When purchasing a property, one of your foremost questions should be whether you intend to use it as an investment or as an owner-occupied dwelling. There are advantages to both types of purchases, and your goals and financial situation will help you to determine which option is right for you.
However, many investors are finding that investing first over buying an owner occupied property is the fastest way to build wealth, due to the following factors.
Investment property owners can take advantage of tax benefits associated with their property that are not available for owner-occupied residences, like negative gearing, depreciation and capital gains tax.
One of the biggest tax benefits is claiming depreciation against your overall income. In accounting terms, depreciation describes how assets decline in value over time. When it comes to investment properties, depreciation is based on the property’s “useful life,” usually ranging from 25 to 40 years, depending on the type of property and how long ago it was built.
There are two important ways properties can depreciate. First off, there is the depreciation of included items such as carpets, window treatments, appliances like ovens and clothes dryers, air conditioners, furnaces, and hot water heaters. Each of these items can be depreciated on your taxes, giving you increased deductions against your overall income.
Another type of depreciation is “capital allowance” depreciation, which is related to the building itself. It’s based on the cost of construction rather than the purchase price of the property, and it’s calculated at a rate of 2.5% pa if constructed after 16 Sep 1987 and 4% if constructed between 18 July 1985 and 15 September 1987. If it was constructed before these dates, the property may not qualify for “capital allowance.”
One of the most attractive attributes of real estate investing is that property grows in value over time, giving you the opportunity to leverage your equity toward other investments.
You can leverage equity in your owner-occupied residence or in your investment property, but the refinancing options may be different. In either case, useable equity is usually about 80 per cent of the value of the property minus debt you still owe.Using this equity is a great advantage for property investors, and often referred to as ‘good debt’.
Finally, consider whether your purchase has the potential to provide you with any cash flow. Many financial experts don’t consider owner-occupied residences to be “investments,” regardless of how much they increase in value. This is because you always need a place to live, and your own residence doesn’t make you any money (other than capital gains). .
Investment property, on the other hand, can provide you with a steady stream of income, even if your cash flow is meager at first. Over time, as rents increase and your mortgage stays the same (or disappears when you pay off the loan), your cash flow improves, providing you with increased financial security as you grow older..
As you can see, there are several benefits of choosing an investment property over an owner occupied dwelling. To discuss your own unique situation, reach out to us at Full Financial Services.