Buying to invest or buying to live in - what’s the difference?

Buying to invest or buying to live in - what’s the difference?
By Scott Bentley

Buying to invest or buying to live in - what’s the difference?

There’s a big difference between buying a home and investing in property.  Many people think buying their home as an investment - ‘your home is your biggest investment’ is an old adage that does the rounds.

For sure, it can be viewed as an investment and you want to buy wisely when you buy your home. For instance, you will be buying to suit the lifestyle you want and the community and facilities that match your family’s needs. 

Your home will suit your personal taste when it comes to style and architecture, family size, and entertainment requirements. And, of course, budget. In other words, you will be buying a home that is fit for your specific purposes.  

You’ll be thinking about whether you want to buy a house that you can refurbish to suit your taste, or if you want to buy a home you can simply move into and not have to lift a finger, but just enjoy as-is.

“These are all aspects we urge our clients to think about when buying their new home,’ First National Marlborough salesperson Vicky Wiblin says.

“Do you want to buy a rural property with some land for a pony or an urban section? Maybe schools are the highest priority. Define your wish list, keeping in mind few properties will meet all your wants.

“Of course, you will also want to consider future resale value. But profit is not usually the driving factor when buying a home.”

Buying to invest

New Zealand’s rental property market still has a deficit of available housing. Last year, 313,596 taxpayers, excluding companies, declared income from rental properties. So should you buy for investment? 

“Buying for rentals requires a different mindset to buying for a home, with different criteria,” Vicky says.  

“First of all, you need to be focused on what you want to get out of this investment. If you’re going into property investment, you need to have the ultimate outcome at the front of your mind. Do you want to make your fortune, to run your rentals for income to live on? Or are you looking at the long term, with your investment providing for retirement?
Get good advice and find a knowledgeable supporter or coach. Come and talk to us as part of your research.”

Whatever your goal, it’s important to stick to it, and to have a great plan in place to get there.

“It’s like any other investment. Consider a rental property purchase from a business and return perspective.’ 

Other factors to think about in your plan include that losses cannot be used to offset other income, and the bright-line test (in effect a capital gains tax) now applies to any properties bought and sold within five years, rather than the initial three years previously in place. 
You will also need 30 percent, or more, for a deposit, as banks are not allowed to lend more than 70 percent of the value of the property.

“Another aspect to consider is whether you want to buy for long-term capital gain, or as an income stream, in which case the rentals will have to more than cover your financial outgoings and maintenance on the property,” Vicky says.

If you’re smart, you’ll buy in a softening market where you can get good yields and hold on to it.  The property’s value in a couple of decades is not that important when you have a good strategy in place.   

“One thing in common with buying your own home to live in, is to pay down your mortgage, because low interest rates aren’t always going to be a given. The last thing you want is to not be able to meet increased mortgage payments, especially if you’ve used your own home as part equity.” 

Buy not on emotion, but based on market need - the typical house a tenant is looking for in your target area. For instance, it could be three bedrooms, decent-sized lounge and master, storage and a garage, close to schools and shops. Identify your market segment and research what rents easily within that market.

As you can see, buying rental properties require a very different approach to buying your own home. Be aware, have a good strategy in place and follow it.