Should You Buy an Investment Property Before Your First Home in Australia?
If you’re contemplating entering the booming real estate market but unsure whether to buy an investment property or a home first, you’re not alone. Many first-time buyers face this dilemma. Owning property has long been a cornerstone of the Australian dream, with visions of stone benchtops, modern appliances, and spacious backyards.
When interest rates were at historic lows, it may have seemed like the perfect time to buy your first home. However, with rates expected to rise, are you prepared for the potential increase in mortgage repayments? If your home loan repayments suddenly increase by $150 a week, could you still comfortably manage?
Jumping into a substantial home loan could put a strain on your finances, especially if the property isn’t located in a growing market. This is why many are considering the idea of purchasing an investment property before their first home.
Exploring Rentvesting: A New Way to Enter the Market
For many Australians, buying a home seems out of reach due to surging property prices, especially in major cities. This is where rentvesting comes into play. Rentvesting allows you to invest in real estate without needing to live in your investment. It may not be the area you personally want to live in, but you can still benefit from owning property while renting in a location that suits your lifestyle.
This approach allows you to get into the property market earlier, earning rental income and building equity while renting in your preferred area. It’s an ideal way to get started with property investment and start building wealth.
Why Consider an Investment Property First?
When deciding whether to buy an investment property or a home first, it’s essential to focus on your long-term financial goals. While owning your own home may seem appealing for the sense of security it provides, it doesn’t necessarily support your cash flow in the same way an investment property can.
An owner-occupier home is considered “bad debt” because it generates no income, offers no tax benefits, and may not appreciate much if it’s not in the right location. In contrast, an investment property is “good debt.” It’s an asset that can generate rental income, provide tax deductions, and typically appreciate over time.
Before deciding whether to buy a home or an investment property first, it’s important to address any existing bad debt. If you have consumer debt, such as credit cards or personal loans, focus on clearing these first to improve your borrowing power.
How Investment Property Buying Differs from Buying a Home
Purchasing a property for investment purposes requires a different mindset compared to buying your first home. While buying a home is often an emotional decision, investment properties need to be evaluated based on logic and numbers.
Successful property investors focus on the financial potential of the property and the market dynamics, rather than personal preferences. While it’s important to feel some connection to the property, remember that you’re buying it for an income-generating purpose, not for personal enjoyment.
Unlike a family home, which is typically chosen based on emotional factors, an investment property should be selected with clear financial criteria in mind. Look for properties in high-demand areas that are likely to provide strong rental yields and future growth.
Key Differences When Buying an Investment Property
- Investment is a Business
Unlike buying a family home, property investing is a business. You must treat it as such, focusing on the financial aspects rather than personal desires. Pay close attention to factors like rental yields, vacancy rates, and market trends to make the best decision. - Understanding the Market
Knowing the market is critical when buying an investment property. You should evaluate the area’s rental yield, population growth, infrastructure development, and economic factors. This is far different from purchasing a home, where your decision may be more driven by lifestyle preferences than financial considerations.
A Beginner’s Guide to Buying an Investment Property
Starting with the right approach is crucial for success in property investment. Here are four essential steps to take before you make your first purchase:
- Consult Experts
Real estate investment requires more than just purchasing property. You need a team of experienced advisors, including a property strategist, financial expert, acquisitions specialist, property manager, accountant, and financial planner. This team will help guide your decisions with accurate data, strategy, and market insights. - Identify the Market
Before purchasing, make sure you understand the market dynamics. Don’t rush into the first property you find. Focus on areas with strong investment potential, such as those with planned infrastructure improvements, high capital growth, or undergoing gentrification. - Set Clear Goals
Define your financial goals and how much you’ll need to live the lifestyle you desire. This clarity will guide your investment decisions and help you build a strategy for acquiring properties that support your long-term objectives. - Find the Right Broker
A skilled broker can make a significant difference in your investment success. They will help you secure financing, set up a loan structure that maximizes your cash flow, and ensure your investments align with your overall strategy.
Should You Buy an Investment Property or a Home First?
While there’s no definitive answer to whether you should buy an investment property or a home first, the smart choice for long-term financial growth is often to buy an investment property. With rental income helping cover costs and potential capital gains, it’s easier to continue acquiring assets over time. You can also keep renting in an area that suits your lifestyle while building your property portfolio.
By purchasing an investment property, you’re not just securing a home for the future; you’re building wealth and creating financial security for years to come.
