Your Next Investment: Deciding Between PPOR and Investment Property

Are you at the stage of your life that you’re ready to step up the property ladder and buy your first property? Having your own place is a dream for many of us. Indeed, it can give us a feeling of stability and security.

Are you at the stage of your life that you’re ready to step up the property ladder and buy your first property? Having your own place is a dream for many of us. Indeed, it can give us a feeling of stability and security.

However, buying a property is a big financial decision especially if it’s your first buy. It’s important to ask yourself what you want for your first property; a principal place of residence (PPOR) or an investment property. And since we have an uncertain time right now, you have to be careful on where you would like to spend your money.

Having a principal place of residence or PPOR as your first property is ideal for those planning for a future family. Choosing an investment property is another option for future planning as it can make more financial opportunities.

To help you better in your decision, let’s understand the meaning of these two investments. Both could be classified as residential real estate but there are huge differences between the two in terms of what they can provide you.

What is a PPOR?

Principal place of residence or PPOR is the property on which you live. As per Robertson of The Truth About Mortgage (2021), this is your own standard owner-occupied property, a home or a condo you live in full time. Or at least for most of your time. This is also known as your primary residence or main residence.

It’s important to declare the property you live in as your principal residence. In the Australian housing market, any property owned by an individual becomes qualified for the capital gains tax. CGT or capital gains tax is the tax you pay from profits of selling any of your assets such as property. However, you won’t be required to pay the capital gains tax when you sell your PPOR.

The Australian Taxation Office set criteria for your property to be classified as your principal place of residence (PPOR). These include that the homeowner or their family must solely own the property, they should have lived in it for an entire year and the property doesn’t produce income for the homeowner.

PPOR should also not have any business on it. There’s also a size requirement. Your primary residence should not be more than two hectares.

What is Investment Property?

Investment Property or IP can be defined as any real estate property that you purchased intending to generate income or return of investment. This could be in the process of future resale or through rental income. Individual investors, a group of investors or even a corporation can own this kind of property.

Income from investment properties can be in the form of rents, dividends or interest. The use of investment property has an effect on its value. Most investors would conduct studies on the best and most profitable use of the property.

Types of Investment Property:

  1. Residential – The most typical and popular way for investors to increase their income is by renting homes. They usually buy a residential property, rent it out and collect monthly rents.
  2. Commercial – Some investors purchase commercial properties and use them for business purposes. These can be commercially-owned apartment buildings or retail stores. Rents for these properties are higher but they also require higher maintenance and improvements.
  3. Mixed-out – These properties can be used for both residential and commercial purposes. For example, a building can use its upper portion for residential units while having retail stores like convenient stores and restaurants on the ground floor.

Benefits of Principal Place of Residence

  1. Emotional appeal – Owning your own home can surely provide emotional satisfaction. When you own the place, you can do any renovation and improvement on it to suit your taste.
  2. Stability – You’re the landlord of your own place. You and your family will have the security of living in a place where you’re comfortable.
  3. Exemption in Capital Gain Tax – As mentioned before, you’re not required to pay CGT if you will sell your PPOR.

Benefits of Investment Property

  1. Cash flow – Unlike primary residences, investment properties provide additional income and can pay for their own expenses.
  2. Tax deductions – Tax deductions that you can claim while your property is being rented or available for rent can include management costs, land tax, maintenance costs, insurance and depreciation.
  3. Equity – With the income from your investment property, you can pay off your loan or use it to continuously grow your financial portfolio.

Difference between PPOR and IP

  1. Mortgage rate – In most cases, investment properties will require higher mortgage rates compared to when you buy a principal residence. Lenders view investment properties as riskier loans and may require stricter requirements.
  2. Downpayment – The two also differ in the amount of downpayment. Investment property can require up to 25% of the purchase price. On average, you need at least 20% of the purchase price as a deposit for a primary residence.
  3. Possible tax consequences – If you’re siding more on getting an investment property, know that there are tax benefits and drawbacks to consider. You have to declare your rental income and other related income to the Australian Taxation Office (ATO). You also need to know the tax breaks you can claim.

To better understand this, it’s best to talk to a specialist on tax issues. 

Choosing your first property is exciting as well as overwhelming. Many are asking themselves which option is better for them – PPOR or investment property. It could be an easy question for some especially if they have the means.

However, before deciding, it’s best to look first at your current financial status and what your goals are. You need to weigh the rewards and the risks of both sides. Do your own research and talk to the experts.

At DDDC Finance, we can guide you in choosing the best property option for you. Let’s work together in making your next move in the property ladder a success.

Sources:

[1] Robertson, C. (2021, August 21). Primary Residence vs. Second Home vs. Investment: Know the Key Differences. The Truth About Mortgage.

[2] Chen, J. (2021, December 26). Investment Property. Investopedia.

[3] Saggers, S. (2015, March 9). Investment Property Or A PPOR – Which Is Smarter? Your Investment Property.

[4] Porcupine Real Estate. (2020, August 3). Buying Investment Property Versus a Primary Residence.

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