Cheaper to Rent? No way!

[crc_error]

Rents don't always go up

http://www.vision6.com.au/em/message/email/view.php?id=446158&u=12069

when I held my 3 IP's, since 2000 and 2005 rents didn't go up, infact I had to reduce them to get tenants in sometimes, or offer '1 weeks free rent'.

even if tables turn, and tenants start to buy, although rents might ease, house prices will go up as there are more buyers in the market.. so its a win win for the landlord..

and when tenants consider to buy, they need to remember that current IR are not going to be around for long, so their payments will increase over time.

and if the economy goes to crap, house prices could fall, saving the tenant a capital loss..

but I agree, I believe everyone should buy their PPOR, and not rent.. as at least its a forced savings plan, and by the time you retire, you at lease own your own home..

 

[crc_error]

Ah Oracle, but you haven't accounted for the fact that this property will actually fall dramatically in value and only be worth 40% of what you bought it for in 5yrs time.

doesn't matter in the case of a PPOR, cause ALL properties would have fallen by the same amount, hence you would still purchase the same property should you sell.

The other thing not mentioned re PPOR is the capital growth is tax free, so add a further 30% onto the growth, this is what you would need to get from shares to end up equal.

If you do rent, you should by a IP, so as you remain in the game.. renting and drinking in the pub your wage each Friday will leave you very bad come retirement.

 

[Witzl]

If you do rent, you should by a IP, so as you remain in the game.. renting and drinking in the pub your wage each Friday will leave you very bad come retirement.

This is the clincher in the argument, and well pointed out

• buying a PPOR is a forced saving plan. This is what you do if you have no plans for active investment
• Renting is stupid if you dont invest the difference between renting and owning. YOU MUST INVEST to make renting the more financially beneficial move
• Renting and investing in IP is the best way to get ahead, simply due ot the laws of leverage as Rob has put it.

Here are some other threads on this same topic.

http://www.somersoft.com/forums/showthread.php?t=48842
http://www.somersoft.com/forums/showthread.php?t=45724
http://www.somersoft.com/forums/showthread.php?t=45363


If you are starting out - i HIGHLY recommend renting and investing the difference. It will give you some great leverage and accelerate your entry into the property market.

I have posted in those threads above that myself and my GF rent, and we found it a better choice for us for a number of financial reasons.

Recently that has changed..... we got engaged, and now we want security of accomodation, and in the area we live now we can afford a nice new PPOR for similar costs to renting.

We have 2 IPs (bought for $296K and $226K, worth $315K and $270K now), and are about to purchase our PPOR for around $490K.
If we didnt invest in those two properties FIRST... we would only be able to afford the PPOR, and pretty much NOTHING else.

Buying the investment properties first enabled us to build a good "starting package" first, and has still allowed us to buy a PPOR together.

In a few years, as equity increases in our $1million portfolio, we will continue to buy more investment properties.

Accumulating whilst renting is the only way we were able to build this portfolio. I consider that we started "properly" investing once we moved out of IP no.1 in April 2007, and in two years we have come this far.

Dont discount renting for what it enables to you achieve - if you apply your cashflow properly.

 

[want2bewealthy]

Another thing to look at is renting your own property, if it costs about the same as renting someone else's and you're paying interest only then why rent if you can put your name on a contract and keep any capital gain the property sees into the future?

you can also lock in your interest rate low so your 'rent' never rises within the fixed period. if you wanna trow a little spare cash into it get an offset feature.

 

[HandyAndy888]

I am now dumber for reading this thread.

 

[Edmond Dantes]

Another thing to look at is renting your own property, if it costs about the same as renting someone else's and you're paying interest only then why rent if you can put your name on a contract and keep any capital gain the property sees into the future?

you can also lock in your interest rate low so your 'rent' never rises within the fixed period. if you wanna trow a little spare cash into it get an offset feature.

Hey W2BW,

What are the tax implications when renting your property to "you"? is it still tax deductible?

 

[Aaron Sice]

when I held my 3 IP's, since 2000 and 2005 rents didn't go up, infact I had to reduce them to get tenants in sometimes, or offer '1 weeks free rent'.

then clearly your demographic DD was lacking.

 

[Perp]

OK, sphinx, I've done a spreadsheet using some fairly modest assumptions. Assume the following averages:

* mortgage interest 6%
* high-interest bank account earns 6%
* rental yield 4%
* value of house rented/bought today $400K
* have $80K cash for deposit or investment

We run along for 25 years, the buyer putting down $80K deposit, then making P&I payments on the $320K balance. The renter pays rent, puts the $80K in the high-interest bank account, and any excess (between rent and P&I payment) goes into the account earning 6%.

At the end of 25 years, both parties are retiring and moving into a consumption phase, so both liquidate. To end up with exactly the same cash in hand after CGT, sales commission, etc, the break-even capital growth required by the buyer would be 3.71%.

