Home vs investment property: What to buy first?

aussie-moneyYou no doubt have been brought up believing that owning your own home is the ‘Australian thing to do”. Renting is just throwing away money and you need to buy your own home so you’ll be able to retire. So the usual steps goes something like this:

1 – Save up a deposit (with or without assistance).

2 – Purchase your PPOR (Principal Place of Residence).

3 – After you have built up equity in that home you consider either renting it out and purchasing a new PPOR, or you look at buying an investment property.

But is this the smartest move?

If you purchase your PPOR first, it can weaken your long-term financial position, because you have an increase in cost of living. It is highly likely it will cost you more to own your own home than to rent. Not just because of your mortgage, but through maintenance costs also.

Here is something to consider:

To maximize your property investment potential, try this approach. Keep your living expenses as low as possible while you establish your investment portfolio. Keeping costs down likely means living with family or renting and resist, resist, resist non-essential spending. Therefore a mortgage on a PPOR is likely not going to help you keep costs down.

Lets look at an example:

PPOR –
•    Deposit: $50,000
•    Loan: $450,000
•    Repayments (principal + interest, rate of 6%): $675/week
•    Cost to you: $675/week

Positive investment property –
•    Deposit: $100,000
•    Loan: $400,000
•    Rental income: $1,100/week
•    Repayments (interest-only, rate of 6%): $461/week
•    Profit: $639/week
•    Rent a $500,000 property: $500/week
•    Total profit to you: $139/week

(Example Source)

So if you purchase your PPOR first, it means you are delaying the investment returns quite substantially. Yes finding a positively-geared property can be tricky – but it’s not impossible, and that $100,000 deposit seems a big nut to crack. But keeping your eye on the prize of creating financial independence, might just be what you need to get over the mental hurdle. So think hard if you are tempted to buy your PPOR, there might be more long-term gains by renting.

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