Is it a good idea to buy an investment property for your first home?

The biggest hurdle for many first-time home buyers is housing affordability. With rising property prices, this is a major obstacle to their dreams of owning their dream homes. This is particularly evident in the nation’s capital cities where the price difference between renting and buying a home continues to be significantly high.

Enter rentvesting. This smart investment strategy is growing in popularity, especially among first home buyers. It can be used as a stepping stone to acquiring the property of your dreams.

A recent survey by lenders’ mortgage insurance provider Genworth has found that one in six, or 15.5%, of prospective first home buyers plan to purchase an investment property as a means of getting foot on the property ladder.

This trend is stronger in capital cities. Nearly a quarter (25%) of Sydney’s aspiring homebuyers and one-in-six in Melbourne plan to use the investment route to get into the housing market.

While property investing can be a great way to create wealth and secure your financial futures, it requires careful planning and unyielding determination to succeed. These are some important things to keep in mind if you’re thinking of buying your first home.

What are the advantages of buying an investment property to replace your first home?

Rentvesting, which is the industry term for buying a home to rent out, has many benefits.

1. You can be on the housing market quicker

You don’t have to delay your home-buying plans by waiting for years to save enough money for a deposit. Instead, it is better to buy a house that is less expensive and requires a smaller deposit in a different area. This will allow you to get on the property ladder faster and begin building equity and profit.

2. You can save your investment property for your dream house

The best way to make money is to invest in property. Even if your investment property generates profit, you could use that income for your rental expenses.

3. It’s possible to live right where the action happens

You can rent out your property to other people and live where you want. If the rental price in the area you are interested is reasonable, you can take advantage of it without taking out a large mortgage. You can also upgrade or downsize your home to suit your financial needs without paying stamp duty or any other legal costs.

4. A range of tax benefits are available to you

The Australian Tax Office offers a variety of tax deductions that property investors can use to reduce their annual tax bills. Sometimes, this can make the difference in positive cash flow or negative gearing.

What are the pros and cons of purchasing an investment property for your first home?

Like any type of investment, however the housing market also has its drawbacks. Here are some:

1. You won’t be eligible for many state-sponsored benefits

You are effectively making yourself uneligible for the First Home Owners Grant and First Home Loan Deposit Scheme (FHLDS) if you get into the property market as an investor. These grants are only available to owners-occupiers of homes.

2. You are less secure with your primary residence

A downside to being a tenant, is the fact that you have less security with your main residence. You may have to make your rental property available for inspections, or vacate it if your landlord decides that you want to sell.

3. For homeownership costs, you will be responsible

You, as a landlord will have to pay for the management and maintenance costs of your investment property. You may end up paying more over the long-term, especially if you have a lower rental income than homeowners.

4. Capital gains tax liability

You will need to pay capital gains tax if you sell an investment property. This is different from selling an owner-occupier residence.

How important are these factors to consider before you buy an investment property?

It is important to do your research and plan carefully when looking for the ideal investment property. Before you purchase one, here are some things to keep in mind.

1. Lage

A property’s location has a major impact on the rental demand, tenant quality, and rate of return. A high-growth area is defined by a large and growing population, accessibility to public facilities, vibrant job markets, low crime rates, access to public transportation, affordable taxes, and favourable insurance rates.

2. The property’s condition

Before buying an investment property, it’s a good idea to hire a specialist who will conduct a detailed building inspection. By doing this, you can make sure the property is in excellent condition and ready to be rented. Unexpected repairs and maintenance costs can drain your cash flow and cause a significant impact on your finances.

3. Listings and vacancies

Strong rental markets are often marked by low numbers of listings and vacant properties. You can increase rent prices by raising vacancy rates to boost your returns.

4. Positive cash flow

An investment property should generate strong positive cash flows every month. This means that the income generated is more than enough to pay all your monthly repayments and taxes.

5. Potential for capital growth

You should be able generate income from your investment property, in addition to cash flow. Cash on return is the most commonly used metric to calculate profit. It takes into account how the property was financed. Experts believe that a great investment property will earn cash at a return of around 8% or higher.

Which suburbs are best for property investment?

You can find high-yield rental properties by looking for areas with low property prices and high rental returns. These areas are usually located outside of capital cities that have high yields but more expensive housing.

Openagent.com.au has released a comprehensive list highlighting the best suburbs with high rental yield, based on CoreLogic data for January through December 2020. The real estate agency has identified the top five areas with high-yielding rental houses in each state or territory.

New South Wales

Queensland

South Australia

Tasmania

Victoria

Western Australia

Australian Capital Territory

Northern Territory