One of the most frequently asked questions is whether to buy a principal place of residence or an investment property. This article covers three key pillars to help you decide: borrowing capacity, lifestyle, and long-term wealth building. By understanding the pros and cons of each option, you can make the best decision for your financial future.
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One of the most frequently asked questions is:
In this article, I want to cover three key pillars that will help define which decision is best for you.
If you're interested in my thoughts, definitely keep reading…
When making this decision, you need to have three key pillars guiding your choice.
Now, I can tell you upfront: I'm not going to tell you whether buying your own property or an investment property is better for you.
All I'm going to suggest is that there are pros and cons to both options. You can then apply this information to your own situation and determine which choice resonates more with your current position. This is the best way to approach this because there is no one-size-fits-all solution.
By the end of this article, you might decide:
Here are the three key pillars I want to cover:
Unfortunately, many of us don’t fully understand what this means when it comes to buying a principal place of residence or an investment property.
To simplify:
I'm going to tell you why:
When you purchase a $900,000 home (assuming you’re in Sydney, where $900,000 might get you something), and if you go in with a 90% LVR (loan-to-value ratio), that means you're putting down a 10% deposit, which is $90,000.
If you do that, your debt will be $810,000.
On this debt, you have a few expenses:
All these expenses are the same for an investment property, with one key difference.
The key difference is:
For your principal place of residence, you can't tell the Australian Taxation Office (ATO) at the end of the year: Look, I’ve got my own property, and these expenses should mean you shouldn’t tax me on my full income.
Instead, you should say: This is my income from my job or business, and here are all my expenses. Because I own this home, you should tax me based on the difference, which would reduce my taxes.
While this isn't how it works for your principal place of residence, it does apply to investment properties. This is where terms like negative gearing and positive gearing come into play.
If it's positively geared, positive cash flow means your income is higher than your expenses, which means you’ll get taxed more.
However, with current interest rates hovering around 6.5% to 7.5%, you're most likely to be in a negative cash flow situation. Another key difference with an investment property is the income it generates.
Why?
Because if you live in your principal place of residence, you’re not generating income—you're just living there.
With an investment property, you have rental income coming in, which, combined with the expenses I just discussed, creates a situation where most properties in 2024 will be negatively geared by between $5,000 and $20,000, depending on where you purchase.
If you’re negative by $10,000, you can tell the ATO: Look, it’s unfair that you tax me at this rate because I’m actually losing money with this investment property.
This is a contentious topic because some argue that it was your choice to invest, so why should you get tax incentives?
On the flip side, investors might argue: I’m providing value by increasing the rental property supply.
I’m not diving into that debate here. However, another key thing you can claim is depreciation.
If your property is younger than 40 years, you could claim tax depreciation. The ATO sees this as: My house is depreciating in value because land appreciates while buildings depreciate. Therefore, you should reduce my taxable income.
This creates a greater tax incentive for you. So, when it comes to the tax situation, and I'm by no means a tax expert, you will find that:
Regarding borrowing capacity, banks can substitute the expenses of an investment property with some income. It won’t substitute it completely, especially with current buffer rates and interest rates, but it won't negatively impact your borrowing capacity as much as purchasing your principal place of residence, which is considered bad debt.
According to some, it’s the worst debt you can have, while others see it as a good way to build wealth.
In my view, when it comes to borrowing capacity, think about this:
You can’t just purchase your principal place of residence and put it into a trust or a different entity. With a principal place of residence, you get certain advantages that you lose if you buy it through another entity.
One major advantage is the capital gains tax exemption. If you live in a property and sell it 6, 10, or 15 years later, you don’t get taxed on the gain.
This is a key driver for many people who choose to buy a principal place of residence.
However, if you’re thinking of buying your own place to take advantage of capital gains tax incentives and then purchasing investment properties, you might be surprised.
I know this first hand because I’ve seen people who, after consulting with us, found that their principal place of residence had significantly reduced their borrowing capacity.
I don’t know what your situation looks like, so I’ll use my own as an example. You can substitute it with your own circumstances, especially if you don’t live in Sydney.
I live in Sydney, which is very expensive. I have the choice to buy a principal place of residence or continue renting.
Let’s address the notion of rent being dead money.
If you simply rent and do nothing else with your money, then yes, it could be considered dead money.
However, if you adopt the concept of rentvesting—renting while investing—rent can actually be a useful strategy.
Let’s use an example:
If I live in Sydney and can afford to buy something for $600,000, I might only be able to afford a unit in Western Sydney for that price.
I may have dreams of owning a house and starting a family, so a unit might not be enough. I might be able to purchase a townhouse in Greater Southwest Sydney, about 50 km from the city. But now, I've got this property.
