From first home to investment
Keeping your first home as an investment property when you upgrade can be a great way to start a portfolio – but there are also potential pitfalls.
It’s not uncommon for enthusiastic first home owners to work hard to pay off as much of their mortgage as possible.
The problem is that when they upgrade, they end up with a large non-tax-deductible debt on their new home with only a small tax-deductible debt on their investment.
By using a mortgage with an “offset account” linked to their loan, investment-minded first home buyers can put themselves ahead of the game without compromising their tax position.
Another potential concern is a potential lack of diversification, if both properties are in the same area, or nearby.
RentCover Executive General Manager, Sharon Fox-Slater, said home owners needed to assess whether their first home was suitable as an investment, rather than an owner-occupied property.
“A rental property needs to appeal to a wide market and be reasonably easy to maintain. Elaborate gardens and purple shag carpet are fine in your own home, but something more neutral will rent out more easily,” she said.
Like all major decisions, finances are a big consideration.
When you turn a property from home to investment there are a number of costs to consider including fees to an agent or property manager, land tax, landlord insurance and services such as maintenance and gardening. (Fortunately these are tax deductible.)
Landlords also need a cash buffer to cover major repairs and vacancy periods between tenancies.
On the income side of the equation, property managers can give an idea of how much rent to expect and what additions – dishwashers, air conditioners, extra cupboards – could prove to be worthwhile.
The final consideration is lifestyle – you are likely to have less money to spend on a new home if you choose to also keep your first property.