Tuesday, 26 November 2013

Should I move into my investment property?

Recently I have been posting about buying a house for myself to move into.  This is not going to be a very short term thing - I was giving myself enough time to look and consider what I actually wanted and where I wanted to live.  What happened though was that I found out that property in Australia is much more expensive than I first imagined - in fact I found myself looking in the same area which my parents live (and I didn't grow up in a great area at all).

This didn't deter me though - I had a decent budget and I could get somewhere ok...certainly not where I thought I would be able to buy but I wasn't going to be buying in the middle of nowhere.  My girlfriend then asked me a question I hadn't really considered before: why don't you move into your investment property for a few years while you save up for a deposit on the place you actually want?

At first the idea of moving into my investment property didn't appeal to me

I think I was most opposed to the idea of taking something that was definitely an investment of mine and converting it into something which was not an investment - i.e. something which I was using for my own benefit.  In my mind I think I thought of that as reducing the amount I had 'invested'.

This was a really short term way of thinking about things and as I thought about it more I realised that perhaps it was not as bad a suggestion as I first imagined.  There are definite draw backs to such a move (which I will outline below) however there are a significant number of advantages (which I will also outline).

The benefits of moving into your investment property (while you save for another place)

When I outline the benefits of moving into your investment property please keep in mind that I am not comparing this to continuing to rent a place - renting is almost always going to be cheaper than buying a house (otherwise negative gearing wouldn't exist).  I am comparing this against buying a house that I can afford at the moment.

The benefits of moving into my investment property include

  1. Being able to save for a place I really want
    • I am currently priced out of those areas that I really want to live in.  Property in the areas that I want to buy are currently in the ~$1 million mark while I can only really afford around $700,000 mark
    • Moving into my investment property will give me a few more years to save up and buy in the area that I want to live in
  2. I already own the place I live in - no further sunk transaction costs
    • Transaction costs (such as stamp duty) when you buy a property run into the tens of thousands of dollars
    • I already own my investment property - I can invest those transaction costs which would have been sunk
  3. My loan is currently at a very manageable stage
    • My investment property loan is currently very manageable - I could pay it down very quickly and save for the place I actually wanted to buy
  4. I can always convert the property back into an investment property
    • When I eventually buy where I want to live I can convert my investment property back into an investment property, leverage against it (and so get a tax deductible loan) and use this to pay down my non tax deductible home loan
The cons of moving into your investment property

The cons of moving into an investment property instead of buying a new house are also very real and I have outlined some of them below

  1. Property prices may rise faster than I can save
    • If property prices rise faster than I can save then I will certainly not be able to buy the property in the area I want to live even if I live in the investment property for a few years
    • Further, inner city properties and properties in better areas tend to have better capital appreciation than those that are further out
    • My investment property is a bit further out of the city and in a decent but not great neighbourhood and I may lose the benefit of owning a house which has higher capital growth potential
  2. You save best when everything is a bit tight
    • I noticed this when I first got my investment loan - I would save really really fast and well when I didn't have a buffer
    • As soon as I got comfortable with my loan and had enough to cover me for a few payments, my rate of savings fell
    • You tend to save slower when you don't have to save - it's an enforced savings thing
I have not yet decided whether moving into my investment property is the best option...

I think this is an equation which is different for every person depending on their circumstances.  Indeed for many it will depend what type of place their investment property is and whether it is suitable for their stage of life.  I am lucky - my investment property is a family home out in the suburbs - I am not ready to have a family yet but I don't think anyone has ever suffered by having too many bedrooms.

I have spoken to several people about the opportunity cost and behavioural finance aspects of this particular dilemma and I do not think that there is any clear answer...there are too many unkowns the biggest one being 'what is the property market going to do and where' and 'can I get better investment returns outside property (i.e. in shares) and so increase my ability to buy a better property.

Do you have a view?  Should I move into my investment property?  I would love to hear what you think

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  1. Is your loan P&I or IO?

    If it is interest only, wouldn't it be better to just park the repayments you make(on top of the interest) into an offset account for now until you buy another house. Use these savings from the offset account as a deposit for your new house so you have the maximum amount of savings/equity in the non tax deductible debt of your PPOR and maximum amount of tax deductible debt in your investment property. This is what i have learnt but i'm only 18 lol

    1. Hi - my loan is IO and I that's exactly what I've been doing for the last 3 years (since I bought my property). It's a great strategy which allows you to keep the tax deductibility of your loan even if you use the cash in your offset account for non investment related purchases.

      The dilemma more revolves around where I should move next. I currently rent though have been thinking about buying another place. I have enough to buy an 'ok but not exactly what I want' place to move into but I what I was really thinking about was delaying buying another place, moving into my place, saving up even more cash and then buying a place I really want.

      I could also continue to keep renting which is something else I'm considering.