If my job requires commuting to the city, I’ve added potentially 45 minutes to an hour each way in travel time.
What if all my friends live on the other side of the bridge? Now, visiting them becomes more difficult.
What if my kids want to attend certain schools that are no longer accessible because I’ve moved further west?
I’m not suggesting there’s anything wrong with the West. What I’m saying is that if you have aspirations to be near the city or the beaches in the Eastern suburbs, it’s going to be more challenging. Plus, we know the cost of fuel is high, and time seems to fly by.
All these obstacles come from wanting to purchase my own place. We may all be eager to jump on the property ladder, seeing prices rise, and thinking that buying our own place is the easiest way into the market.
However, if the only option you can afford is a townhouse in a less desirable location or a unit in a large block with no expected capital growth in the next 5 to 10 years, it may not be worth it.
Instead, you might consider renting in a location you love and using your extra savings to invest in a property where the numbers make sense. This allows you to:
Ultimately, buying property and being financially free is great, but if you spend your 20s, 30s, and 40s solely focused on financial freedom, you might achieve it by 40 but with regrets. You might miss out on travel, relationships, and experiences because you prioritised money over everything else.
This is where that whole saying of:
This is why I think rentvesting in 2024 is such a valuable tool, especially for those in their 20s and 30s. If you can live at home for as long as possible, you’ll be able to not only enter the property market but also build a portfolio over the next 5 years, putting you in a strong position despite media fears about home ownership.
You might be looking at property solely to build wealth.
Real estate in Australia has been a strong wealth builder. You can use some money to buy a house, leverage equity to buy other investment properties, or control a larger asset with leverage.
We know the game, and that’s likely why you’re interested in property investment.
When it comes to long-term wealth building, don’t deceive yourself. If you think: I’ll buy this place and eventually turn it into an investment property, you might be mistaken.
Why?
When you purchase your principal place of residence, you’re often making an emotional decision.
I don’t care who you are; you will buy with emotions. You might say:
“Hey, I don’t like that. There’s no backyard.”
“Oh, I don’t like the kitchen colour.”
You end up making an emotional decision.
In contrast, when buying an investment property, you focus solely on the numbers.
You should evaluate locations based on data and metrics, looking for areas where demand exceeds supply, and trends are favourable. This approach ensures the best return on your investment in real estate.
If long-term wealth building is your priority, and you’re reading this article for that reason:
Emotions do play a role. If you’ve moved around a lot in your younger years or are planning a family and don’t want to move frequently, I understand why you’d prioritise owning your own place.
There’s something special about owning your own home, no matter the size. I relate to this sentiment, especially given the stories I hear from my team and clients.
Ultimately, it comes down to self-awareness and priorities. If you bought your home to live in first, it’s an emotional decision. And you might not have a clear direction on when you’ll execute on this decision. Generally, 99% of people buy their own home and later upgrade.
Generally, you’ll say: well okay I've become a property investor by accident, because I don't want to sell the first property. I'll keep it. I'll get a tenant in there and now I stretch myself to go and purchase another property and when I purchase this property I'm probably going to upgrade at some other point.
This cycle of upgrading—whether to keep up with others or simply because you’ve outgrown your space—can continue.
If you aim to build wealth quickly through real estate, structuring yourself correctly with investment properties might be the way to go. Then, you can come back to purchase your principal place.
Starting early makes these decisions easier, especially when it's just you or you and your partner. If you’re on the same page, decisions are faster, and you have fewer liabilities.
You’re also more flexible in your choices, including employment and location. When you have a family, it becomes more complex.
That’s why you shouldn’t sit on the sidelines and wait. The market may not crash as anticipated, and waiting can lead to missing opportunities.
Action is key.
Be honest with yourself. If you’ve been postponing action, you need the right team around you. I want to be part of your team.
You can book a free discovery call or call our office at 1300-314-462 to discuss your next move.
You might decide to walk away after a great 5-minute conversation, or you might explore new possibilities and start making moves.
I hope you’ve gained valuable insights from this article.
As mentioned earlier, there’s no definitive answer—only one that you must find for yourself. Be honest with yourself in making this decision.
There’s something beautiful about owning your own place, and I hope to achieve that one day.
However, I decided early on that I would rather own a fleet of cars and sell a few if needed to buy my dream car.
In this case, we’re talking about the dream house. Structuring your portfolio effectively can help you achieve that without selling everything.
I’ve seen people sell their homes due to rising interest rates, invest in other properties, and then use the equity to buy their own place. They end up with the best of both worlds.
I hope you enjoyed this article.
I’ll catch you in the next one.
Thanks, everyone!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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