Invest
Pros and cons of being a landlord v owner-occupier
First-time home buyers are presented with a promising financial opportunity when they take out a mortgage. They are usually offered more enticing loans than those who are already established property owners.
Pros and cons of being a landlord v owner-occupier
First-time home buyers are presented with a promising financial opportunity when they take out a mortgage. They are usually offered more enticing loans than those who are already established property owners.
The government has also put in place several schemes that aim to help first-time home buyers to enter the property market.
But property buyers also encounter a challenging choice. They have the option to purchase their first home as an owner-occupier property or alternatively, as an investment property.
Some first-time home buyers with lower levels of available upfront capital and savings choose to buy their home and live in it until they can afford to purchase an investment property. In other cases, some buy a home to reside in to have a rental-free life.
However, investment properties can also provide a solid foundation for your financial future. First-time investors tend to dive right into the property market because it seems easier to understand compared with other types of investment. Purchasing a property and renting it out as a landlord can generate a passive income that can be used to further grow your money.
There are pros and cons to both being a landlord and an owner-occupier. So, is it best to buy a property with the intention of being a landlord or utilising it as your home?
Investment property v owner-occupied property
As the names indicate, the main difference between an owner-occupied residence and investment property will ultimately boil down to what you intend to do with a property you have purchased.
If you buy a house or unit that you are planning to live in, it is labeled as an owner-occupied property. But if you declare that your intention is to rent out the property or flip it (selling the property after purchasing it, consequently making repairs or improvements), it is considered an investment property.
In some instances, people will live in a home they bought and then rent it out after choosing another place to live in, depending on their current situation. Others choose to purchase a building and lease it to tenants at first, then move in themselves at a later period.
If you choose to put your money in the property market, it may be helpful to have a game plan. Read here to know how to use an investment strategy to buy your dream home.
The pros and cons of being a landlord v owner-occupier
If you are deciding whether to become a landlord or not, here are some of the advantages and disadvantages of renting out your property.
Pros of being a landlord
Tax deductions
One of the main advantages of investment properties is the significant tax benefits you can collect from them.
The most attractive tax perk for being a landlord is negative gearing. Investors can claim this tax benefit if your investment costs exceed the rental income and you suffer a loss. This loss is also offset against your other assessable income such as salary and investment income. However, if you are positively geared (your rental income is more than your expenses), you will have to pay tax on the income you received. Read more on gearing here.
Landlords can also claim a tax deduction for the value depreciation of your investment property. You can also receive tax breaks by applying for a Tax Withholding Variation through the Australian Taxation Office (ATO) every time you get your salary instead of waiting 12 months.
Extra income
Provided your tenants pay on time, becoming a landlord will provide you with a steady cash flow. The rental income can also cover the mortgage of the property, allowing you to hold on it as its value increases.
Long-term income
The investment property market is popular among investors due to its potential capacity to appreciate in value over time. This money can be used in your retirement planning, for emergencies or other expenses. Owning a real estate also means you can use the property yourself during recessions or times of financial downturn, as long as it is within the terms of the contracts signed by the tenants.
Flexibility
When you rent out your property, you are technically the owner of your business. This means that you can decide the terms, rules and standards (as long as it’s within the law and your contract). You also have the freedom to choose whether you will sell or not sell the property.
Cons of being a landlord
Financial outlay
Owning a property is just the first step in becoming a landlord. Start-up costs can be expensive, but so can renovating or repairing a property. Before buying a house or unit, calculate how much you will invest in repairs. Buying new furniture and installing amenities will also cause your costs to balloon.
Being a landlord will also mean incurring several further expenses, not all of which are tax deductible. Some costs include:
- Rental income tax
- Tenancy deposit scheme
- Gas safety certificate
- Energy efficiency certificate
- Landlord insurance
- Letting agency fees
Maintenance and ongoing repair costs (which are not tax-deductible) can also eat away at your income. Remember that you will also have to deal with emergencies such as fires, water damage and roof leaks, so stash away some rental money to an emergency fund for such unexpected repairs.
Legal issues
Being a landlord will also mean that you need to be updated on the most recent property law and legislation on renting out property. You should also set guidelines on situations such as late rent payments, deposits and evictions.
If your business relationship with your tenant also takes a turn for the worse, you can also expect to spend a lot of time, and possibly money, to get things in order.
Tenant issues
Your rental income comes from your tenants, so having problematic tenants would be a huge issue. If tenants don’t pay their rent on time or evade doing so, you will lose your income. There is also a risk of property damage, noise complaints and other violations that can affect your credibility and reputation. You may also have to hire a collection agency and get lawyers involved if tenants violate your contract and you need to recover your income.
Locked-in investment
While it is appealing to think that you are in control of your investment as a landlord, having a short-term view when investing in a rental property is not ideal. View it as a long-term investment in which you will incur costs by both getting in and getting out. If you choose to sell off your property, there may also be a risk that your property will not sell fast and within your target value.
Conclusion
Deciding what you do with your property can be a challenging task. But if you ultimately decide to rent out your property, make sure you do your research and know the pros and cons of being a landlord versus an owner-occupier. This will arm you with the knowledge to better navigate through being a landlord and ultimately help improve your financial future.
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