April 15, 2010
If you are considering upgrading to a new home, you may ask yourself ‘should I hold on to what I already have as I move on'?
Property gurus often advise that retaining your first property is a good investment strategy because of the potential to gain from capital growth, healthy rental yields and tax breaks. It may even help you own your ideal home sooner.
Senior corporate affairs manager for Mortgage Choice, Australia's largest independently-owned mortgage broker, Kristy Sheppard explains some advantages and disadvantages to owning a secondary property.
“The Australian property market is experiencing more buyers competing for a limited number of properties, thanks to strong population growth and serious housing supply issues,” she said.
“Consider this situation when deciding whether to put your first property on the market in order to purchase another. Doing so after a number of years and in a ‘sellers' market' will increase the likelihood of you making a solid profit; having greater capital gain to work with will propel you further towards purchasing a more ‘ideal' home.
“However, keeping your first home as an investment property can be beneficial. Holding on to what is often a smaller, less expensive property may be a profitable long-term investment if it is in a desirable location that sees strong demand for rental properties, Of course, you must be able to afford to repay a larger or second mortgage plus ongoing expenses and maintenance costs.
“The equity built up in your initial property can be utilised to secure finance for a second property and may help you overcome today's stricter lending criteria. A reputable mortgage broker will help you search through a wide range of lenders and loan products to find one that is tailored to your unique financial and lifestyle circumstances.
“You will need to think carefully about your repayment strategy such as whether you commit to a principal and interest loan or an interest only loan. Keep in mind that although interest only home loans are not structured to reduce the loan amount, they result in smaller monthly repayments. This allows you to make greater contributions towards your principal place of residence, if that is your strategy, while both properties hopefully experience capital growth.
“There are often tax benefits that come with being a property investor, which you can discuss with an accountant. If you are negatively geared, you can claim a number of deductions including, but not limited to, interest paid on the loan, cost of repairs and maintenance, property management fees, travel to and from the property for inspections and repair work, as well as property depreciation. However, you still need to budget accordingly and make up the shortfall throughout the year.
“There may be issues to contend with down the track such as the likelihood of rental vacancy, bad tenants and rising interest rates. Prepare yourself for such situations by saving as much as possible and depositing additional money into a redraw, offset or savings account. Also bear in mind that capital gains tax will apply when you sell any property that is not your principal place of residence.
“Property is often a terrific investment growth strategy if wise decisions are made early on and all pros and cons are understood. Be sure to set yourself long-term goals – remember that regular income from any investment isn't a certainty and capital gains don't appear overnight.”
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