My partner and I want to invest in the property market. We currently rent an apartment. In the medium term, our goal is to own our primary residence and have a few investment properties. We want to have the primary residence in one name and the investment properties in the other name so that we can get more access to bond finance.
The question is, what should we aim to acquire first? Do we put our cash together for deposit/transfer fees to buy a primary residence or do we buy investment properties, wait a few years then leverage them for a deposit on our primary residence?
The question of whether to first buy a primary residence or investment property is extremely subjective and depends on a lot of factors and variables. The first question you should ask yourself is why you want to own investment properties specifically, compared to investing in the stock market. Buying an investment property is very much putting all your eggs in one basket, especially if it makes up a large chunk of your overall wealth.
I am going to approach this question by mentioning the pros and cons of owning a primary residence versus owning an investment property:
- You might see owning your own home as a life goal. You may feel that you have worked hard for the privilege of owning your own home and this is a great goal to have.
- Once your property is paid off, you will own your own home and later in life, this property could give you flexibility in terms of retirement accommodation or provide some cash by downscaling.
- You have a capital gains tax abatement on your primary residence of R2 million, or R1 million per spouse if married in community of property.
- Moving homes is a big decision and buying on top of that makes it even bigger. People generally buy a residence for the medium to long term, so as a buyer you must have a relatively good idea of what the future might hold for a reasonable amount of time.
- If you bought a house in a good area and there is a demand for this property, you can sell it for a good price or you can get a good rental income from this property to initially pay off the majority of the mortgage bond.
- The expenses you incur for owning the property (bond, rates and taxes, etc) can be set off the rental income received for tax purposes.
- You need to decide whether to deal directly with your tenants or appoint a rental agency to manage the property for you – which naturally costs money. This will mean that you will need to either increase the rental or give up some of the rental income.
- Owning a property has responsibilities. You need to maintain the home and keep it in a leasable condition. Major issues can become expensive and time-consuming.
- You need to consider the growth potential of the property you are looking to buy versus that of other investments. For more detail on this, please follow the link to the following article: Structuring your bond consider your lost opportunity costs.
- Depending on the property, you might need to be paying some of the mortgage bond yourself initially; it is quite rare for rental income to cover the full mortgage bond from the start.
The pros and cons listed above are only a few factors that you need to consider when making this decision and, from the above, you will see that it is very much a subjective decision. The most important factor is to decide what your long-term objectives are and whether buying a primary residence or investment property supports these objectives. Ideally, we suggest that you consult with an independent financial advisor who can guide you through the decision-making process.