Don't think 'first home', think 'first investment'

I read this article in Domain and been discussing it with my hubby as another possible route to getting our 'dream' house. Of course, it won't happen overnight as we need to build 'credit history' to even borrow from bank.


If you believed everything you read about the housing affordability crunch, you'd be forgiven for thinking there's only one choice: struggle like mad to buy a house to live in, or rent for the rest of your life.

If you're continually missing out at auctions or private sales because other buyers have more money to spend, there is an alternative. You can't stop the market, so instead of running after your dream home and watching it get further out of your reach, it may be better to face reality and direct your energies into something more productive. All it requires is a change in your thinking.

Instead of thinking "first home", think "first investment". Keep renting a place to live - and buy an investment property instead.

If you focus on buying purely for investment, you don't have to factor in your lifestyle wish list during the search process. If the property has fewer bedrooms or a smaller backyard than one that you'd want to live in, it won't matter. It may be less expensive than a larger property, making it easier for you to break the cycle of disappointment and get a foothold in the market.

In other words, the savviest way to approach the property market may be to purchase something that you wouldn't live in yourself, knowing that other people will. When it comes to investing, time should work for you, not against you. It's far better to be in the market and allow capital growth to do the work than stuck outside the market and unable to save as quickly as the market is moving.

If this sounds like a viable option to you, it's essential to choose a property that meets the criteria for a high-quality investment. First and foremost, this means buying an asset with strong capital growth potential. Look for locations where demand from buyers has consistently outstripped supply for a long period.

You can research this by looking at median house price movements, which are usually published by organisations such as Australian Property Monitors and the Real Estate Institute of Victoria. If the median price for a particular suburb has increased at a faster rate than the rest of the Melbourne market over at least five years, it could be an indication of strong capital growth potential.

Auctions are also a good indicator of capital growth potential. Have a look in this newspaper to track the location of auctions each week. Auctions work best in areas where demand from buyers outstrips the number of properties available for sale. If there are consistently more auctions than private sales, it's a sign that capital growth is likely to be strong.

You should also attend as many auctions as possible before buying to get a feel for the market in your chosen location. If there are several bidders competing strongly and driving up the purchase price, it's another indicator that demand is outpacing supply and capital growth should be strong.

Capital growth compounds - the longer you hold the investment asset, the greater the rate of growth. Once you've bought an investment property, it's wise to hold it for at least seven to 10 years to let compounding work its magic.
I
f you can afford it, it's also a good idea to make extra repayments to reduce the loan balance. This will increase your equity (the amount you own, as distinct from the amount you owe the lender) more quickly than capital growth alone.

As an investor, you have access to a tax benefit that homeowners don't. You can claim holding costs like interest on the loan, repairs, council rates, insurance and property management fees against the rental income.

If the holding expenses are greater than the interest payments, you can use the difference to reduce your tax liability. This keeps more money in your pocket and makes it easier to hold on to the property.

Dos and don'ts
- If you can't buy a house to live in, an investment property may be a better bet.
- Forget your lifestyle wish list; focus on capital growth potential.
- Buy where demand consistently outpaces supply.
- Hold long-term to maximise the effects of compounding.
- Use tax breaks to minimise holding costs.