Should first home buyers buy a PPR or an investment property?

Let’s face it – first homebuyers are doing it tough. They’re saving harder than ever before to build a substantial deposit, only to have the goal post moved further and further away by Sydney’s crazy property market. Many have sidelined dreams of owning their own home now in favour of investment properties to build long term wealth. Which option is best? Let’s investigate….

First home – the pros:
1. You could have access to First Home Owners grants. The grants are not as generous as they once were, but they can make a big difference, especially if you buy a new property.
2. It’s YOUR home (and the banks of course!). No need to worry about being kicked out at the end of the lease, you can decorate to your heart’s content and you know that you’re paying off YOUR mortgage and not someone else’s.
3. No Capital Gains Tax (CGT) applies when you sell, no matter how much the property has grown in value since purchase.
4. Quicker finance – Banks are more likely to loan to owner-occupiers at the moment so gaining finance could be easier.

First home – the cons:
1. A big deposit – If you’re buying in Sydney, you’ll need a large deposit which can take years to scrape together. But the longer you wait the more the market may push you out of the race.
2. You may have to buy in an area you don’t necessarily want to live in. Unless you win the lottery or have a hefty stockpile of cash you may find you can only afford to purchase in a suburb that is miles away from your current home. Perhaps not the trendy inner city suburbs you’re used to!
3. If building a portfolio of properties is part of your long term wealth building strategy it may take quite a while to get on top of your mortgage. If you’re bogged down with a large monthly mortgage, finding the extra money to save for a new deposit plus costs may be difficult.

An investment property – the pros:
1. You can buy an affordable property in an area you wouldn’t necessarily live in. A lower value property means a lower deposit so you can get your foot in the door sooner.
2. Cash flow. You could be earning a regular income to help pay the mortgage in part or full. Most importantly the mortgage is being paid by someone other than you.
3. Your repayments may be lower. Lenders are generally ok with interest only payment on investment properties, which will put less of a strain on your family budget.
4. You can claim losses on the property on tax and receive a deduction on your main source of income.
5. You can rent where you want to live and still be contributing to your financial future.

An investment property – the cons:
1. You can’t access the First Home Buyers grants.
2. You will have to pay Capital Gains Tax on the property when you sell.
3. You still have to find somewhere to live which isn’t your own.
4. You may have to contribute some extra money from your weekly wage to top up the running costs of the property.

There are many arguments for and against both scenarios. So, you need to ask yourself: what exactly am I trying to achieve? Why am I looking at buying a property in the first place?

For home buyers, the main benefit is as your long term principal place of residence. So if you have to borrow a little extra to buy in an area you’d like to live, you might find that leasing the property out initially will help with any extra burden. Once you find yourself in a position where you’ve paid down a chunk off the mortgage, you could consider moving into the property.

But if you want to build a property portfolio that will work for you now and into the future, then an investment property might be better for you. Whichever way you decide to go, you should always first speak to your team of professionals (accountants, mortgage brokers, financial planners etc), to ensure your ownership structure and choice of investment complements your long term strategy.

*Illustration: Ron Tandberg, source

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