If you are considering upgrading to a new home, you may ask yourself ‘should I hold on to my first home for investment purposes’?
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 put you one step closer to owning your ideal home sooner.
When considering this option it is important to look at both the advantages and disadvantages of owning a secondary property to ensure that you are making the right decision for your needs.
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.
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 could also be utilised to secure finance for a second property. A mortgage broker can help you search through a wide range of banks and other lenders and loan products to find one that is tailored to your unique financial and lifestyle circumstances.
If you are considering hanging onto your first home for investment purposes, 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 may also be potential tax benefits associated with being a property investor, which you can discuss with an accountant. Also bear in mind that capital gains tax will apply when you sell any property that is not your principal place of residence.
It is also a good idea to prepare yourself for any other issues you may have to contend with down the track such as the likelihood of rental vacancy, bad tenants and rising interest rates, by saving as much as possible and depositing additional money into a redraw, offset or savings account. This will help build a financial buffer for times of need.
All in all, 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.