For many, the dream of owning your own home involves the act of living in it. Yet there are a number of advantages of taking on both the owner and renter roles.
While many people think rent money is dead money, the concept of handing over your pay packet to the landlord each week may be a better financial move than you think.
By itself, paying rent can be a futile exercise if you’re looking to get ahead; however, disregarding renting as an effective investment strategy can be like throwing the baby out with the bathwater.
Consider these two scenarios:
On the one hand, you have chosen to invest in your own home, paying down the mortgage from your own pocket. On the other hand, you could choose to stay renting, purchase an investment property elsewhere and use the rent collected from your tenants to pay the mortgage on the investment property.
In each scenario, you have invested in a property and in each scenario you are paying down a mortgage. The difference lies in where the money is coming from to pay the mortgage.
While it’s true that in the second scenario you would be paying money to a landlord, you now have additional income to consider that the first scenario didn’t – rent from your tenant.
There are a number of factors to consider if you’re looking to pursue this scenario however. Let’s take a look at some of them here:
Living where you want: If you’re renting then you have the major benefit of being able to choose where you want to live and for how long.
Ability to adjust your budget: Mortgage repayments can be one of the biggest financial strains on a household. While you can slowly pay the balance down over many years, the first 10 years are often a struggle. If you’re renting though, you can adjust your budget accordingly; or if your financial circumstances change, you then have the ability to move down (or up) to a property that’s more suitable for you financially. Job promotion? Great! Upgrade to a better neighbourhood. Saving for a trip to Europe? No problem, simply downgrade for a year to a smaller space. Flexibility is the key here, and if you’re open to change (and maybe a bit of an adventure) then renting is a no-brainer.
Tax deductions galore: Very simply, repayments on a principal place of residence cannot be deducted. On the other hand, interest repayments from an investment property are fully tax deductible, so you can end up making some great savings when tax time comes. With prices as they are, many people are taking interest-only payments on their homes to reduce mortgage stress, so the benefit of paying off the principal is lost anyway. You might as well opt for a fully deductible situation if this is the case.
Greater profit potential: You love the suburb, but would you invest there? Most people wouldn’t know the growth prospects of an area they’re hoping to live in and most wouldn’t care. Whether you know it or not though, your money is in the market, so you might as well make the most of it. While your choice suburb may be a great place to live, your money may be better spent on a property in a growing area that is more likely to build your wealth faster than the area you’ve identified as ideal for your own lifestyle.
Say goodbye to entry and exit costs: Selling your own home and then purchasing another to live in will cost you about eight per cent of the asset’s value (stamp duty and legals plus agent selling costs). This is how much your property portfolio loses every time you decide to pick up and move. Not so with renting, where the major cost is in furniture removal and delivery.
Renting isn’t always rosy of course, and there can be disadvantages that balance up the positives:
It’s always temporary: Like it or not, the home you live in does not belong to you. While this may not bother those who ore more pragmatic about things, it may be much harder to bear for others who have more of an emotional connection to their living space.
Limited changes: While I have found some great wall-hanging systems to put our personal art collection up on the walls without too much damage, I know friends who shudder at the thought of not being able to put a nail in the wall (or paint the wall) where they live. Personally I’m not that interested in changing things around, but if that’s your thing, or you have a teenager who wants to paint their room black, then renting could prove a difficult concept to come to terms with.
Potentially less choice: This is particularly the case for more premium-style properties where owners are much more prevalent than renters. In this situation, your dream home may simply be not available to rent. Mind you, unless you’re in a buyer’s market, finding a dream home can be difficult at the best of times.
Packing: Urgh! – Nothing ruins a perfectly good weekend more than breaking out those packing boxes and dismantling everything you’ve spent years arranging only to have to unpack it again in a foreign place. While this can be a burden, it does provide a good opportunity to do a bit of house cleaning though. You can also opt for a two-year rental if the owners agree to it, with yearly price adjustments as necessary.
If you want to do some quick calculations for yourself, there are many online calculators available throughout the Australian market. Some have the ability to tell you how long it will take until you’re ‘better off’ buying. These are great tools but it doesn’t take a genius to realise that if you can afford to buy into the market, then it’s only a matter of time before you’re at an advantage. Rent money really is dead money.
The real advantages listed above come from renting AND investing. The key being to have your money in the market at all times, then you can really maximise the benefits of this strategy that not only creates a more affordable and flexible lifestyle but can also supercharge your wealth.