While the high prices occurring in many capital cities is good news for property investors, it’s not so great for those wanting to get on the property ladder with prices set to continue rising.
Investors dominated the borrowing market in 2013 with 37.3%. A long way behind was borrowings by first home buyers, accounting for only 8.2% of housing finance.
It has long been the Australian dream to “own your own home” by saving a deposit, paying it off and retiring mortgage free.
Some believe home ownership is a mark of success, whereas others question if this is the smartest financial path?
There are those that are happy to rent and invest in the property market rather than own their own home. And, believe this is a better long-term wealth creation strategy.
Saving a deposit can take several years, only to find property prices have increased, requiring a greater deposit. This cyclical effect has resulted in many first home buyers looking to less traditional methods to getting into the property market.
Many first home buyers are turning to investment properties as their first home purchase, which could provide justification as to the higher investor and lower first home buyer borrowing numbers.
It’s not just first home buyers choosing to rent long-term whilst building financial freedom through property investing. But, what are the positive and negatives and what do the figures show?
PROS to renting and investing in the property market
Take advantage of tax deductible debt on investments whilst avoiding non-tax deductible debt on own home
Cheaper in the long-term (mortgage rates tend to be greater than rental yields)
Choose where to live based on lifestyle requirements, not affordability
Greater flexibility to move without buying / selling costs
CONS to renting and investing in the property market
Inability to make where you live ‘a home’ and put your personal touch on it
Greater insecurity – can be forced to move when lease expires if landlord sells
Rent increases
At mercy of landlords
HOW the numbers stack up
Property expert Chris Grey recently provided a useful comparison of renting and investing versus buying. His example data is included in the following examples:
Option one: BUYING HOME
Cost: $1.5 million
Average historic mortgage rate: 8%
Annual spend considering above factors: $120,000
Option two: BUY 3 PROPERTIES AT $500,000 EACH and RENT A $1.5 MILLION PROPERTY
Estimated rent return: 4%.
Loss after tax rebate = $30,000
Remember there could be additional tax deductions available
Annual rent payment: 2% of $1.5 million value = $30,000
Total annual cost of purchasing 3 properties valued at $500,000 each whilst renting a $1.5 million property would cost $60,000.
In comparison, purchasing a $1.5 million property would cost $120,000 annually.
Under this example scenario, it would cost less to rent whilst investing in property than buying your own home….
Source: http://www.news.com.au/
NOTE: the above figures are for example purposes only and do not consider individual situations or current / future market conditions.
CONCLUSION
Owning a home provides stability and freedom, which for many is greater than the financial justifications for renting. And, it’s a personal choice, taking into consideration many individual factors. I, for one, enjoy owning my home…
However, the financial evidence cannot be denied that shows renting while investing in property can be financially viable. No-one should try to persuade you that under this scenario, rent money is dead money!
As in all property investing, it comes down to selecting quality property and making sure the numbers stack up for your investment preferences…