Buy A Place To Live Or Purchase An Investment Property?
It’s a conundrum that many people face right now, particularly with the property boom we’ve seen in Sydney and Melbourne over the past 5 years. That is, the decision to focus on saving for a place to live or purchasing an investment property instead.
I get asked this question a lot by my clients, so I thought I’d give you my two cents in case this has been something you’ve been thinking about recently.
I think it goes without saying, the first step to having a successful retirement is owning a place debt free. A mortgage or rent typically takes up 1/3 of a family budget so eliminating this requirement makes a big difference to your cash flow in retirement.
Alright, well question answered right? Well, not quite yet, I digress…
For most people, when thinking about a place they want to live, they have a fair idea of the type of property and also the location they want to buy. You know why? Because people are already renting in the location they want to buy!
The next three questions to ask are:
What is the purchase price of the property I want to buy?
What deposit so I need to save?
What will my repayments be?
I work in Sydney’s North Shore suburbs so let me take Lane Cove as an example. In this case, I’m going to presume you want a three-bedroom townhouse.
Answers to those questions are:
Once you know those three numbers you can start to make some key decisions…
The first is, how long do you reckon it will take for you to save the deposit? If the answer is less than three years, I generally recommend people continue saving. However, if the answer is three years or longer then a change of strategy is needed (which I’ll detail below).
The next key decision is to consider those repayments and confirm whether or not if they’re affordable for your family budget. If the answer is yes, then again, I think you’re on the right path. If the answer is no, then your deposit will have to increase so your repayment can decrease. And again, the question is how long will it take for you to save that deposit?
A change in strategy
If you look at the numbers and the reality is that it’s going to take you three years or more to get the ideal property you’d like, then there are two ways to go about things:
Change the area you want to buy in or purchase an investment property and continue renting.
In relation to the first option, I’ve seen mixed results. What I’ve come to the conclusion of is your overall happiness with your place of residence is heavily linked to where you work and the travel time it takes to get there and back. From talking with my clients, if it takes you more than 1 ½ hours to get to work each way, this will take a toll on your health and happiness over time.
I can’t speak for the rest of the country, but Sydneysiders are very stubborn as to where they want to live. For example, there are many people that live on the beaches and work in the city or elsewhere that sit in traffic for an exorbitant amount of time. And it’s not to pick on the beaches, the same holds true for people coming from Gosford, Hornsby or the south.
So, if you can compromise and can find other suburbs near your work that have a lower purchase price it’s definitely something to consider. However, for people that compromise where they live, generally it means putting great distance between work and home and as I said, I don’t think it works out in the long run.
The other option for you is to put your money into purchasing an investment property now and then relook at things in a few years. I say this for two reasons:
Putting your money into property as opposed to a savings account has historically seen a far greater return on investment. With the low-interest rate environment we’re in, investment properties are often cash flow neutral and therefore don’t put a strain on your cash flow to hold the property.
The capital gains you receive from your investment property over time will allow you to achieve the deposit you need for your owner-occupied property one day.
In summary, we all need a place to call our own one day. However, everyone’s circumstances are different so sometimes an alternative strategy needs to take place in order for you to achieve this goal. It all starts with understanding the realty of the path ahead and then formulating a plan of action specific to you.