Ask Paul: Should I buy an investment property before my first home?


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Q. I have just turned 27 and, like many other Australians, I dream of owning my own property.

I'm originally from Adelaide, where one can purchase a reasonable three- or four-bedroom family home for around $400,000- $450,000. In Melbourne, where I live now, this will only allow me to buy a small apartment in the CBD.

I would like to purchase an investment property as my first home just so I can enter the market while I rent with friends until I'm in a position to use this equity to purchase my own property down the track.

ask paul clitheroe should i buy an investment property first

I earn $80,000pa and have a $40,000 deposit but I have a HECS loan of $68,000. So with a rental property I'm concerned that I'll struggle at tax time with higher HECS repayments due to the income from the investment property.

With a declining real estate market in Melbourne but a stable market in Adelaide, I'm not too sure where I should buy.

I'm at the stage where I want to make sure I'm wise with any financial decision so I can reap the benefits in my later years.

Am I making the right choice to look at purchasing an investment property first? What do you suggest I should do? - Chris

Good on you, Chris. I love seeing young people with a sense of purpose about their money. I don't think your HECS loan would be a problem regarding income from an investment property.

If you go this way, and borrow most of the purchase price, you would be losing money on the investment, not generating extra taxable income.

So I agree that an investment property is potentially the way to go for now. A falling market gives you more choices. As the Melbourne population is predicted to double in the next 30 years, I personally would be comfortable investing there. But I would be really selective, buying a well-built, established apartment in a central location, near public transport.

Another advantage of a falling market is that you can take your time and look at many properties. If you do buy, do so with your head, not your heart.

The real issue is your ability to resell at a profit in time to come. It is important to start by checking your borrowing capacity. Lenders are taking a disciplined view on this, so I'd start by checking out the loan size available to you.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.

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