Personal vs. Investment Property

Hi, I'm new to this forum, and have searched for similar post but was not able find what I was looking for. Apologies if this has been discussed before.

My family and I are renting at the moment. We have cash in the bank (enough for a house deposit), doing nothing. Looking to the future I'd like to have rental income as a 3rd income stream. My question is simply this: should we continue renting, which we are happy to do, and focus on the investment property first, or should we buy a house for ourselves first and stop paying rent and only later buy an investment property? What would be the best scenario?

Thanks in advance
Juan

 

Hi Juan,
First up where do you currently live?

 

I guess this depends on your goals. Either way you are far better investing the money than having it sit in a bank account with lousy interest. If you buy an investment property first you get the benefits of the tenants helping you pay the mortgage and other costs plus all the tax breaks.

 

To hard to answer with out more info and also what your goals are?

Renting does improve serviceability as there is no extra loading on it as opposed to OFI (other financial institutions) debt for home loans which will be calculated at between 7- 8% as a rough guide.

 

Thanks everyone for the great feedback. Some background:

We recently relocated and have sold our home in Brisbane (hence the availability of cash). Our long term goal (10-15 years) is to have passive income equal to our current lifestyle. This will allow me to transition from a full time employee to a part time, or contract worker which in turn will give me more time to pursue interests and spend more time with the family.

Having recently been educated on tax efficient debt I am leaning towards buying an investment property and paying this off as quick as possible then moving on to the next one, until such time our goal (above) is reached then only buy our own residential home. I suppose my main question would be: "am I throwing money away by renting (keeping in mind that we would be buying an investment property) or is this a wise approuch"? Hope I am making sense.

Once again, thanks for everyone's great feedback.

Cheers
Juan

 

Rather than paying off the investment debt, you're better off saving into an offset account - this gives you the same benefit but allows you to keep your cash free for your eventual PPOR. You want to put as much cash toward this as possible, otherwise you'll have a bunch of paid down IP's and a huge non-deductible PPOR debt right when you want to be kicking back.
It's fine to buy IP's first, but don't reduce the debt more than necessary over and above what's required.

Depending on what you buy investment wise, you might sell to buy the PPOR but if you're hoping to hold as an income stream you are better off saving your cash for the PPOR purchase.

 

Hi @Juan Le Roux , welcome to PC,

re your Q, agree with @Jess Peletier , always pay down non deductible debt, such as PPOR loan, and then IP loan. when you don't have PPOR loan, it is always a good idea to have offset accounts against IP loans, and deposit all available cash into the offset accounts.

 

Hi @Juan Le Roux
As already mentioned - depends on your goals.
I know some are OK with the idea of 'rentvesting' - but it is not for every one. It goes back to if you are comfortable continuing to rent, and not having the stability your own home provides. It does impact servicing - but then, have you checked with a broker on what potential you have - and have them run the two scenarios - buy PPOR first vs build your real estate portfolio? Ideally, it is better to buy an owner occupier property first, and then recycle debt / draw down on equity later on to build you real estate portfolio. Will go back to your overall borrowing capacity and life goals.

With the current lending rules, once you buy investment properties first, how does it impact purchase of your PPOR later on?

 

When you were educated on Tax Effective Debt, did it cover the tax effectiveness of your PPOR being Capital Gains Tax free at sale? Everyone's situation is different and we cannot possibly know the details of this. Does the annaul tax deductablility of the interest payments against your salary compare more or less favourably to the saving on future Capital Gains Tax payable upon sale of any Ip to service the future purchase of another PPOR and to service your future retirement?

 

Why did you sell your home in Brisbane?

It is just about to boom!!!

As @Angel has stated, a PPOR can tax efficient as well. We are looking at selling our PPOR next year (not suitable as an IP as it is on 5.5 acres). We will make more money after tax from this property than any IP in our portfolio. I trust you education covered this.