6 essential questions to ask before turning your home into an investment

Moving interstate for work?

Need to upsize to fit the kiddies in or downsize now they’ve all left the nest? 

Are you thinking of keeping your current home as an investment property when you move?

Holding onto your home has a couple of distinct advantages.

You won’t be forking out the various fees payable for selling it, such as agents’ commission and advertising.

Plus, it may also serve as a kind of security, knowing you have a place to go back to should your plans or circumstances change.

However, there are a few key factors you should consider and questions you should ask yourself, before taking the leap from owner-occupier to landlord…

1. Can you keep your emotions in check? 

Renting out your own home – a place you love, full of memories and sentimental attachment – can prove to be a major tug on the heartstrings.

Are you ready to see your beloved baby’s nursery turned into the new tenant’s man cave or home office?

As an investor, you need to trust your head, not your heart, and this can be difficult when you are emotionally tied to a property.

Of course, as an investor you shouldn’t think that way, but I know many people do, and if that’s the case, buying a new place to use as an investment may be a better option.

2. Have you considered Capital Gains Tax?

If you don’t seek professional advice, you could find yourself stung with a nasty Capital Gains Tax (CGT) bill when it comes time to sell the property.

It’s a tax that owner-occupiers never have to worry about as it’s not applicable to your primary place of residence.

However, if you’ve rented the property out you might find yourself slugged with a CGT bill when you sell it.

The ATO does allow you a 6 year grace period to decide which property will be treated as your principal place of residence when you move out, but be sure to check with your financial advisor or accountant about the potential implications before the “For Lease” sign goes up in your front yard.

3. Does the property have capital growth potential? 

If your home is in a low-growth area, you might be better off selling up and buying a new “investment grade” property with more potential for capital growth.

Weigh up the fees and costs associated with buying and selling, against the likelihood of the property growing in value and the length of time you hope to keep it as an investment.

While there’s no sure way to predict how the market will fare in the future, you can certainly take an educated guess on which option will give you the best chance of a good profit down the track.

4. Is the rental market strong in your suburb?

Living there as an owner-occupier, it’s probably never occurred to you to notice how many of your neighbours are renting their homes.

But now as a new property investor, it’s vital you find out stats like vacancy rates, median rents and the percentage of renters versus owners before your convert the family home into an investment property.

You can find this information online, and calling a few local property managers doesn’t hurt, too.

5. Does your property appeal to the tenant base?

A large family home with a sprawling, high maintenance backyard probably won’t appeal to students on a budget, just as a studio apartment in an outer suburb surrounded by quarter-acre blocks may not be the best fit for an urban professional couple.

You need to be sure that your property is suited to the local tenancy market.

That’s because trying to rent out a property that doesn’t appeal to the local tenant base could leave you vulnerable to long-term vacancies and expensive advertising fees.

Chat with local property managers to find out what local tenants want, and if your place doesn’t meet the market, you may want to consider investing elsewhere.

6. How will the property be financed? 

If you’ve got significant equity in your home, chances are you’ll want to use it to buy your next home.

Before you do anything get advice from a proficient finance broker to make sure you structure things correctly.

Just because you’re using your new investment property (which was your old home) as security for your loan won’t make the interest on the loan tax deductible.

It’s the purpose of the loan that counts in the eyes of the tax department – so it’s critical to set things up correctly.

Getting the numbers right is the element of investing that can make or break your future wealth, so don’t try to tackle it yourself unless you’re a real finance guru.