How buying an investment and renting can be a good option
Have you ever heard the saying, “rent money is dead money”? It’s a phrase much-beloved amongst first home buyers and mortgage brokers, and it’s meant to give you the idea that renting a home when you could be buying one is a sucker’s choice.
But let’s look at this a bit more closely. Why is rent ‘dead money’? Because it isn’t providing you with an asset. If you rent a house for twenty years, at the end of those years, you don’t own the house. If you pay off a mortgage for twenty years, at the end of that time, you either own the house, or you’re pretty close to it. However, there’s a logical fallacy here. For a start, most mortgage repayments are higher than the rent would be on a comparable property. Also, a large percentage of the repayments that you make on a mortgage actually falls into the category of paying interest, rather than paying back the capital of the loan. In essence, interest is simply ‘rent money’ that you pay for renting the purchase price of a property when you take out a mortgage.
Interest money is dead money, too.
Many people are starting to take a different approach to property ownership. They’ve turned their backs on the idea of buying a house in their price range that meets all of their current requirements regarding location, size, amenities and the like – but which might not suit them in a few years’ time. These people are finding that their best investment strategy is to buy investment properties in good locations that are slated to improve in value, and then rent a house or flat that meets their own specific requirements.
What are the benefits in such an approach? For a lot of people, there are many:
- Flexibility: it’s much easier to find a new rental home than to sell and then buy a house. If life circumstances change – a new child, a new job in a new location – you won’t have to lose out if the property market is temporarily depressed in your area.
- Savvy market decisions: when you buy a property solely as an investment, you’re free to ignore the personal preferences and requirements that might separate you from the majority of home buyers. You can simply buy a property that will appeal to a wide variety of buyers in the future.
- Tax deductions: you can’t apply losses from your primary home as tax deductions, but you can negatively gear investment properties.
So is renting a home and then buying an investment property the right decision for you? It might be – or it might not. It’s important to look at your own specific situation to figure out which options would best compliment your existing investment portfolio.
Have a look at the example below to see how the cost of renting is actually cheaper than owning your own home. You’re actually better off renting and buying an investment than you are to buy the same home to live in by about $69/wk in this example. If you then take into account rates and tax depreciation then the real difference can be as much as $200/wk.
Now I’m not saying you should sell up the home and go and rent, but if you’re in that phase of life where this type of decision is coming up then I’d love to meet with you and help you explore the choice that’s best for you.
You may also find that it’s not socially acceptable for your family to rent, to save $50 a week, but if you found out it could save $500 each week, then maybe it would be worth it.
If you’d like to explore this and other investment possibilities, then why not give us a call and book in for a free initial consultation? We’d love to meet with you and help you to discover the best investment options to suit your individual needs.