The upsides of buying an investment property first
You could earn regular income that will help you better manage your cash flow. Essentially, your tenants are paying your mortgage repayments, provided you buy a property that’s earning enough to cover the interest payments.
You may pay lower repayments
Lenders often allow you to pay just the interest on your mortgage for a number of years. This can make it easier to hold your property and will likely put less strain on your budget. In contrast, you’re more likely to be obliged to pay principal and interest repayments for your owner-occupied loan.
You can potentially borrow more
You can potentially get more money from the banks, thanks to the rental income you’ll be getting from your investment property. While lenders will apply different criteria, generally they take about 60% of the rental income as a proportion and use this in their calculation of your borrowing capacity. Having this extra 60% added to your personal income could make a huge difference to your loan approval and serviceability.
You can claim deductible expenses
There are a range of expenses that you can claim as tax deductions in relation to your rental property. For example, in most cases you can claim interest payments, maintenance costs, and rates, among others. In contrast, you won’t be able to claim any of these if you buy your property as an owner-occupier.
You can take advantage of negative gearing benefits
Negative gearing means your investment property is earning less than the cost of holding it. You cover the shortfall in the hope that in the future your property will grow in value so you can recoup these losses. You can then claim these losses as tax deductions against your taxable income. High-income earners like this strategy as a way to reduce the tax they pay on their income. However, it can often be a big drain on your cash flow and could severely limit your ability to borrow more money.
Disadvantages of buying an investment property first
You pay CGT on sale of the property
You pay capital gains tax when you sell your rental property, although if you have held the property for longer than 12 months you will get a 50% concession. The capital gain amount is added to your other assessable income and taxed at your highest marginal tax rate.
You have no access to federal and state government grants
Buying an investment property makes you ineligible for the assistance provided by the federal and state governments for first home buyers.
Best of both worlds
The good news is you can have the benefit of owning both a home and a rental property.
Here are a couple options you may want to consider:
Buy a smaller, less expensive property in your chosen area and live in this property for at least 12 months.
You can then look at turning this into rental property, meaning you move out and either rent or buy another property.