Will Australian property grow more than 3.71% over the next 25 years? I think so, but even if we don't:

1) Most renters would not have the discipline to consistently invest the difference.
2) Of those who do invest the difference, most will be tempted to dip into it for vacations, weddings, new cars, etc.
3) I think many of these "renters" would rent a nicer house than they can afford to buy... ie they won't pay just half the amount to rent the $400K property; they'll rent a $5-600K property.

I don't think property's the "be-all and end-all", but I would have to say that buying your own PPOR is at least not a bad financial decision.

 

[oracle]

At the end of 25 years, both parties are retiring and moving into a consumption phase, so both liquidate. To end up with exactly the same cash in hand after CGT, sales commission, etc, the break-even capital growth required by the buyer would be 3.71%.

Ozperp, what about the tax on the interest earned each year in high saving online account? Which would depend on your personal salary but I reckon you can safely assume 30% tax bracket. How would that affect the compounded growth of the money in the bank account?

Cheers,
Oracle.

 

[jaycee]

Just wondering why post on a property investment forum if property investment is such a bad investment?

Is it to warn property investors how bad their investment are?

I was wondering the same thing.

 

[investor_eddie]

50 bux a week rent is sweet.. you just need more people

 

[Perp]

Ozperp, what about the tax on the interest earned each year in high saving online account? Which would depend on your personal salary but I reckon you can safely assume 30% tax bracket. How would that affect the compounded growth of the money in the bank account?

Good point - just knew I'd have forgotten something. Thanks, oracle.

Now you only need 2.68% capital growth on your PPOR to end up in the same position.

 

[BoatBoy]

Good point - just knew I'd have forgotten something. Thanks, oracle.

Now you only need 2.68% capital growth on your PPOR to end up in the same position.

Apparently you also forgot maintenance you big silly

From the bear pit's comments on this thread

4. There is the small matter of the maintenance. I had a guy here all day changing doors and stuff today. Funny I only remember paying him two glasses of water.

Oh no, a couple of hundred dollars here and there, when will it end, I'll be ruined

Dave

 

[Perp]

Apparently you also forgot maintenance you big silly

I put in 1.5% of market value per year, to cover rates, maintenance, etc, so no, I didn't forget that, Dave.

 

[want2bewealthy]

Hey W2BW,

What are the tax implications when renting your property to "you"? is it still tax deductible?

No not that I know of, its still better than renting though.
You can rent the property out before you move in however and claim heavy deductions on depreciation

 

[sphinx]

You still don't get the point about leverage do you?

Yes. I don't get it when you only consider the rosy scenario of leverage on the way UP, not DOWN when your deposit is effectively wiped out for a small drop in property price. On a high LVR, there is a very high possibility of getting into negative equity when bubbles burst.

When prices have deviated for 40% from long term trend (which is now), and IF it just goes back to long term trend (no overshoot, no catastrophe, just back to normal), it will take probably decades to grow back to the current level or any level that has a meaning return on investment.

I have sympathy if your smart investment plan is to buy and hold for 70 years. (While in the mean time, the initial deposit and all the money you have poured into it over the years, would have grown into an amount that is worth several properties, under a moderate alternative investment plan... trouble free).

Again, I am OK if one admits that he is a property "speculator" who can rush in and out of a bubble at the right time.

But if you say, taking on a lot of debt to "invest" in long-term property will get you very rich based on bubble period data and anecdotes...... You are in serious disillusion.

 

[steveadl]

Apparently you also forgot maintenance you big silly

From the bear pit's comments on this thread


Oh no, a couple of hundred dollars here and there, when will it end, I'll be ruined

Dave

Maintenance costs seems to be one of their main sticking points. Perhaps they're purposely creating maintenace issues because they hate their LL's?

Of our properties, the average maintenance bill per year is around $300 each, and that's being generous (allowing for one offs which don't always happen). Most of that is just cleaning bills. Amounts to <2% of rents. Oh well, I'm sure they know best.

 

[MichaelW]

When prices have deviated for 40% from long term trend (which is now), and IF it just goes back to long term trend (no overshoot, no catastrophe, just back to normal), it will take probably decades to grow back to the current level or any level that has a meaning return on investment.

The long term trend is for resi IPs to yield 5%, they're currently yielding 5%. What deviation are we talking about here?

Yield matters my friend. Its about the only true indicator of fair value. Today, yields are sitting on their long term average. This means valuations are appropriate if you use mean reversion logic.

Cheers,
Michael

PS That chart is from one of Shane Oliver's old reports where he argued there was no case for resi property price increases as yields were still at 3% and needed to get back to 5% to reflect long term averages. That was two years ago. Amazing what 2 years of sustained rental increases can do to those sorts of arguments isn't it.

 

[steveadl]

The long term trend is for resi IPs to yield 5%, they're currently yielding 5%. What deviation are we talking about here?

Ahhh Michael, Michael, poor deluded, misguided Michael! You just never learn do you?!

You're forgetting rents are going to be falling Australia wide by 50%. Where will that leave your deviation?

 

[Witzl]

OUCH!!! I think i just walked into a cloud.