Should You Buy a Home or an Investment Property First? A Guide to Smart Property Decisions

Deciding whether to purchase your own home or an investment property first can be a tough decision, especially with rising property prices and changing market dynamics. Both options come with their own set of benefits and challenges, and the right choice depends largely on your goals and financial situation. In this blog, we’ll break down the pros and cons of each option, and we’ll also introduce a middle-ground strategy that could offer the best of both worlds. 

Buying Your Own Home First: Pros and Cons 

Pros of Buying Your Own Home First: 

1. Security and Stability: Owning your home gives you the stability of not having to deal with rent increases or being asked to move by a landlord. This is particularly appealing if you have a family or an established career. 

2. Capital Gains Tax Benefits: When you sell your primary residence, any capital gains you earn are generally tax-free. For instance, if your home appreciates from $700,000 to $800,000, you can keep that $100,000 gain without paying taxes, allowing you to reinvest in your next property. 

3. Add Value with Renovations: Homeownership offers the chance to renovate and add value. Cosmetic improvements like updating a bathroom or painting can increase the property’s worth, which could help you build equity that can be leveraged later. 

Cons of Buying Your Own Home First: 

1. Lower Borrowing Capacity: Since you don’t earn rental income from your own home, it may reduce your borrowing capacity when you want to buy additional properties. Mortgage brokers and banks might find your serviceability limited, making it harder to invest in the future. 

2. Risk of Overcapitalisation: Homeowners tend to become emotionally attached and might overspend on renovations. Investing in expensive upgrades like marble countertops or a luxury backyard might not always yield a high return. 

3. No Tax Deductions: Unlike investment properties, you can’t deduct mortgage interest or other expenses from your taxes when it comes to your primary residence. This means that the costs of owning a home can be relatively higher in comparison. 

Investing in Property First: Pros and Cons 

Pros of Investing in Property First: 

1. Tax Benefits: With an investment property, you can deduct expenses like mortgage interest, property management fees, maintenance costs, and even depreciation. These deductions can reduce your taxable income, making it a tax-efficient way to build wealth. 

2. Easier to Scale: Investment properties generate rental income, which can boost your borrowing capacity. This allows you to build a larger portfolio faster, giving you the opportunity to benefit from compound growth over time. 

3. Building a Larger Asset Base: By starting with investment properties, you can potentially build a property portfolio worth millions within a shorter period. This allows you to take advantage of market growth earlier, setting the stage for long-term wealth. 

Cons of Investing in Property First: 

1. Less Stability: As a renter, you may have to deal with rent increases and the possibility of being asked to move out. This lack of stability can be challenging, especially if you have a family. 

2. Landlord Responsibilities: Owning an investment property means dealing with tenants and maintaining the property. While you can hire a property manager, being a landlord can still require time and effort. 

The Middle Ground: Buy, Live In, and Convert to Investment 

For those who want both the stability of homeownership and the financial benefits of investing, a hybrid approach can be ideal. You can buy a property as your primary residence, live in it for a few years, add value through renovations, and eventually convert it into an investment property. Here’s how this approach works: 

• House Hacking: Rent out rooms while you live in the home to generate additional income. This can help you pay down the mortgage faster and build a savings buffer for your next purchase. 

• Cosmetic Renovations: Renovating your home can increase its value, allowing you to leverage the equity for future investments. 

• Transition to Investment: Once you’ve lived in the property for a while, you can convert it into an investment property and move into another home, keeping the tax benefits and potentially even claiming certain first-time buyer grants through specific legal structures. 

This hybrid approach provides the security of owning a home while still allowing you to grow your investment portfolio. It can be an effective way to balance personal and financial goals. 

Final Thoughts: Choose the Right Path for You 

Deciding whether to buy a home or invest first comes down to your personal situation and financial goals. If you value stability and want a place to call your own, buying your home might be the better route. If you’re eager to build wealth and are comfortable with a bit more risk, starting with an investment property can be the way to go. 

Whichever path you choose, make sure to do your research and consult with a financial advisor. And if you’re looking for the right suburb for your next investment, use Property Dollar’s Suburb Shortlist feature. It can help you find the areas with the best potential for growth, making your research process more efficient. 

Disclaimer: The information provided in this blog is general in nature and not intended to be personalized financial advice. Please consult a financial advisor before making any decisions regarding your finances.