Property guru Miriam Sandkuhler gives us the low down on property investment vs home ownership.

You may find yourself in a situation where you want to buy your own home but can’t afford to buy where you are living or renting. What is becoming more and more common nowadays, particularly among generation Y, is the concept of buying where you can afford and renting where you want to live.

More advanced than that is buying where you will invest well (i.e. own an investment grade property) and having the flexibility to rent where you want to live and move according to changes in your life circumstances.

It’s actually a smart strategy and the one I personally employed 15 years ago when a relationship breakup resulted in my not having enough money to buy back into the suburb we had just sold in. And it worked really well.

With property prices continuing to escalate, this really is the only option for many, so let me give you some things to consider that may support your decision to go down this path.

Reality check

If you simply cannot afford to buy where you want, change something. It’s all about price, property and position so either change the type of property (e.g. from a house to an apartment), change the size of the property (e.g. make the land size smaller) or change the suburb to a neighbouring one.

If this tweaking doesn’t work for you, then you should seriously consider buying where you can afford and renting where you want to live.

Single or married with children?

Are you single but soon to be coupled or coupled and soon to have children or even decoupling? If so, these life changes can often bring about a change of requirements, which usually means needing to live in a different sized property. If these things are on the horizon in the short term (the next 2 – 4 years) , then you don’t want to be buying, then selling and buying something again, as the costs of entering and exiting property are very high. Consider buying for that future event now and again if you don’t have the funds to do so, then consider buying where you can afford to invest and renting where you want to live.

Your income, expenses and cash flow

Do you have a low income or high expenses and tight cash flow? If so, owning your own home and having a mortgage means you have debt that isn’t tax deductible. Owning an investment property means you are entitled to certain tax benefits, including claiming expenses such as your mortgage interest repayments, repairs, maintenance and depreciation against your tax. This may make it more affordable for you to get your foot on the property ladder.

Some cons to consider when buying an investment property first while still renting are;

• Any capital gain you make when selling the property is taxable.
• You also don’t have the security of a long term lease unless you negotiate it and you are at the beck and call of the landlord when it comes to them fixing items that need repair or even updating the property to make it more liveable.

Alternatively, let’s look at buying a home versus an investment property first. Consider the benefits;

• You have the security of knowing that you won’t get evicted, unless of course you don’t pay your mortgage!
• You can renovate (cosmetically or structurally) and add value to the property at any time and therefore generate extra capital gains tax free equity as a result.
• You can rent some rooms to flatmates to help pay down your mortgage
• You can landscape the gardens to add value to the property
• You can move out and rent it out at any stage and treat is as an investment property. At this point you will qualify for all of the associated tax benefits, so you will need to get a licensed valuer (not an estate agent) to do a full valuation at this time, to ensure you only pay capital gains tax on any increase in the value of the property from the time you rented it and not the from the time you bought it.

Note that both of the scenarios above depend on your borrowing capacity. Lenders will determine how much they will lend you based on your ability to service debt. They may lend you more if it’s an investment property as a tenant will help you service that debt, but you should find out what your borrowing capacity is for both scenarios first before considering either option.

It really all comes down to your personal goals, your age and your circumstances. This is best dealt with by having a think about what your short and medium term goals are and then creating an investment plan for yourself or better still, take into consideration the factors mentioned above, do some cost calculations and move forward on that basis. Remember what works for someone else may not work for you so make it personal and take the steps that best suit your needs.

Let’s face it; the average person is not a property investment expert so you may also wish to seek independent and unbiased professional advice for assistance. Mistakes when buying or investing in property can cost tens of thousands of dollars, so be sure not to take the process of investing lightly.

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Miriam Sandkuhler is the founder of Property Mavens, a specialist property advisory firm in Melbourne. She excels at identifying high-performing property and strategically building a client’s portfolio with high capital and income growth assets. She is also a passionate advocate of fair play for all and complete accountability and transparency in the real estate industry. For more information visit www.miriamsandkuhler.com.au