if the tax office can successfully prove you never intended to make the property your principal place of residence, you may be required to pay back the grant.
- VOLATILE COSTS
Part of the allure of renting is never having to pay for maintenance (unless, of course, an issue is your fault). Leaks, mould or flooding isn’t your problem, it’s your landlords. Of course, if you rent and buy an investment property, suddenly you are a landlord – and all those problems with your investment property are now your own.
Don’t underestimate the time and cost of maintaining a rental property. If you have a good property manager, you may have relatively few surprise costs. But for some unlucky property managers, the first time they hear about a leak is six months after it was reported, when the pipe has burst and the ceiling is ruined – blowing a small cost into thousands of dollars.
If you’re purchasing an investment property, make sure you have plenty of time and money to deal with maintenance.
When renting and owning an investment property, you get all the frustrations involved on either side of the fence.
As a renter, you also face uncertain costs. Mortgage payments are generally quite regular, even with rate changes. The rent your landlord chooses to charge is not necessarily so consistent. If your landlord decides not to renew your lease, you are also tasked with finding new accommodation (and, normally, paying bond and a month’s rent up front).
- CAPITAL GAINS TAX
You will be required to pay capital gains tax when it’s time to trade any properties that are purely investment assets. You aren’t required to do so when selling your primary place of residence.
- RELINQUISHING CONTROL
As many renters can attest to, living in a property you don’t own can be a frustrating experience. Maintenance seems to take double the time it should, costs can go up unexpectedly and you can’t customise your home the way you would like.
- WHICH IS A BETTER STRATEGY?
The answer will, of course, depend on the property you’re hoping to purchase, your priorities, and your investment goals.
For some, the first home owners grant is negligible when compared to potential rental income. For others, the frustrations of maintaining a property that you don’t have control over just isn’t worth it, especially if you have no experience in property. Negative gearing benefits may not make a difference to someone on a low income, and if you’re disinterested in renovations, you may be very happy to rent for the rest of your life.
Purchasing your first property is a complex investment and big financial responsibility – make sure you do your research. Speak to an accountant and be honest about your personal goals before jumping into the property game.
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Property Friends is a specialist Property Investment Strategist that provides solutions for people aspiring to financial independence, choices in retirement, or leaving a legacy. www.propertyfriends.com.au (03) 9758 5331