First Home Buyer Investment Property: Is It Possible?

There are many different types of home loans in Australia designed for a variety of borrowers.

Some are owner-occupied loans, where the buyer lives in the home, and some are investor loans, where the owner rents the property out to tenants and lives elsewhere.

Owner-occupied loans are more common in Australia, according to data from the Australian Bureau of Statistics[1].

However, if you are buying your first property, it doesn’t have to be where you live. This is often referred to as ‘rentvesting,’ where you buy a property, rent it out to tenants and continue to rent elsewhere (usually in a preferable location).

For example, you may live in an inner city rental apartment in Sydney because of its close proximity to work, beaches, nightlife, cafes, and bars, but a deposit to buy a property in the same area is out of your price range. You therefore decide to buy a house in a more affordable suburb two hours outside the city.

You can rent out the investment property to tenants, generate passive income to help with your own rent and enjoy capital gains as the investment property grows in value.

How to obtain an investment property as a first home buyer

With any mortgage, a lender will assess your serviceability, which is your capacity to repay the loan, where they look at your income, expenses, credit score, assets, and existing debt.

One way to get an understanding of your borrowing power is by getting pre-approval. This is when a lender estimates how much you can borrow.

With an investment loan, the lender will assess if you can afford your current expenses (including rent) in addition to your new mortgage repayments for your investment loan.

Lenders usually consider investment loans to be higher risk, which affects how much they are willing to lend you, and they are usually accompanied by a higher interest rate.

Buying your first home as an investment

Potential benefits

Flexibility

Unlike owner-occupied loans, you can search for property anywhere in Australia as an investor. You may have no interest in living in a certain location, but decide to buy there based on capital growth and rental income potential.

This gives you more flexibility as an investor and, ideally, more potential to benefit from capital gains as your decision is based purely on your investment goals, rather than where you need to live, so your entry point to the market can be much lower.

Passive income

Unlike an owner-occupied loan, you can generate passive income on an investment property, which means your tenants help pay off your mortgage.

Tax deductions

Unlike owner-occupied homes, investment properties come with different tax regulations and potential deductions including interest, that can help you save money as the owner.

Possible risks

Paying rent and mortgage

In the rentvesting model, you are paying rent where you currently live and are also responsible for making mortgage repayments. Having these two costs can be difficult to manage and you need to ensure you are capable of repaying both simultaneously.

Furthermore, you may not be able to benefit from first home buyer schemes that are exclusively for owner-occupiers.

Interest rates

Historically, investor loan interest rates have been higher than owner-occupied rates due to the perceived risk associated with investor loans.

Furthermore, should interest rates rise during your mortgage, your repayments will increase, which can put you under financial stress.

Vacancies

If you buy an investment property you should consider the periods where it is empty as you search for new tenants. During this period you will not be generating rental income which can put you under financial pressure to service the loan yourself.

Market fluctuations

There is also a risk that your investment property loses value due to market changes, which leaves you at risk of owing more than the property is worth.

Ongoing costs

There are different ongoing costs associated with investment properties you need to consider such as:

Property management fees
Advertising fees
Insurance
Maintenance
Income tax.

Tips for buying an investment property while renting

Save a bigger deposit

While there are investment loans available with a small deposit, saving 20% or more of the property’s value will help you secure a better loan, avoid paying LMI, and have a stronger LVR which can offset some of the risk.

Consolidate other debts

Before taking on a mortgage as a renter, paying off existing loans like credit cards, personal loans, and car loans will help you when it comes to home loan approval and your own finances when paying off your mortgage.

Market research

Investing in property is a big financial decision and commitment. Make sure you have thoroughly researched the property type, location, rental yield, and risks before making a purchase.