Should you turn your home into an investment property?

So you already own your own home, (which is great news by the way) but are you wondering whether you should turn your home into an investment property instead to make some money. This sounds like a great idea in theory, but in reality this is not always the best solution for all homeowners.

Of course, many homes make a great investment property, but there are a number of factors that need to be considered first and the decision should definitely not be rushed into.

There are many reasons as to why you might be thinking about turning your home into an investment property. You might be downsizing and would rather rent it out then sell up. Perhaps you are relocating, but don’t want to part with the property, or you may simply feel that your home is situated in a good location which will benefit more being rented out and make a great investment property. There are also the financial incentives to consider which provides greater opportunities.

So what are the advantages of turning your home into an investment property?

1) Tax Deductions - Firstly, a major incentive of turning your home into an investment property is the tax deductions available to property investors. Property investors will now be able to claim deductions on things such as agent fees, interest expenses, repairs and maintenance, council rates and body corporate fees and charges to name just a few.

2) Depreciation - Investors will also be able to claim on depreciation on the building as well as fixtures and fittings within the property including dishwasher, blinds, heating and cooling. The depreciation savings can be huge, especially if the property is newer and it is well worth getting a reputable quantity surveyor to draw up a complete depreciation schedule for you so you know exactly what you can and cannot claim.

3) Start earning an income – By renting out your property you can start to make an income and the rent might be more than what you were paying on your mortgage. Even if the rent doesn’t cover your mortgage you can still claim this back in tax.

Of course there are also factors you need to remember if thinking about turning your home into an investment property.

Things to bear in mind when turning your home into an investment property:

1) Capital Gains Tax (CGT) – When the property is your primary place of residence you are exempt from CGT. However, when you rent the property out you will have to pay partial capital gains tax on the property when you sell it for the duration that this property has been rented out for.

2) Mortgage – As an owner occupier, you might have already paid off a significant amount of your mortgage, so the tax deductions might not be as great. However, you might have built up a good amount of equity in this property which you could use as a deposit towards another investment property.

3) Loans – Owner occupiers tend to have a mortgage that is a principal and interest loan allowing them to pay down their mortgage. However as an investor, to benefit from tax breaks they tend to have an interest only loan instead so only the interest is paid and the principal is not touched.

4) Gearing – The majority of properties are negatively geared which means that it is more likely that the property will be making a loss, which will be claimed on your tax return to reduce your taxable income. You therefore need to ensure that you have the money available to fund this loss, which you will be able to claim back, every month or at the end of the year.

5) Managing the property – As soon as you rent the property out you will become responsible for this property which includes finding tenants, collecting rent, making repairs etc. This can create a lot of hassle and stress for many, so you may want to employ a property manager to take charge of this for you. Plus you will be able to claim tax back on these costs.

So, should you turn your home into an investment property? This really depends on your situation and your goals.

There are many people today, particularly first home buyers who will purchase their first property as a first home buyer in order to take advantage of the first home owner grant and then turn this into an investment property to benefit from tax deductions and depreciation. Turning your home into an investment property earlier on has many more benefits than if you have owned your home for some time. In this case, it will be more beneficial to keep your home as your home and use the equity within your home to purchase an investment property which will provide higher tax breaks and benefits.

It is also important to do your due diligence first and buy your investment property in a location that is in high demand which is close to transport, shops and important amenities. Renters want convenience and have amenities on their doorstep or within easy walking distance. If your home is not close to public transport options or local shops then it might be harder to rent your property out and you would be better off keeping your home and buy a new investment property in a high growth and high demand area instead.

Published on 1st of January 2021 by Michelle Leftwich
Michelle Leftwich
Michelle Leftwich


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