Your first property doesn’t always have to be your main residence. Many people actually buy an investment property first while they’re still renting, and buy their own home later when the time is right, the so-called “rent-vesting” trend that you probably have heard about, especially in recent years. Today, we will go through the key differences between these two choices and hopefully give you some ideas on which would be best for you.
I should make it clear that I am not recommending which is the better option. This is a complex topic and involves factors that cannot be accounted for with numbers, such as lifestyle and family. I can only present objective information. At the end of the day, this is a decision you need to make yourself.
First - Location
For an owner-occupied property, you will need to balance lifestyle, proximity to work, nearby amenities, with prices still important but can be stretched a bit. This means you are limited in the sense that you can only buy near where you work, possibly near good schools, where you are familiar with, close to your favourite restaurants, etc., some also prefer to have family nearby.
Investment properties are usually bought with a much more profit-oriented mindset. You would only care about rental demand, rental yield, maintenance costs, future price growth. Because of that, investors are willing to buy in less developed neighbourhoods that have potentials. Many would even buy in a completely different part of the country where they have never been to, relying only on the financial data that is available.
Second - Type of property
A lot of people want to buy their first home as their dream home. This often means most first home buyers would try to future-proof their home if possible. An extra bedroom for when the baby comes, a backyard for an extension later on, maybe a brand new apartment instead of a 10-year-old one next door. Even when future-proofing is not a priority, many would be open to the idea of getting additional features on their home even if it means going slightly over budget.
Investors, again, put less emphasis on the extra features of the home and more on how well it would perform financially. Of course, additional features could lead to higher rent, but it could also mean higher maintenance. An investor would be more likely to pass on a feature if it does not add to the rent.
Third - Price
Since owner-occupiers tend to focus on lifestyle and higher quality as we mentioned, most would levitate towards already expensive neighbourhoods. They are also more willing to stretch a bit for a more desirable property.
Investors are the complete opposite. They would be attracted to less developed but growing regions, negotiate harder for the lowest price possible, and look at nice-to-have features more critically if they don’t increase the rent.
All of these mean that you tend to have a higher budget when buying your own home than when buying an investment property. This has the side effect of many first home buyers delaying their purchase for more deposit or higher borrowing capacity. Contrast this with investors, who would be more strict with their budget and more likely to purchase sooner than owner-occupier.
Fourth - First home assistance schemes
These are programmes available to those buying their first home as owner-occupiers, ranging from tax exemption to special loan assistance.
For most of these schemes, investors do not qualify even if they are buying their first property. In some States (notably New South Wales), you lose these benefits if you buy the investment first then buy your own home, even though your second property is technically your "first home". In these cases, you only have one chance to get government benefits, and that is buying your first property as an owner-occupied home.
These schemes do have a major impact. For example, an $800,000 property in Sydney will cost an investor nearly $32,000 in Stamp Duty, which is like a transaction tax, while a first home buyer would get this waived completely. Another scheme allows for a 5% deposit while a non-qualifying buyer would need a minimum of 9%. These are some of the most enticing reasons to buy your first home as an owner-occupier.
Fifth - Tax deductibility
This has been regarded as one of the main reasons to own an investment property in Australia.
When you buy an investment property in Australia, any expense related to that property can be deducted from your income, lowering your tax. These include maintenance, agent fees, Council rates, Strata, and most importantly, loan interest.
Depending on how your tax is organised, you may end up not paying any tax on the rental income, and even get deduction from your usual income tax.
Obviously, owner-occupiers do not get this benefit.
Finally - Bank assessment
Buying an investment will give you rental income, and you can include that in your application to increase your borrowing capacity. Some banks also take tax deductibility into account, boosting your capacity even higher. However, don’t forget about the rent that you still have to pay. If you are getting a similar rent to what you are paying, your borrowing capacity may not change that much.
This obviously does not apply if you are living at home rent-free, in which case your borrowing capacity will be higher for an investment property.
Because of the assistance schemes, owner-occupiers would have lower deposit requirement, or need to borrow less, making them more likely to be approved for a loan.
Side note on Price Growth
This is a complex topic and I will go into more details at a later date. For now, we just need to keep in mind that houses, which generally include anything that does not have Strata, have seen tremendous growth over the last 50 years. Apartments, on the other hand, tend to be quite inconsistent. Many areas have seen their apartment prices staying flat, or even decreasing slightly over the last 10 years. Since owner-occupiers tend to favour houses for the size, and investors favour apartment for rental yield, we have been seeing an interesting trend of owner-occupiers actually getting better price growth in recent years.
This does not mean all apartments are bad, if it gives you really good rent or helps you stop paying rent yourself without over stretching your finances, it could still be a sensible option.
I hope you have found this to be useful. As I explained at the beginning, this is aimed towards comparing owner-occupied and investment purchases in key areas of interest. If you have any questions, or found that I have missed something, be sure to leave a comment and I will address that.
Until next time, stay sensible.
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