The dream of owning your own “castle” has changed a little, with many first homebuyers today buying an investment property first instead.
Australians increasingly want to live close to work and where the action is, which is why most people like to live close to the capital city centres, but with prices rising across most capital cities, purchasing property near or close to the city is becoming increasingly difficult for buyers – especially first homebuyers.
The increasing appeal for younger generations to rent in desirable locations (where they can’t afford to buy) and buy an investment property where they can afford to but don’t want to live, is behind this sentiment shift to buying an investment property before their first home.
This trend, described as “rent-vesting”, suits the lifestyle of many millennials, allowing them flexibility in where they live, giving them the opportunity to travel and at the same time allowing them to grow their wealth.
Interestingly, this shift could mean the official statistics that show record low first homebuyer activity probably understate the real buying activity of young Australians, because rent-vestors purchasing investment properties wouldn’t be documented as a first homebuyer in the data.
Buying an investment property first may help you achieve your ultimate goal of owning your dream home in a number of ways:
1. Someone else pays the mortgage
Imagine you find a property you’d like to call home, but can’t quite afford to buy it right now.
One solution could be to initially rent it out so the tenant helps pay off your mortgage until such a time as your finances improve and you can move in yourself.
You’re likely to find tax benefits, including depreciation and negative gearing, may help you manage your loan for those first few difficult years.
By using the rent coming in, plus any regular savings, your loan could be paid down much quicker than if you moved in straight away.
Before you adopt this strategy, make sure you get tax advice as your investment property could attract capital gains tax in the future, even if it becomes your main residence.
2. The benefits of capital growth
There’s no doubt in my mind that if I had to choose between cash flow and capital growth as an investment strategy, I’d invest for capital growth every time.
This is because wealth from real estate is achieved through long-term capital appreciation and the ability to refinance to buy more properties.
Therefore, you should only buy in a suburb that offers high capital growth potential, and this may not be where you’d like to live in the short term.
Remember, most inner- and near-city apartments have exhibited little capital growth over the last decade, so if you’re keen to live in the centre of the big smoke, just rent there and buy your investment property in a high growth suburb elsewhere.
If your investment performs well, it could help reduce the amount you ultimately need to borrow to buy your new home.
Some other important issues to consider
Before you adopt rent-vesting, or any other investment strategy, you should:
- Prepare a budget and get independent tax and accounting advice to ensure your approach is financially achievable.
- Understand the risks as well as the rewards of property investing, such as the responsibilities of being a landlord as well as the illiquid nature of property investment.
- Recognise that property prices can go down as well as up, so there may be some risk to this strategy.
- Understand your eligibility for your state or territory’s first homeowner grants or stamp duty concessions if you buy an investment property first.
- Always keep a close eye on how your investment property is tracking in terms of cash flow and capital growth, but remember that property investment is a long-term wealth creation strategy.
So, there you have it – maybe renting is the way to go after all.
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