Look beyond the obvious when calculating tax deductions
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One first-time investor heeded the advice of many successful property investors and decided to start his business of creating wealth through property early on in his life. He's is looking into using his First Home Buyer's Grant to start building his portfolio — but is it actually the best way to begin an investment journey?
After renting for four years, Smart Property Investment Show listener Sam Wright wanted to get into the property market—particularly in Queensland—to be able to put his money into an investment instead of a "black hole." However, buyer's agent Paul Glossop advises against jump-starting an investment journey through the First Home Buyer's Grant without prior education, especially because data usually changes pretty quickly.
"As of most recent changes, the First Home Owner's Grant in Queensland for buyers who are going to be building or buying a new property has increased by $5[,000] recently, so that's at $20[,000] as far as a grant's concerned for first home buyers. So, Sam would be entitled to that $20[,000] if he or she was to buy a new or off the plan... On top of that, there is also an $8,750 Stamp Duty Exemption up to that amount," Paul explained.
"The unfortunate part on that side is if you're gonna buy established, essentially, the First Home Owner's Grant is abolished. So, it's only applicable for people who are buying new or off the plan. You still get the Stamp Duty Exemption so there's still incentive to buy and get into that new home as an owner occupier at this stage."
Smart Property Investment's Phil Tarrant agreed that the necessary caution must be observed when using the First Home Buyer's Grant, and while it does help a budding investor jump-start building their portfolio, one should still have enough money to sustain their journey.
"What I'm assuming here from Sam's note—it looks like they just want a place to live in. So, [he is] saying, 'I don't have much money, but I'm paying rent, so I could probably show to a bank that I have cash flow to be able to pay for rent, and therefore, I should be able to service a mortgage.' But, the problem here is savings... The First Home Buyer's Grant, you get it once it's all set and done. It's a rebate back from the government so you still need to find the money," Phil said.
"You need to have genuine savings or equity or cash or someone going guarantor effectively to make sure the bank is going to be having security on what you're buying," Paul explained further.
Find out how prospective property investors can find their way through that "make or break" first purchase through First Home Buyer's Grant and mortgage lending:
Is there a particular mortgage lender that would be best for first home buyers?
Phil Tarrant: Everyone's circumstances are different... That said, my response to that is [to] just go and speak to a mortgage broker.
Paul Glossop: Speak to them and speak to a few and then ask them what their advice is and get comfort as well.
What should prospective investors keep in mind before starting their investment journey?
Paul Glossop: You're saying you're renting and you're sick of it because your money's going to some landlord who's actually making money, [and now] you've perceived they're making money out of you, and you want to buy instead of rent. That's all good and well, as long as the numbers work in the long term. When I say that, I mean, you can go on rents and you can buy elsewhere and that money might be working better for you. Just because there's a home owner's grant in Queensland specifically that's going to be incentivised doesn't mean that's the best place for your money to start working.
If you're renting and your actual investments are going to work harder than your rent is, then sure, it makes sense to tip your money [into your own property] instead of into rent... because it's gonna go up in value. But a lot of people get caught in that trap. Just because there's a little carrot dangled, they think all of a sudden, [that] it's a licence to print money, and instead of paying rent, they're gonna pay a mortgage, but if that property doesn't increase for five years, then you effectively probably would have been better off renting or chucking your money into an investment that's going to work harder for you.
What would be your most important advice for first home buyers?
Paul Glossop: Oils ain't oils—do some research rather than just thinking, "Because there's a grant, that's going to be twenty grand in my pocket rather than someone else's and, all of a sudden, I'm going to make money out of it."
Phil Tarrant: Just because you can get a First Home Buyer's Grant in Queensland doesn't necessarily mean that that's the best place for you to buy. Now, I would say you've only saved a small amount already... So, number one, can you actually afford to live where you want to buy—in Queensland? You know, there's a lot to be said about renting where you want to live and buying where it makes the most sense for you... You can realise the benefit of being a property investor and holding property long term [without putting] a lot of strain on yourself because if you need that First Home Buyer's Grant in order to have enough money to buy a property, maybe it's not the right time for you to be doing that.
Should First Home Buyer's Grant be a deciding factor for prospective investors?
Phil Tarrant: Just because you get something for free doesn't mean you should do it. A lot of people have found themselves in a lot of problems with First Home Buyer's Grants... If you think you can get your First Home Buyer's Grant and quickly turn it into an investment property, I'd definitely be speaking to an accountant and make sure you know what all the rules and regulations are around it because you don't want to be caught out and it's not the right way to behave... You need to do everything you possibly can to try to understand what you're trying to achieve in property and where the properties are best suited to meet the objectives you have in terms of investing in property.
Tune in to The Smart Property Investment Show's Q&A session with Paul Glossop to know more about accountancy and money management platforms, how you can better prepare yourself at tax time, and more answers to some of the most frequently asked questions about property investment.