Buying own home vs investment property

backno67 on 19/08/2014 - 22:03
Last edited 19/08/2014 - 22:04

I am renting at the moment and I've saved $15,000 for a deposit for an apartment. With the little knowledge I have, it seems better to buy an investment property so I rent that one out and can claim depreciation and expenses to pay less tax - while still renting where I am. This has the added benefit of being free to move around as I may change locations for work etc.

Though to me it makes sense, I don't hear many people doing it. Is this strategy common and/or viable? Or am I forgetting an obvious flaw? Perhaps I am overestimating the benefit of paying less tax and underestimating the costs of having a rental property (both financial and time-wise)? If it is relevant, I only earn $50,000 a year so I don't pay a hell of a lot of tax. Or are there some rules of thumb to go by? For example, it seems to me that one can make this work if one is prepared to live in a fairly cheap place, and buy an investment property where the rent is higher than where you live.

I tried to google this idea and didnt find much. I did find this webpage with a video of a guy stating pretty much exactly my plan:
http://www.yourinvestmentpropertymag.com.au/expert-advice/sa…

He mentions something regarding 6 years to sell the investment property? Not sure what he means. Any thoughts, ideas and suggestions are greatly appreciated.

Financial

Comments

  • ilostnemo on 19/08/2014 - 22:14
    +3

    Your logic is correct.

    I was lucky enough to sponge of my parents and buy an investment property when I was younger.

    It's great as all the borrowing costs were tax deductable and in no time at all, it was positive geared.

    With real estate a lot is luck, so I wish you luck, may your investment grow at a rapid rate.

    • backno67 on 19/08/2014 - 22:51

      Thanks. Do you mind sharing some of the things to watch out for from your experience as a young investment property buyer?

  • maximum on 19/08/2014 - 22:24
    +1

    Yes financially this is the way to go but there are advantages to living in your own home which aren't financial which is why people tend to live in their own home. The 6 years is the period of time it can be treated as your home for capital gains purposes if you have lived in the property and then moved out.
    If you are looking financially there are usually better ways to invest than property - don't be fooled by negative gearing especially not on a low income - a positive cash flow and capital gain is better.

    • backno67 on 19/08/2014 - 22:57

      Thanks for the reply. Could you expand a bit on "a positive cash flow and capital gain is better"? Do you mean capital gain by buying own home and having the unrealised capital gain, or capital gain through other assets such as shares?

      • adn on 19/08/2014 - 23:05
        +1

        go to somersoft.com and read the whole forum. It seem you are starting from very minimal knowledge of property investment.

      • maximum on 19/08/2014 - 23:43
        +2

        Some people - especially real estate agents- spruik the idea that a property that runs at a loss is good because you get a tax return. I'd rather make $1 and pay 30 cents tax. Than lose $1 and get 30 cents back.
        In simple terms look for a property that at least breaks even and will hopefully grow in value. The capital gain can be on your investment if you have lived there and have not had another principle residence for tax returns in 6 years.
        I do agree $15000 isn't a great deposit. I'd save more there can be lots of expenses when you buy a cheap place - you need a good buffer in case something breaks eg oven hot water system etc.
        Financially with $15000 I'd buy shares or a managed fund while I saved for a better deposit.

  • [Deactivated] on 19/08/2014 - 23:07
    +1

    Where on earth are you going to buy a home with such a small deposit? I'd continue saving. Most people start with 10 times that in the capital cities.

    • noyesmaybeok on 19/08/2014 - 23:43

      Know plenty of people who have used the first home grant as their deposit ;)

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