May 03, 2019 Get smarter, don’t work harder to buy your family home
Buying a home for the first time, particularly if it’s your family home, is a massive financial decision.
And for good reason – buying your family home quite possibly could be the biggest purchase you’ll likely make in your lifetime. I know because I’ve been there myself.
Throw in the pressure of having a young family (or if you’re planning on starting a family in the near future) and being squeezed for space, and the stress that comes with buying a home becomes even more heightened.
I’ll explain why.
If it’s your forever family home, buying a home can often be a bit of a trade-off. On one hand, your dream home’s typically more than you can comfortably afford. On the other, you don’t want a huge mortgage hanging over your head.
For me, my biggest consideration was giving our kids the security, stability and memories that come with creating your dream home, just like the ones my wife and I enjoyed growing up – and that’s something you can’t really put a price on. Hence why our dream home was more than what we thought we could afford.
Back around 2009, I was convinced that I had to knuckle down to grow my wealth over the following five years so that my wife and I could comfortably afford to buy a home that ticked all the right boxes. I’ll be honest, I got stuck in procrastination mode – there just seemed to be too many pros and cons, and I couldn’t quite work out which was the right strategy for us.
That was until my brother and business partner, Jason, stepped in and simplified everything for me. The crux of his advice was this: instead of buying our family home in five years’ time and waiting, the smarter thing to do was buy it now, rent it out as an investment property for those five years and pull on all the financial levers available to pay down the mortgage as fast as possible in the meantime.
To this day, it’s by far and away the most important decision I’ve ever made. Not only have my wife and I recreated the magic of our respective childhood family homes for our kids, but we wouldn’t have been able to afford our dream home had we have waited another five years. In other words, it was a huge step up for us.
I’ll walk you through the home purchase strategy Jason devised for us and its five key financial tactics…
#1 Negative gearing
This one’s under the microscope at the moment, given that, if Labor wins the Federal Election, negative gearing could well end up being quite restricted.
If you don’t know already, negative gearing means that the interest – as well as other expenses such as rates, management fees and maintenance – you’re paying on your investment property is more than the income (rent) generated. As a result, if your investment is making a loss, the government will allow you to claim a loss against your taxable income. Let’s say your loss for the financial year is $15K and you earn $100K, for example – your taxable income would then be reduced to $85K.
Claiming the deprecation on your investment property can save you a lot, namely by claiming the depreciation of the building itself, including concrete and brickwork, as well as items within the property such as the hot-water system, oven, dishwasher, carpet, blinds and the like. To take advantage of depreciation, your home just needs to have been built or renovated after July 1985.
#3 Rental Yield
Next, you need to work out the rental yield you can expect to get for your investment property. While rental yields have been fluctuating off the back of Melbourne’s cooling property market, 3-4 percent annually is a good rule of thumb.
Now, the market’s shifted a lot over the past 18 months. I get that. On average, though, house price growth has increased by about 7.25 percent annually over the past 30 years. And here’s the kicker: had I followed my initial strategy of waiting five years to buy, I don’t think my wife and I could have afforded the family home we live in today. In other words, you can’t hang your hopes on what the market might do in, say, three or four years time. There’s never a ‘perfect’ time to get into the property market.
#5 Capital Gains Tax
This is where Jason was really banging on with our home purchase strategy. If you purchase an investment property outside of your family home, Capital Gains Tax (CGT) can cost you thousands, even when discounted. By purchasing your family home as an investment, though, and provided you plan on living there for more than 20 years, you’re effectively deferring CGT while you live there. If it’s your forever home, get this – you’ll never need to pay CGT. If we were to ever sell, CGT would only apply for the period we rented it out.
For us, the sacrifice over the short term was well worth it. As I said before, had we have left it for five years, we wouldn’t have been able to afford our dream house. What’s more, we were able to pay an extra $20K a year over five years, which allowed us to shave a whopping $100K off our mortgage over the life of the loan. I know – high-fives, Jason!
If you’re open to what some may consider a less conventional approach to buying your family home, it’s definitely worth thinking about, let me know. I’m happy to set up some time to talk you through the steps we took in a little more detail.
In the meantime, here’s a bit of a buying a home checklist if you’re considering this particular strategy. Book in a 15-minute chat below, and we can go from there.
- Can you live in your current home for at least 5 years?
- Can you afford to buy your dream family home today? If you’re unsure flick me a note and we can check your equity and borrowing capacity for free.
- Are the tax benefits associated with Negative gearing and depreciation attractive enough to help pay for some of the cash flows?
- Are you prepared to rent out your dream home to someone else?
- Are you prepared to be a landlord?
Disclaimer: all information contained within this article is of a general nature. It does not take into consideration your personal financial circumstances. Please consult a professional financial adviser (just like us ) when making a financial decision.