Is it better to rent?

E

Elke

We are paying off our first home, a 2br townhouse with courtyard. It's really nice but I want more outdoor space for two toddlers. A house in our street is now available for rent, at 480pw. very old cottage, big level backyard pure north facing....heaven!

In terms of rent prices, another unit in our block rented in May 2011 at $475pw. A comparable one - all original - but with a tiny courtyard (ours is four times as big) rented in May for about $430-40. The $375 one is a 2br but with a new kitchen, new bathroom, and timber blinds, whilst ours is original from 1991.

So - am I correct in thinking that we may be better off financially - or on a par - if we rent?
Theoretically, assuming no vacancy just for the exercise, if both were rented at $480 pw, then what could we tax deduct????

Yes or no:
1. All utilities on this house (water)
2. Council rates
3. Body corporate fees
4. Repairs here
5. Depreciation on all furnishings etc - do we need receipts as proof of purchase?
6. building eg we have a plan to put in an ensuite - probably not now but down the track, so the loo and vanity,could we tax deduct them?
7. A new shower, bath, ?
8. New oven, stove?
9. New benchtop?
10. Fence screening eg lattice?

We rent ours out either as is for $440 pw OR we hook in in the next week and get a new shower, vanity, paint a few walls (not all need doing), get new stove and blinds and aim for 480 also.

Thoughts?

I'm also posting about bigger jobs and whether it's better to hook in and do them now (ie get a builder to do it), or rent out for six months immediately, and plan the other, bec I don't think they'll be done in a week!

- ensuite
- another bedroom
- courtyard - expanding the porch to be more of a deck.
 
Why don't you call a few local property managers today to find out their rental estimate for your place? Once you have a solid number to work with, it may make your decision easier.

As for tax deductions, anything that you repair, along with council/rates/strata/water costs etc are deductible. Anything you replace or add to the house will be a depreciable asset. So while you can't claim the cost of the replacement/addition as a tax deduction, you can get a tax deduction on the depreciation of those items. Go to the tax section of this forum or google depreciation and you should find some good explanations of this.

In my local area, units and houses are going for similar rents, and with yours sounding similar, it is likely that you won't be financially worse off by renting the house down the street. If it's space you're after, I say go for it!
 
Hi Beachgirl
Actually we had 3-4 agents thru about a month ago. They said that the other units in our block are a good indication, and they thought 'as is' with nothing done, about $330. But they recommended: fresh paint, steam clean or replace carpets upstairs and on stairs, new vanity, new shower. The jury was out about the kitchen - two said it was ok, (it's cream with modern handles) as long as it all worked ok, it wouldn't change the rent value.
 
Hi Y-man, Are you serious???? Our repayments become tax deductible? That's got to be a good thing, right?

Because we bought this place very much intending for it to be an IP, so always prepared we'd have to pay CG if we ever sold.

Ta. Any other nice surprises like that?
 
Hi Elke

Not everyone considers home ownership a necessary pastime in this country, believe it or not. In fact, the younger generation today are one of the biggest tenant populations Australia's seen, so it's interesting times ahead. A real lack of affordability and a desire for lifestyle over debt has resulted in a significant portion of the population electing to rent rather than buy. It really is a lifestyle and very personal decision. The largest downsides to renting are not having that control over how long you're likely to live in one place as well as the risk of blowing all your monies on lifestyle and not investing/saving elsewhere. I know many investors who own several IPs yet don't have a PPOR.
Best of luck whatever your decision and happy renovating :D
 
Elke said:
Hi Y-man, Are you serious???? Our repayments become tax deductible? That's got to be a good thing, right?

Ta. Any other nice surprises like that?
Click to expand...


Nah, Y-man is just pulling your leg. If your property is being rented out, you still don't get to deduct the interest on the loan. Hell, if that were true, everyone would be doing it - right - and the Banks would go bankrupt.


Y-man, you're very naughty for leading Elke up the garden path like that.


I tried that trick last year. I walked into the ATO head office and said "Now look here ol' chum, I've been speaking with a friendly chap called the Y-man on the internet.....and he reckons you guys need to give me back half of my interest payments."


