January 29, 2013 by Dymphna

Should You Own Or Rent Your Home?

I want to talk about a dilemma that so many people face in their real estate investing decision process. In fact, I faced the same dilemma myself when I found myself divorced and hard up for cash.

The dilemma is simply this: What if you can only afford to buy one property? Not two or three, but just one? Which should you buy? Should you acquire a principal private residence (PPR) to live in, or should you buy an investment property?

The truth is that there is no one right answer for everyone; much depends on your own personal situation and how you view things.

As funny as it may sound, us females look at things just a little differently than you males do. Call it our nesting instinct, but women tend to want to own our home now. Men, on the other hand, tend to look at the cash flow aspect of property before they begin to think about finding their permanent home.

Neither perspective is wrong, just different. But as a real estate investor, I personally believe that until you’ve replaced your income two, three, or even four times over what you’re used to earning, via passive income from investment properties, you shouldn’t be buying your “dream” home. But that’s just me.

Having said that, it doesn’t mean that you shouldn’t own some kind of a home today. After all, the benefits of your own home are certainly plentiful if you go about it the right way. Let me explain…

First Homeowner Grant

For example, if you’re a young person or a young couple, and you want to buy a home, you can do so and reap the benefits of the First Home Owner Grant that many states still offer first time buyers. Depending upon in which state you intend to buy, you may be eligible to receive a grant from your state or territory of up to $15,000 if it’s a new home, so it’s definitely worth having if you qualify.

Tax-Free Capital Gains

But there is more good news with buying your home. If the value of your home (PPR) rises, then when sell your home the capital gains are tax-free! When you consider that capital gains taxes on most other investments are 45%, you can see what an important and beneficial tax advantage home ownership can be.

PPR means a Reduction in Stamp Duty

The fact is that there are numerous ways the laws favor people owning their homes. For example, The First Home–New Home scheme gives exemptions or concessions on transfer duty for first home purchases in NSW. It also applies to those buying vacant land on which they intend to build their first home.

The First Home–New Home plan gives eligible buyers full stamp duty exemptions on transfer duty on new homes valued up to $550,000. If the home costs more, partial concessions on transfer duty apply for new homes valued between $550,000 and $650,000.

And if you buy vacant land to build a home on, you will owe no stamp duty on lots valued up to $350,000 and get a concession on duty for vacant land valued between $350,000 and $450,000.

Manufacturing growth in your PPR

And building your home can be a very smart way to go. Not only do you get to build your home how you want it, but also you create instant value above the costs of the home right away. You can literally “manufacture” growth in the value of home. Be careful with this scenario, however.

If you build in a subdivision, once the housing division has been completed, the values often drop since the marketers will walk away with 30-40% profit once their sales of homes are complete. Building on an individual lot outside of a subdivision can give you more protection from that happening.

Convenience and value in a PPR

But there are other important factors to think about if you’re buying a home. Say, for example, your job pays you $50,000 per year and you have two properties from which to choose:

Property #1, a PPR, is close to work but has no land attached to it. You like it because it’s convenient to your work and town. Also, it has a payment you can afford.

Property#2, also a PPR, is not close to work–say a 45-minute drive each way and is also affordable. But it also has land attached, which can be subdivided and sold for $50,000. The question in this case is, ‘should you value convenience over income?’

If you look at it as a real estate investor, the answer is clear: Property #2 is the one you should buy. Even though it takes longer to get to work and back everyday, you will have gained $50,000 tax-free when you sell it, which turns out to more than a year’s income to you! Now which property do you think is really more “convenient?”

Another fantastic option is to buy the investment property first and then buy the PPR with the First Homeowner Grant. Of course, there are some specific steps you need to be aware of to do this, but it is certainly worth it!