Stability in housing affordability and relatively low interest rates, are making the housing market increasingly attractive to would-be borrowers. And while many are convinced now is as good a time as any to buy, the decision remains whether to purchase a home first or an investment property.
Many of us expect our first property purchase will be our first home. Stepping off the rental roundabout and saying goodbye to landlords and leases is a very attractive proposition. The emotional pull of buying your first home is very compelling, but making the right call depends on several factors.
Buying your first home is like buying an anchor. The complexities and costs associated with purchasing property mean there is significantly less flexibility in your life after you become an owner-occupier. However, if you have certainty in your medium to long-term future, then decreased flexibility may not be an issue.
Another issue associated with this issue is location. Your budget may force you to move significantly further away from the city in order to get the ideal first home. An investment property, on the other hand, may not involve any compromise on your part, as you are still free to live/rent in the city.
From a purely financial perspective, it is often cheaper to rent where you want to live than purchase a comparable property as your first home – particularly in capital cities. In addition, an investment property allows you to have a tenant assist you in making loan repayments with rental income, while you continue to build equity in your asset. As well, taxes on property investments are currently tax-deductible in Canada, as are interest expenses. More specifically, Canadians are allowed to deduct interest charges where they use a line of credit, second mortgage, or separate loan to pay for a portion of a property’s deposit or various operating expenses related to the property. These expenses can include repairs, utilities and property taxes. The key is being able to trace the payments from the line of credit to the property. Ideally, a separate line of credit is used wholly for investment purposes. Where you require a line of credit for personal use, this should be done with a separate account. This ensures you do not mix amounts spent on your vacation or big-screen TV with those related to your investments.
A variety of financial institutions have debt products which allow you a total amount of debt and then divide this total into multiple accounts you have created. Over time, it may also be possible to restructure your debt so that even otherwise non-deductible interest can be converted into fully deductible interest. To make sure you can take advantage of deductible interest, talk to your tax adviser about what you can do to deduct as much of your interest as possible or read our top tax tips for real estate investors article for more information — and in a method that is acceptable to the CRA.
Appetite for risk
When buying an investment property there are several factors you should look for: location, job growth, population growth, amenities, transport, crime rates and rental vacancy rates. But even the best properties will occasionally be vacant. So prior to making your investment property purchase you’ll have to ask yourself if you will be able to cover the inevitable lulls in tenancy and still afford to pay your own rent. As well, you should be concentrating on positive cash-flow properties. Positive cash flow allows an investor not to fret during the inevitable property price downturns that cycle through the market, as they are not fully relying on solely property price increases to profit.