An
apartment is the first rung on the property ladder for many first home
buyers, especially those priced out of a freestanding or attached house in
Australia’s priciest capital cities.
But
when the needs of a growing family prompt an upgrade to a larger home, the
question of whether to keep the first property as an investment may arise.
On
the one hand, the sale of a sound investment too early risks potential future
gains from holding onto the home as a rental, and increases the impact of
transaction costs such as stamp duty and selling fees.
On
the other hand, selling and realising equity in the first property and
investing the proceeds into a more valuable asset can allow buyers to live in a
better home that brings lifestyle improvements.
Why
hold property?
"In
an ideal world, the vast majority of people, if they could, would try to hold
their first property,” says Property Planning Australia director David
Johnston.
"In
most cases holding property is going to create a better financial
outcome.”
But
the proportion of people who actually do keep their first home is low, Johnston
says.
Top of Form
"They
just don’t have the equity there to be able to keep it and purchase the next
home.”
First-home
buyers overlook the importance of their first property as a stepping stone,
says Empower Wealth director Bryce Holdaway.
"People
in that early stage of the property ladder aren’t generally thinking about
holding onto properties,” he said. "It’s always sell and buy the next one.”
Retaining
ownership of the first home brings an additional income stream if rent exceeds
holding costs such as mortgage repayments, strata levies, and maintenance.
But
the appropriateness of this strategy can depend on the home’s investment
credentials, including its desirability as a rental, and future growth
prospects.
"A
lot of first-home buyers are quite happy to buy a one- or two-bedroom
apartment,” Holdaway said. "Quite often they make for a really great
investment. The next generation, if they can’t afford to buy, are quite happy
to rent it.”
"If
they’re lucky enough to get a house for their first property, that’s an even
bigger bonus because they’ve got land.”
When
it doesn’t work
One
of the drawbacks of converting a home to an investment is the impact on the owner's borrowing capacity.
"You
might have enough equity but you might not have enough income to upgrade and keep it,” Holdaway said. "The serviceability on two loans just
might not be there.”
Even
if an owner has managed to put a dent in their mortgage over the years, owing a
few hundred thousand dollars may prevent them from borrowing enough money to
purchase their ideal home.
"If
you were to keep that property you may only be able to afford a three-bedroom
home but you’re chasing four or, alternatively, a two-bedroom home if you’re
chasing three,” Holdaway said.
Deciding
on a course of action requires an assessment of lifestyle and financial goals,
says Johnston, and the needs of a growing family usually take precedence.
"Right
now, you might just choose to prioritise lifestyle over the financial goals,
which means you spend more money on the superior home but you have to sell the
current property to achieve that.”
Growing a portfolio
Holding both properties and selling the
investment later can lower mortgage repayments if the proceeds are held in an
offset account. This also creates a cash buffer that might come in handy if
raising children means incomes are reduced.
"Say you’ve built up some equity in the first
property,” said Holdaway, "You may actually want to use that equity on the
second property to reduce the loan and have a smaller mortgage.”
Having a growing deposit available can allow
homeowners to invest further down the track, but Holdaway warned their next
property would have big shoes to fill.
"The recycle costs to get
into the next one means the property you’re about to buy has to perform very
well just to break even,” he said.
If building a portfolio is the goal, holding
onto an appreciating asset can bring it closer.
"You may be in a better
position down the track that you can borrow against any improved value to buy
another one.”
Article Source: https://www.domain.com.au/
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Jason Gwerder
Wednesday, 5 May 2021
