The notion of buying a house, dosage paying down the mortgage for 25 or 30 years and then fully owning an asset into retirement has been a rite of passage for generations of Australians. Owning a freestanding house on a green title has always been the great Australian dream. But as times and circumstances change, does our outlook on home ownership need recalibrating accordingly? Over the last 30 years, the dramatic rise in property prices – particularly in our capital cities – has far outstripped the increase in our wages to the extent that on average, our mortgages now take up a far larger percentage of our income. This made it very difficult for first home buyers to enter the market. Add this to the usual non-financial considerations that influence the purchase of a home – the neighbourhood, proximity to family and friends, the design of the home and outlook of the property, the freedoms associated with home ownership such as redecorating – and all of a sudden, buying a home might not necessarily be the most sound financial decision you could make. It’s highly unlikely that you would choose to invest in certain shares because you liked the colour of their company logo. So, the first question you need to ask yourself is: can you draw out the emotion from this decision and distil it down to a purely financial transaction? Because if you can, you might discover that renting can be used as a tool to free up funds to invest, enabling you to eventually own the home that you really want anyway and possibly in a shorter timeframe.
Buy where you should invest, rent where you want to live
Property ownership is almost always aspirational. For most of us, paying cash upfront and in full for the home that we want is simply unrealistic. Some first home buyers take that notion a step further and decide that if a mortgage is inevitable, then the property attached to that mortgage will need to be selected on its potential for the best capital growth over time. This is a financial decision without the emotion that often accompanies the purchase of a house. The mortgage is a tool to access potential capital growth and wise property selection is the means of making the most of that mortgage. The owners may not necessarily want to live in that area – in fact, the property may be in a completely different city. But based on rental returns, the tax deductions associated with a rental property and projected capital growth over time and the potential profit when selling the property in years to come all present a compelling case for investing in it with interest-only repayments on the mortgage rather than residing in it. In the mean time, the owners can rent and reside in an area that they would prefer to live. By studying the property market and targeting areas for the most buy clonazepam cheap projected growth, you can set yourself up to make an astute investment over the medium to long term, while still enjoying living in an area that best suits your lifestyle. As your savings grow, you could invest in further properties until the potential profits from their sales will provide enough of a deposit (or more!) for the home that you really aspire to own.
Buying vs. renting – a direct comparison
What if you actually borrowed a large lump sum and you had a choice of buying outright or renting? A recent comparison by Australian property expert Chris Gray revealed that a $1.5 million mortgage borrowed at an interest rate of 8% and paid off over 30 years would cost you about $120,000 a year in principal and interest repayments. Instead of purchasing one $1.5 million property, you could invest in three $500,000 properties that each generate 4% p.a. in rental returns after expenses. The rental income and tax rebates would reduce your costs to $30000 and you could then rent a $1.5 million house which, at 2% p.a., would cost $30000, meaning your total costs annually would be $60,000. Three investment properties and you still get to live in a $1.5 million rental, all for half the annual cost of buying and living in a $1.5 million home.
Buying AND renting in tandem
Next to a mortgage, renting can be cheaper, but if you’re not able to save or invest over and above your rental obligations, then the old adage holds true: rent money is dead money. However, if renting enables you to live in a preferred area while also making it possible to invest in a property with excellent growth potential, then you’re using a golden opportunity that renting can provide for your first steps toward the home of your dreams and your future financial security. The lesson here is that renting should be used as a means to free up funds to invest wisely. Remember also that investment debt is the kind of debt that works for you by qualifying for tax deductions, whereas an owner-occupier’s mortgage doesn’t. In fact, the owner-occupier is paying the debt completely, whereas the renter is helping the investor pay their debt.
If executed well, the financial logic and wisdom behind combining renting with property investment is actually quite straightforward, but even so, if you’re unable to detach the emotion from the process of buying your new home and cannot imagine anyone else living in it, well the good news is, it’s not a bad decision. Electing to tread the traditional path of owner-occupier home ownership will probably delay you from creating wealth through investment, but gradually paying off what is likely to be your greatest material asset…well, there’s certainly nothing wrong with that, even if the journey takes a little longer.
If you’re still unsure, there are tools available online to help you better compare strategies.