Should you buy a property to move into and rent out your property or buy an investment property?

4 mins
Updated
March 6, 2025

If you're in a position to purchase a second property, one common dilemma is whether to buy a new home to live in while renting out your existing property, or to purchase an investment property outright. Both options come with distinct financial and lifestyle implications, making it essential to carefully consider your long-term goals and personal circumstances.

Option 1: Buy a property to move into and rent out your existing property

Advantages:

  • Lifestyle upgrade: This option allows you to improve your living situation while maintaining an income stream from your existing property.
  • Capital gains tax (CGT) exemption: If your current home has been your primary residence, renting it out can still allow you to claim the CGT exemption for a period (typically up to six years in Australia under the "six-year rule").
  • Long-term wealth building: Holding onto your current property while renting it out allows you to benefit from both rental income and potential capital growth.
  • Familiarity with the property: Managing a property you’ve lived in may be easier, as you already understand its maintenance needs and neighbourhood appeal.

Considerations:

  • Rental yield: Your current property may not generate high rental income, particularly if it's not designed as an investment property.
  • Emotional attachment: Letting go of the personal connection to your home can be challenging and may cloud business decisions.
  • Mortgage structure: You may need to refinance your loan to better suit an investment property strategy, which could involve costs and changes to your borrowing capacity.

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Option 2: Buy an investment property

Advantages:

  • Tax benefits: Investment properties come with tax deductions for expenses such as interest on loans, property management fees, and maintenance.
  • Diversification: You can strategically choose a property in a high-growth location or with higher rental yields, potentially providing better returns.
  • Separation of assets: Keeping your primary residence and investment separate allows you to approach the purchase purely from a financial perspective without emotional ties.
  • Higher income potential: Investment properties can be selected based on rental yield and capital growth, potentially offering better cash flow than renting out your home.

Considerations:

  • Capital gains tax: Unlike your primary residence, any profits from the sale of an investment property will be subject to CGT.
  • Higher deposit requirements: Investment properties often require larger deposits, which could affect your borrowing capacity.
  • Ongoing property management costs: These may be higher if the property is located further away or in a different market than your current location.
  • No lifestyle upgrade: This option doesn’t improve your living situation, which could impact your quality of life.

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Factors to consider

  1. Financial goals: Are you prioritising capital growth, rental income, or lifestyle improvements?
  2. Cash flow: Will renting out your home generate sufficient income, or would a purpose-built investment property yield better returns?
  3. Tax implications: Consider how negative gearing, capital gains tax, and other deductions will affect your financial position.
  4. Market conditions: Research local property markets to determine which option aligns better with market trends.
  5. Future plans: How long do you plan to stay in your new home, and does renting out your existing property fit into your long-term goals?

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The decision between buying a property to move into while renting out your existing home or purchasing an investment property depends on your financial objectives, lifestyle needs, and risk tolerance. If you're looking to upgrade your living situation and benefit from rental income, moving into a new home while renting out your current property may be the best choice. However, if maximising financial returns and growing your property portfolio is your primary goal, investing in a high-performing investment property could yield greater rewards.

Consulting with a financial advisor or mortgage broker will help clarify the financial and tax implications of each option, ensuring your decision aligns with your long-term wealth-building strategy.

Disclaimer
Prepared by Beck McLean Finance Pty Ltd ABN 80 632 809 833. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
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