Should I buy an investment property or owner occupier property first? Part 1 of 2
Recent research shows that more first home buyers are purchasing their first home as an investment property rather than an owner-occupier property.
In 2015, 30% of first home buyers purchased their first property as an investment property according to research released to the public by Mortgage Choice.
With so many first home buyers now weighing up between purchasing their first home as an owner occupier property or alternatively as an investment property, we thought we would gather a few experts from our FHBA Services Community to explore the debate of, should you buy an owner occupier property first? Or an investment property?
The experts for this debate include:
- Liz Sterzel, Director of Property Wizards
- Scott Northcott, Director of Real Property Advice
- Steven Jovcevski, Head of Referrals at Australia’s money saving zone, Mozo
- Daniel Cohen, co-founder of First Home Buyers Australia
- Taj Singh, co-founder of First Home Buyers Australia
Am I better off buying an investment property first? Or a property to live in (owner occupier)?
Scott Northcott from leading Queensland buyers advocate firm Real Property Advice says there is no clear, black and white answer, to which is better. Mr Northcott says a good starting point is to think about what your current circumstances are and what you want to achieve. “The main thing to consider is the need for you to live in your own home. Some people really want that feeling and peace of mind” Mr Northcott said.
Liz Sterzel from premier Perth buyers agency Property Wizards agrees. “The main reason for buying your own home first is that you don’t have to contend with the demands of a property manager or landlord, rent increases, lease renewals, property inspections and being restricted in what you can do, such as hanging pictures” Ms Sterzel said.
Ms Sterzel further went on to say that for those who don’t need the security and independence of living in their own home and who are impatient to build a portfolio faster, there are advantages to buying an investment property first. “Financially, an acceptable investment property may be cheaper, meaning you can get into property faster and you can take advantage of the constant compromise between the standard of a home and the growth potential due to location or adding value”.
Many will say they want to achieve both according to First Home Buyers Australa co-founder Taj Singh. Mr Singh says there are some ways you can achieve a bit both. “Potentially, if you want to live in your first property, but privacy is not as big of a concern as building wealth, you can consider buying a multi bedroom property and then rent out the spare bedrooms”.
For those who aren’t risk takers, Ms Sterzel offers the following scenario: “Many first home buyers will choose to begin investing in property by buying their first home and paying down the mortgage as fast as possible, usually into an offset account in case the property is later converted into an investment. Later, once the home has some equity, it can be used to borrow against for the first investment property. This cycle then repeats as you start to build your portfolio.”
For those who do want to invest to get a maximum return, but still need to live somewhere, the concept of ‘rentvest’ has been growing amongst first home buyers. Ms Sterzel explains “you may be able to afford to buy a home but really don’t want to live in the home you can afford, whereas you can afford to rent a property that’s perfect for you.” This way, you are living where you need to live (for work and lifestyle factors perhaps) while you own an investment property in an area that you can afford to buy and you believe will deliver you strong investment returns.
At the end of the day fellow FHBA co-founder Daniel Cohen says it comes down to what do you really want to achieve. “Do you want the peace of mind that you have your own roof over your head and you can decorate and renovate the property as you see fit, or, are you wanting to use property as a way to build and maximise your wealth for your future?”
What are some of the differences you need to consider from a lending perspective when buying an investment property versus an owner-occupier property for the first time?
Ms Strezel and Mr Northcott both agree that it’s not just your goals you need to think about when making the decision, but you also need to consider your financial circumstances. So we approached financial expert Steven Jovcevski, from Australia’s money saving zone Mozo, to go through some of the differences between obtaining an owner-occupier property loan versus an investment property loan. Mr Jovcevski had the following points to share with us:
- “The introduction of the APRA investment lending requirements last year has seen some lenders cap investor loans at 80%, while owner-occupiers can still borrow up to 95% of a property’s value”
- “Interest rates will likely be higher on investor loans as lenders seek to grow their owner-occupier loan portfolio”
- “Investor loans often have higher set up fees compared to owner-occupier loans”
- “First homeowners purchasing a property to live in are eligible for a First Home Owners Grant if the property is new or bought off the plan and valued below the market value cap. If you are purchasing a property for investment purposes, you still may be eligible to apply for the grant under the condition that you live in the property for the first 6 months”.
Mr Singh added to Mr Jovcevski’s list:
- “First home buyers purchasing new property to live in are also potentially eligible for other government assistance such as Stamp Duty relief”
- “Investors are also entitled to unique government assistance that owner occupiers are not eligible for, such as claiming certain property related expenses as tax deductions (e.g. the interest on the mortgage). However, investors also have to pay tax on capital gains (increase in property value) when they sell the property, whereas first home buyers do not have to pay any tax on the property that increases in value if they live in it”.
This topic is very big and the decision can be overwhelming. Mr Northcott says whether you are thinking owner occupier or investment property first, you should start off by thinking about affordability. “Make sure you do your figures on a higher interest rate as the long term averages are much higher than the current rates. It would be prudent to use a more realistic (larger) figure to do your affordability sums with”.
While we have part 2 of this debate still to come, Mr Cohen says “it really is tricky deciding what is right for you the first time. There is no clear, black and white, right or wrong path. There are numerous things you need to consider (which we will look at in more detail in Part 2) and it is a really wise ideally to seek professional advice who can help you methodically brain storm out loud, go through the different options and then assist you achieve your dreams. Your first home will likely be your biggest asset you will purchase at this stage of your life and will set you on a path towards greater wealth later in your life. Don’t be afraid to ask a professional for help.
This is Part 1 of 2. For Part 2, please click here.
To plan and strategise your first property purchase talk to your local Buyers Advocate.
To work out your borrowing capacity and home loan options, you should speak to a Mortgage Broker.
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