18 Jan Should you buy your own home or buy an investment property?
If there’s any thornier question in property investment, we’re not sure what it is.
Should you buy your own home or buy an investment property?
Isn’t as clear cut as you might think and it’s worth considering both sides of the argument.
For Buying Your Own Home
Many of the arguments for buying your own home rather than an investment property are emotional arguments but to ignore them is unfair. People are emotional after all.
- It gives you a sense of security having your own home. It does. It’s hard to argue that having a roof over your head doesn’t make you feel better. However, it’s worth noting that until you pay off the mortgage –it’s not your roof, it’s the mortgage lender’s roof.
- It’s expected of you. We don’t think tradition is a strong argument for anything but people make it anyway. Did you know that in many Western societies, such as Germany, it isn’t expected that people will buy their own home?
For Buying An Investment Property Instead:
These arguments tend to be more focused on the financial benefits of such an arrangement and while it might seem a little odd – it can be more profitable to rent your own home and buy another place to rent to someone else.
- It lowers your costs. In one of the strange quirks of the financial system – property investors get tax deductions that home owners don’t. When you take this into account it is more expensive to pay off your own mortgage than one on an investment property. So, it can work out cash flow positive to rent your own place and buy an investment property.
- It changes your credit rating. It’s not quite as simple as this but in essence a mortgage on your own home creates no income. Thus your debt to earnings ratio is higher than if you have a mortgage on an investment property which creates additional earnings. This isn’t a massive deal but it does affect the serviceability calculation that some lenders apply to their lending criteria.
- It reduces your own maintenance costs. When you spend money maintaining the investment property – it has tax benefits. When you rent your own home, you don’t spend money maintaining that whereas if you own that property – you do spend to maintain and you don’t get tax breaks for doing so.
One of the more interesting arguments in all of this is that most home owners don’t live in their dream homes. They live in the best place they can currently afford. Because investment properties can cost less to run than a home – it can free up more cash to enable you to rent a better place than you can afford to buy.