So the million dollar question – Rent or Buy your own home?
Financially you are better off renting your own home and buying investment properties, rather than buying your own home. Buying your own home is a ‘lifestyle decision’ and will cost you more than buying an investment property. Here’s an example of why:
Let’s say we both own identical houses side by side each worth $400,000. You live in yours and we live in ours. We both have a 90% mortgage of $360,000. We both pay the same rates, insurance etc. Everything is identical for the sake of this exercise. Then one day we have an idea! Someone suggests that we swap houses and rent off each other.
How has our situation changed?
You pay us $400 per week rent, and we pay you $400 per week rent. So the cost of renting you incur is cancelled out by the rent you receive. We both still own one property worth $400,000. If the market goes up by 10% we both still make the same money. We both still have a $360,000 mortgage, and we have the same rates and other bills to pay.
But… now the property we own is considered an ‘investment property’. So the key difference is the government allows us to claim all our expenses on tax! All our mortgage interest, all our rates and insurance bills, maintenance costs, everything! So we get a big tax return every year. Simple.
That is why renting and buying properties for others to live in is always better financially than buying your own home. We are not saying that buying your own home is ‘wrong’. It is just important that you recognise that it is a lifestyle decision and not a financial decision.
Not only are you better off renting where you want to live, but it also allows your buying criteria to be purely focused on investment reasons, and as such you will make exponentially more money because you will be able to buy where the property market is booming. There is always somewhere in Australia that is booming. If your criteria is purely investment-driven, then every time you buy a property it can be in a boom location!
Another advantage of renting where you live and buying investment properties is that if you are on a low budget, you can actually get into the market sooner. If you don’t have to buy where you are living, you can buy anywhere in the country. So if your budget is say only $400,000, then you can realistically still find something for that price somewhere in the country.
But there is one negative to consider that may, or may not, affect you. Good property investors generally never sell their properties, but if you do there is one key advantage to living in a property you own. When you sell your ‘principal place of residence’ you are exempt from capital gains tax. If you are thinking of selling your own property, this is something to discuss with your Accountant to see what the best option is for you.
I hope you are enjoying this series on Growing your Property Portfolio, it’s so simple when you know the tips and tricks.
Tomorrow I touch on something that I try and tell all my investors “Anything is Better Than Nothing”.
~Daimien Patterson
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