Should your first property be an investment?
Question,
My partner and I have been renting in inner-city Sydney for the last five years and have a good bit of money saved up to buy our first home. However, we don’t want to move out to the outer suburbs – we like to be close to all the action. Would it make sense for us to buy a house we could afford in the outer suburbs and rent it out instead of buying a place for ourselves? Or would we be better off buying a tiny unit in the inner city to live in?
Answer:
That’s a very good question and very much driven by what your current income situation as well as your budget. For the purpose of this exercise I will assume that you wish to spend $500,000 on your investment; both options are illustrated below.
Option 1: Purchase a house in the outer suburbs and continue to rent in your current location
OPTION 1: OUTER SUBURB HOUSE Budget of $500,000 | |
Deposit: 10% | $50,000.00 |
Loan | $450,000.00 |
Annual interest repayments at 6.75% | $30,375.00 |
REVENUE from rent at $500pw | $26,071.00 PA |
EXPENSES PA | |
Management fees at 6% | $1564.26 |
Council rates approximately | $600.00 |
Water rates approximately | $300.00 |
Repairs and maintenance | $500.00 |
Insurance | $500.00 |
TOTAL EXPENSES | $3,464.26 |
ANNUAL COST | |
NET PROFIT (Revenue – Expenses) | $22,606.74 |
Annual Repayments at 6.75% | $30,375.00 |
Short Fall / Contribution PA | $7768.26 |
GROWTH Allow for 5% per annum | |
COST of RENT (where you current live at $500pw) | $26,071.00 PA |
TOTAL COST (shortfall +rent) * | $33,839.26 |
TOTAL COST per WEEK | $650.75 |
TOTAL COST per DAY | $92.71 |
*You would have to cover the annual short fall as well as pay the rent in your current location, which might be $500 per week.
Option 2: Purchase and occupy a small inner-city unit
OPTION 2: SMALL APARTMENT Budget of $500,000 | |
Deposit: 10% | $50,000.00 |
Loan | $450,000.00 |
Annual interest repayments + Principle = 7.25% | $32,625.00 |
EXPENSES PA | |
Levies | $1,600.00 |
Council rates approximately | $600.00 |
Water rates approximately | $300.00 |
Repairs and maintenance | $500.00 |
Insurance | $500.00 |
ANNUAL COST | |
TOTAL COST PA | $36,090.00 |
TOTAL COST per WEEK | $694.71 |
TOTAL COST per DAY | $98.97 |
As you will see, both are very similar in the cost of ownership. Over all the decision to invest in property is a good one; both will prove to be sound investments over the ownership cycle. However one compelling point is that you will not pay capital gains tax on your home, which in the long term will save you a significant amount if you wish to divest out of your acquisition.
Byron Rose is the president of the Real Estate Buyers' Association of Australia and is principal of Rose&Jones.
