Live-in property versus less expensive investment property?

My partner and I would like to buy some property, ideally to live in. We are first home buyers and self-employed with savings of around 150K. Problem is, we live (and would like to remain) in inner-city Melbourne so anything we can afford is in pretty bad shape/tiny. I am reluctant to spend more and burden ourselves with a big mortgage, so I've started to think about investing in an up-and-coming area instead, such as Frankston. With our savings we could almost buy a small unit outright, which we'd rent out. We would continue renting in the city until such time that the returns from this investment helped us to more comfortably buy in an area we would like to live. This could obviously take years.

I don't know if this is a good strategy - do you think it is better to spend more (like $600K) on a modest but decent inner-city place that we could live in, or spend a lot less on an investment property and continue renting for the next few years.

I suppose investing in stocks could be an alternative but that's a whole other ballgame.

Interested to hear your thoughts - thank you.

Jess

 

Hi Jess

You may get more responses re: property on Somersoft.com than InvestEd

 

Jess,
In Melbourne with rent yields generally low, it is often the case that it is a lower cost (from a cash perspective) to rent rather than own and live in your own home, especially closer to the city.

It does depend on what sort of property you want however, there are reasonable priced units/apartments in the low to mid $400k range within 10 to 15km of the city. Look out west especially.

With a $150k deposit (good savings) you could buy a $450k established property, pay around $12k in stamp duty (first home owner concession) to borrow around $313k. Interest only would be around $300 a week ($390 a week P&I).
To purchase a $600k home, using $150k deposit, borrow $470k. Equates to $450k a week (IO) or $580/wk P&I.

It really gets back to where you want to live and in what type /size of property. If you cannot afford to do that by buying, then continue renting and look at the investment property path.

My view is that having a capital growth asset is a better option than just having interest only assets. With your deposit, you could structure the purchase as an investment property so that it would be neutrally geared (or positive) so that it is not affecting your day to day living yet paying for itself and being a capital growth asset, so when you do decide you have sufficient equity to purchase your own home, you can either pull out equity or sell.

Let me know if you need anything else.
Greg