A question I’m often asked is whether people should buy an owner-occupied property first or an investment property. What most don’t realise is that it might be possible to do both. A client could purchase a property that needs a cosmetic renovation, add value to it and then leverage into the world of investing.
BY JAMIE MOORE
Accessing this newly created equity means they could fund a deposit and costs on their first investment purchase. With this strategy, the client also gets to take advantage of government bonuses like the First Home Owners Grant (FHOG) and stamp duty concessions.
As an example, take Mike and Kate who recently purchased a $400,000 property in the Australian Capital Territory. They were able to take advantage of the $7000 FHOG and concessionary stamp duty (which was only $5000). Using a 10 per cent deposit, they took out a loan of $360,000.
After a couple of months of carrying out cosmetic renovations on their first home, which included new paint and flooring, new kitchen cupboard doors and sink, light fittings, window furnishings and landscaping, their property was revalued at $450,000.
They were then able to increase their loan back up to 90 per cent of the new value and access $45,000 in equity. This equity was used as a 10 per cent deposit (plus costs) on their first investment – a property across the border in Queanbeyan.
This strategy isn’t for everyone. Some people may not be in a position to afford the holding costs on their own home and an investment property. Others may prefer to rent in a particular location they enjoy or live at home while investing.
Either way – having your cake and eating it too, or in this case buying a first home and an investment property, is a possibility.
Jamie Moore is the owner of Pass Go Home Loans, a mortgage broker firm specialising in sourcing and correctly structuring finances for property investors across the country. www.passgo.com.au
This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.
Great article Jamie.
It’s also important to note that investors don’t stop at their first investment property!
If you follow a strategy of improving and drawing the equity, the sky is the limit (serviceability obviously comes into play eventually)
Comment by Erik Tyler — April 23, 2012 @ 3:43 pm
Very interesting article and a strategy certainly worth considering for those starting out.
I’m a fairly young investor myself who relied on organic ‘market’ growth in my first PPOR (principal place of residence) to find the $$$ (equity) to leverage into an investment property.
But, in a flat market such as this, there probably won’t be any ‘organic’ growth for a little while. Don’t get scared off by this! It is a normal occurence and part of the long-tail cyclical nature of the property market.
Instead, you’ll have to ‘manufacture’ growth to build equity for your investment property of the future.
In fact, that’s what I’m doing for my next acquisition; I’m purchasing an old unit in a well located inner-ring suburb of a capital city, moving into it for 12-18 and trying my hand at basic cosmetic renovation, to build equity and growth.
It’ll hopefully be a double-win;
1) I’ll increase the rental return capacity by about $30-$40pw, and continue letting it out for higher rent
2) I’ll (hopefully) manufacture $30-$40K of capital growth over the next two years; enough to unlock some wealth to procure the next portfolio purchase.
As Jamie said, it’s not for everyone. But; those who can, DO!
Comment by Cameron McEvoy — April 25, 2012 @ 10:48 pm
This is a great opportunity for buyers, especially first timers who are in the right position in their life and financially.
Building home equity is very self-rewarding, perhaps if this option isn’t feasible solely, it could be achievable through a joint venture?
…the property market is unpredictable so you might feel more confident and secure this way.
Comment by Mel — May 22, 2012 @ 2:26 pm