Is it Worth Having a Principal Place of Residence?
Here’s the standard model of property ownership that most of us see out there in society:
- Buy a house and live in it (principal place of residence).
- Buy an investment property and rent it out.
- Keep buying and selling investment properties.
However just because everyone is doing something does not mean it’s necessarily the right thing to do – or the right thing for your particular situation.
In many cases, I’ve found that not having a primary place of residence – in other words, not buying the home that one lives in – actually works better, financially, for a lot of people. Take me, for example. I’m 42 years old, I have a family with 4 children, and I regularly invest in and sell properties. Yet I’ve never owned the home in which we live. This is not an odd quirk, but a hard-headed financial decision that has paid off handsomely over the years.
So let’s look at some of the pros and cons of having a principal place of residence.
Security: a place to call home and live in as long as you desire. Psychologically, this is important to a lot of people – it’s the iconic Australian dream.
Capital gains tax: capital growth in your principal place of residence does not incur capital gains tax when it is sold.
Freedom: you can modify and decorate your own home and its environs as you desire; a rental home generally offers far less flexibility.
Long-term savings: you can install energy-saving options like solar panels and more efficient water heaters to reduce your gas and electricity bills.
Like-minded neighbours: in your own home in a highly owner-occupied area, you’ll likely be surrounded by other people who own their homes. This tends to increase safety and lead to a more aesthetically-pleasing environment.
Pets: if you own your home, you’ll generally be able to choose your pet(s) to suit your family’s needs with minimal outside consultation.
Expense: depending on the percentage of the home’s price that you need to borrow, it could be quite a lot more expensive to pay off a mortgage than to pay rent on a similar home.
Dead money: while many describe rent money as ‘dead money’, mortgages also involve a lot of ‘dead money’ paid in interest and expenses like lender insurance.
Sale costs: if you move frequently, stamp duty and real estate commissions start to really add up, easily costing you tens of thousands of dollars per move.
Overcapitalising: many people end up overcapitalising in their principle place of residence to create their dream oasis. Much of this money spent will not result in increased value on the property and is also dead money.
Opportunity cost: paying off a mortgage rather than renting your home can take up a substantial amount of money that could be used to take advantage of great investment opportunities.
Slower financial growth: spending a substantial amount of your income on paying off your residence means that less of the money you earn each month can be invested – hence less money that will be working for you and earning you an income. Over a number of years, this loss of income can be substantial and lead to a much slower rate of investment growth.
Generally speaking, the major benefits of owning vs renting a home come down to those of lifestyle: having security and control over your place of residence. There is no one-size-fits-all answer to the question, but it’s very much worth considering for yourself, crunching the figures – and deciding whether you think it’s worth your while to have a principal place of residence.