Should you sell or rent your home – that is the big question many homeowners are asking themselves.
It can be all too easy to become caught up in the idea of selling your home so that you can buy a larger property, to then repeat this process over the years to gradually accrue wealth. The reason this method is popular is because it generally works! According to the 2016 Census, 30 per cent of households owned their home without a mortgage, indicating just how powerful the Australian dream is of owning property. But there are other ways to build wealth in property, and one that not many consider is that of turning their home into an investment property.
The benefits of selling your home
The greatest benefit of selling your home is the ability to gain access to the capital gains accrued in the value of the property during the time you have owned it.
Along with an assumed wage increase over a person’s career and any other accumulations of wealth, such as through other forms of compound interest investments, the release of capital gains when selling your home is generally how homeowners are able to afford to upsize their homes or move into areas with greater prospects for financial growth and lifestyle.
Sounds great, doesn’t it?
However, remember that any release of capital gains is subject to taxation, which is felt most by those selling their Permanent Place Of Residence (PPOR). Correctly pricing your home to sell can make a significant difference in your eventual earnings once taxation plays its part.
Where planning to sell your home to afford a more expensive home can go awry is in your susceptibility to market fluctuations. There can come moments in a person’s life where they may have to sell their home within a certain time period, and this leaves them at a disadvantage if the market is not in their favour. The alternative is therefore to keep your home as a major asset and see market downturns through to the end of their cycle by turning your home into an investment property.
The benefits of turning your home into an investment property
By far, the greatest benefit of turning your home into an investment property is the potential savings you can make through various tax incentives for property investors.
One relatively unknown tax incentive is known as the six-year rule. This allows property investors who have lived in their investment property for at least 12 months to claim tax breaks on any capital gains accrued in a six year period following that initial 12 months. You can read more about the six-year rule here.
The second advantage to keeping your home is the ability to pay it off in full and be one of the 30 per cent of households in Australia that no longer stress over mortgage fees.
Of course, there are considerations to make before turning your home into an investment property.
While you will have the opportunity to borrow on the existing equity in your home, you need to be able to afford the daily costs of your new home and a business (the investment property). When costs exceed incomes from an investment, many choose to negatively gear their properties and make the most of tax incentives for that scenario. However, with the costs of running a home running up to almost 5 per cent of the purchase price of a home per year, you need to be sure that you are not stretching your finances to their limit (especially with any changes to interest rates or your own employment). Tax incentives are policies, and these policies can change with new governments, so be cautious not to rely solely on these as a long term investment plan.
The decision of whether to sell you should sell or rent your home is one that must take into account a multitude of factors that are different for all homeowners, which is why it is important to first speak with an accredited financial adviser to see whether your finances can support the transition of your home into a business and source of income. Remember that if choosing to turn your home into an investment property, you will most likely have to sacrifice on your lifestyle, as your new PPOR will need to be affordable enough to account for the increased costs of running an investment property.