Don't Buy A House...Yet (Home Vs Investment Property)

Introduction

This tutorial will help you navigate the decision of whether to buy your own home or invest in an investment property. Based on insights from Ravi Sharma's video, we will explore three key pillars that will guide you in making an informed choice. Understanding these areas will allow you to assess your financial situation and lifestyle preferences to determine the best path for you.

Step 1: Assess Your Borrowing Capacity

Understanding your borrowing capacity is crucial when deciding between a principal place of residence and an investment property.

• Debt Differences:

  • Debt for your principal residence is considered "bad debt" and is not tax-deductible.
  • Debt for an investment property can be tax-deductible, potentially providing you with tax advantages.

• Calculate Your Debt:

  • Example: For a $900,000 home with a 90% loan-to-value ratio (LVR), your debt would be $810,000.
  • Consider interest repayments, council rates, insurance, and maintenance.

• Income Generation:

  • Principal homes do not generate rental income.
  • Investment properties provide rental income, which can improve your overall financial picture and borrowing capacity.

• Negative Gearing:

  • If your investment property expenses exceed your income, you can claim a loss on your taxes, which can reduce your taxable income.

Step 2: Evaluate Your Lifestyle Preferences

Your lifestyle should play a significant role in your decision-making process.

• Living Location:

  • Assess your desire to live in specific areas versus potential longer commutes if you buy a property further from your desired location.

• Rent Vesting:

  • Consider renting in a desirable area while investing in a property elsewhere. This strategy allows you to live where you want and still invest in real estate.

• Future Considerations:

  • Think about your long-term plans, such as family size, job stability, and preferred community settings.

Step 3: Focus on Long-Term Wealth Building

Building wealth through real estate requires a strategic approach.

• Investment Mindset:

  • When purchasing an investment property, focus on data-driven decisions rather than emotional choices.
  • Look for locations with strong demand and potential for appreciation.

• Avoid Emotional Purchases:

  • Be cautious about buying your principal residence based on emotions, which can cloud judgment regarding investment potential.

• Leverage Equity:

  • Use the equity gained from your investments to finance additional properties or eventually purchase your own home.

Conclusion

Deciding between buying a home or investing in property requires careful consideration of your borrowing capacity, lifestyle, and long-term wealth-building goals. By evaluating these three pillars, you can make a decision that aligns with your financial situation and aspirations. Take the time to reflect on your priorities, and don’t hesitate to consult with financial professionals if needed. Remember, the earlier you start investing in property, the more opportunities you'll have to build a strong portfolio.