By Rich Harvey, CEO & Founder, propertybuyer.com.au
When someone comments on property buying, they usually frame any purchase as one of two possibilities – either as a home or an investment.
This seems important because securing one or the other often requires different strategies.
But it’s possible homebuyers have been looking at their purchase the wrong way.
You see, if you adopt the right mindset, your home can be one of the greatest contributors to your growing investment portfolio.
A foundational investment
The first property most people buy is their home, and it’s selected for myriad reasons.
We will want to live in a certain suburb – perhaps within a particular school district or an easy commute of work. We’ll have a set budget we can spend. We’ll even have a preference about the property type, whether it be house, apartment or townhouse.
But we rarely think about what that home can offer in terms of helping us establish a base for long-term financial security.
You see, the family home can provide an excellent source of equity if you make the right choice in the first place. When you eventually sell your home, the proceeds are all capital gains tax free.
Sure – you want to meet your family’s “must haves” list but think a bit more broadly about a home that has the right characteristics to increase in value, or even have appeal to local renters in the future.
You equity partner
I think building equity in your home should be a no-brainer for savvy property owners.
Why? Because saving for a deposit to invest in property is hard work, and drawing on your equity helps overcome that.
I speak from experience. Drawing on my home’s equity is how I built my portfolio.
Here’s a simplified example of what can be achieved. Let’s say you have a 20 per cent deposit ($200,000) on a $1 million home purchase. So, you’re borrowing $800,000. Through disciplined budgeting, you find a way to pay $100,000 off the loan over the course of two years. Meanwhile, the property has risen in value by 10 per cent over that same two-year period and is now worth $1.1 million.
Your loan-to-value ratio of 80 per cent has now dropped to 63 per cent – i.e. $700,000 owed on a $1.1 million property. That’s $410,000 in equity you now hold, a percentage of which could be redeployed to buy an income-generating investment property. The rent from this second home helps service your loan, all while it’s going up in value. You now have two properties which have growing equity that can be drawn on for another purchase in the future.
This is the process investors utilise build multi-property portfolios that boost their income and deliver more financial freedom.
Choosing the right home investment
Of course, maximising this strategy depends upon choosing a property that delivers promising capital gains potential – and there are a couple of ways to do that.
Choosing the best property requires you to consider three key factors –
1. The location
2. The local market drivers
3. The individual property characteristics.
First up, make sure you pick a suburb/ location that has a history of sustainable capital growth and will appeal to a wide range of local buyers – both owner occupiers and investors. Select suburbs with excellent amenities close to transport, shops and schools.
Then consider suburbs with a high quality demographic profile - the higher the incomes the better- and consider the local drivers of demand. Find out the typical buyer type for suburbs – are they young families, downsizers, aspirational (upgrader) buyers or retirees?
Then finally consider the individual property characteristics – look for complimentary colour schemes, simple but liveable room sizes and layout, great outdoor areas and so on. Think about position, outlook and capturing natural light as well.
Wide appeal equates to greater demand for your property into the future.
Also, look for a home where you can value-add simply and effectively. A new paint job could be a great value grower. A simple kitchen or bathroom renovation, or a few weekends spent improving the street appeal can all result in a marked uptick in value in a reasonably short timeframe.
Added benefits
There are some other upsides to thinking about your home as an investment when your buy.
When it comes time to move house, having a property with wide local appeal should help drive rental demand if you don’t want to sell it. Some owners make the mistake of selling their homes when they shift. By talking to a qualified mortgage broker and financial advisor, you may discover the advantage of holding onto the property and enjoying the benefits of a rental return. But this depends on whether you still hold a mortgage over the property to maximise tax deductions and the future capital growth potential of the existing home versus other alternatives.
Also, if you do decide to sell your home, it is an excellent source of CGT-free income. Having some focus on the homes investment potential when you choose it could deliver a wonderful financial windfall in the future – and the ATO won’t see a dime of the sale price.
Buying a home delivers a range of benefits. It provides shelter while also delivering physical and financial security for you family. The trick to maximising the investment benefits of home ownership is making the right choices from the start.
This is where an experienced buyers’ advocate can assist. We’re adept at unearthing properties that will not only meet you housing needs right now, but that can also deliver on your financial needs well into the future
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