Owning a home is a major life milestone, but it’s also a major financial commitment.

Should I Buy an Investment Property or a Residential Property?

Many people dream of saving and buying their first property. However, the nature of the first property purchase differs from individual to individual. One may opt to go for a residential property or an investment property. Ordinarily, the choice between the two alternatives will depend on your circumstances as well as the type of property you aim to buy. Your financing options also play a big part in your decision. For specific information taking your finances into account, get in touch with our mortgage brokers today.


Buying Your Home First

There is often a sense of achievement that comes with buying your first home. It allows you a lot of freedom to customise it and make it align with your taste. You can renovate it to fit your ideas and preferences. Your new home will also alleviate the constant worry about rent.

As a first-time home buyer, you are likely to enjoy some incentives such as reductions on stamp duty or government subsidies. Additionally, you do not pay capital gains tax on the sale of your home later on. That is regardless of whether the value of the property grows. Thus, buying a home would have a tax advantage due to the capital gains tax exemption. To learn more, check out this capital gains tax guide by TaxReturn.com.au.

On the downside, buying a home first requires a compromise on some aspects. You have to compromise on either size, location, or type of property due to budget constraints and property prices. The property available within one’s budget may not always meet all their preferences. Thus, a compromise may be necessary.

For some people, buying a residential property may feel restraining. It may feel restrictive if one feels like they may not have the freedom to take up opportunities elsewhere or even abroad. Thus, they may shun changes in their careers and business due to the inability to relocate after buying a home.


Benefits of Buying a Home

The biggest benefit of buying a residential property is the freedom to design it as you want. The owner can renovate it to fit their preferred style.

Buying a home also gives the buyer security of tenure. Thus, you do not have to worry about rent or being kicked out by the owner for failing to pay rent. You, therefore, gain the peace of mind to start developing your lifestyle around your home.

Lastly, where one is a first-time buyer, one can enjoy some government incentives like reduced stamp duty. For more information on all of the grants and schemes available to help you get into your own home sooner, check out the resources at Firsthomebuyersclub.com.au In case you end up selling the property some years down the line, you also get capital gains exemptions.

Buying a home is an investment but whether it is a good investment depends on a few factors.


Buying an Investment Property First

Although not many people have often seen investment property as ideal for their first purchase, there has been a recent increase in the uptake of this type of property. Buying commercial property first has many advantages that are worth considering. As an alternative to buying a residential property, it is worth reviewing the pros and cons of investment property.

One major disadvantage of buying residential property is the compromise on location. However, with investing in commercial property, there is no emotional attachment as it does not need to be in your preferred residential area. Thus, you can easily move to whichever neighbourhood you want without having to sell your property. The focus in your decision would be cash flow coupled with long-term potential.

Commercial property comes with tax benefits that you can utilize. You can apply depreciation and gearing to it to reduce your tax obligation.

Although buying such a property allows you to rent your preferred home in your preferred area, you lose some of the benefits that you would have had as a first homeowner. For instance, you would not get the capital gains tax exemption as well as first homeowner grants. You also do not get the peace of mind of owning your own home.


Benefits of Buying an Investment Property

One question one is likely to have would be, “Is it worth buying an investment property?” The answer to that lies in the analysis of the benefits of buying an investment property.

Investment in commercial property has tax benefits for the owner. You can apply the negative gearing strategy to reduce your tax liability. Since the property would be commercial, you can claim deductions on maintenance costs that will reduce your taxable income.

Buying property for commercial purposes also allows you to live in a better property that you may not be able to afford ordinarily. You do not have to reside in the property, and you can rent elsewhere without compromising some of your preferences. The rent you pay would also likely be less than the mortgage payments you make for your property.


Cons of Buying an Investment Property as a First Home buyer

  • Involves paying rent for your home and mortgage on your investment property
  • Exposure to inherent property risks such as low rental yield, vacancy, and property downturn
  • Potential rising mortgage interest rate risk
  • Significant cost of buying and selling the property
  • Attracts capital gains tax upon the sale of property


Differences Between Buying an Investment Property and Buying a Residential Property

When looking for property to buy, your focus would be different depending on whether you are buying an investment property or a residential property. When looking to buy a residential property, the focus is likely to be on the type of tenant in the area rather than where you are likely to live. Some important considerations include proximity to resources and amenities such as transport links and schools, as well as demand for the area.

Unlike residential property where you focus on your ideal residential place when buying an investment property, you look at the potential for high rental returns or capital gains.

Like any investment, though, the purchase of an investment property comes with both risk and reward.


Reasons to Buy an Investment Property as Your First Purchase

There are three main reasons one should consider buying an investment property over residential property.


1. Housing Affordability

Most people would prefer to live in or near city centres due to the proximity to their places of work and other amenities. However, purchasing property in such areas is prohibitively expensive. Thus, most people are likely to rent in such areas but buy property in cheaper other places. They then rent out their property for some income. This strategy allows home buyers to own property while residing in their preferred locations.


2. Leveraging Property Price Appreciation

Investment property has the potential for capital appreciation. Over time, its value would increase, resulting in capital gains when the owner decides to sell it in the future. First-time buyers can buy property in a high-growth potential area and benefit from the appreciation over time.


3. Making the Loan Repayments through Rental Income

An investment in commercial property has the advantage of generating rental income for the owner. Therefore, as a first-time buyer, you can use the rental income to service loan repayments for the property. There are instances where the rental income suffices to cover all expenses of the property such as the principal and interest payments on the mortgage.

In instances where the rental income does not cover all the expenses, the extra expenses you cover out of pocket are tax deductible. An investor can also claim depreciation against their property. An owner-occupier would not deduct such expenses from their tax returns.

Residential property and investment property both have their benefits and downsides. However, while residential property may give the owner peace of mind as far as rent is concerned, it has more limitations for the owner. An investor buying commercial property is likely to enjoy more benefits. From the generation of rental income that can go into offsetting the mortgage to the freedom to live in your preferred location, there are more upsides than downsides to owning commercial property.

Gavin Harrigan

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With over 18 years in the finance industry, Gavin's wealth of knowledge relating to home loans is matched by few in Australia. This knowledge is reflected in his dozens of awards, including being inducted into the Plan Australia Hall of Fame. His qualifications include a Bachelor of Commerce from Curtin University for Applied Finance and Commercial Law and a Diploma of Finance and Mortgage Broking Management from AAMC Training Group.

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