Well, of course, it took them about 2 seconds for them to all laugh at me and of course I left empty handed. Don't you believe a word of it Elke, they are pullin' yer leg.
 
I think it is a question of how much capital you have.

I don't think owning a PPOR with a 90 or 100% mortgage stacks up anywhere in Australia and renting well and truly is a cheaper option than this and you will have more disposable income to invest in the case of remaining a renter yourself.

buying investment homes works if you use credit and take a positive view on house prices long term. Buying a PPOR makes no sense unless you take an overly optimistic view I suspect why gen y'rs are not going down this path...

However all that aside buying a PPOR makes sense if you are using your own capital.

In the case of someone having the full purchase price in capital, in this case renting does not seem so attractive where you are paying full tax on your capitals income. Wherever you deploy this capital you will pay tax on the income except in the family home or other areas which will save you costs rather than earn you income. (Unless you have a stay at home spouse where you can get some relief assuming you trust her?)

Put this capital in a PPOR and you avoid paying rent but do not pay tax on this saving in rent so it then becomes as good a place as any to deploy it even if you think house prices were not going anywhere for a decade it still would be line ball with keeping it in a deposit taxed at 38 or more percent.

say you had;

500k in a savings account (I wish I did!)

got $32,500.00 per annum interest.

Got taxed $13,000.00 of it.

leaving you about 20,000.00 which will probably not rent you a house worth 500k in most parts of Australia.

whereas you could take the 500k of capital out of the deposit forgoing the 32.5k taxable income and buy a place which will save you in most parts more than 20k (post tax) in rent and this saving importantly does not get taxed.

Owning the PPOR then stacks up for the person with a 100% deposit, however in my opinion does not for the person borrowing 90 or 100%. Unfortuantely the point is somewhere in between and this point is unique to every area and your own capital position where it makes sense to buy your PPOR or otherwise depending on what capital you put into the transaction. A simple excell spreadsheet with your marginal rate of tax, the rent v purchase costs would answer whether it stacks up for you.

It does not surprise me that it does not make sense for gen y to buy for the most part. At 90% lends buying costs so much more than renting so the decision would only ever be made for reasons other than financial in my opinion untill they have saved for 15 or more years a sizeable deposit and start to get sick of handing over too much to the tax man.

This is not always the case over time. When renting costs move closer to purchasing costs as has been the case many times in the past buying a PPOR makes sense at a higher LVR.

The upshot of all this as is said often here; have your own capital in your PPOR, where debt is non deductable and any IP's should have the minimum possible capital in the transactions if you have a PPOR where capital should be kept with its tax free nature. Extending this further, do not own a PPOR unless you have alot of capital / equity to place here away from the taxman.
 
Clearly renting is cheaper than owning a PPOR at first.

Over time, rents go up. Assuming you don't take on more debt, home loan repayments may fluctuate up and down, but over time they stay about the same. Over 10, 20, 30 years, inflation makes the cost of home ownership far cheaper than renting.

Of course the counter argument is what's the opportunity cost of using the initial savings to invest wisely?

Without doing the maths I'd suggest that if you invest well the money you'd have initially saved by renting. This would likely more than compensate for the higher costs of renting in the future. Unfortunately the average rent simply doesn't do this given most people seem to live from hand-to-mouth without realy savings or investments.


10 years ago I did the maths of rent vs buy and for us it was clearly more cost effective to rent, especially with the tax benefits of investing. At some point however, we got sick of renting and decided we just wanted to own our own home, with a backyard and a dog. :)


Overall I think the best strategy is to get into the property market.

If you decide to buy your own home first, save like mad and pay down the non deductable debt. Borrow the equity you've created back (or use capital growth) and invest that money.

If you decide to rent and invest, save like mad and invest that money.

Either way, you win, simply by spending less than you earn and investing the surplus.
 
PT_Bear said:
Either way, you win, simply by spending less than you earn and investing the surplus.
Click to expand...

And this is pretty much all your have to do, regardless of whether you rent or buy.

I have people regularly tell me that they don't want a 'crippling mortgage', to which I respond "how long will it be crippling for"?

Rent, buy, it doesn't really matter as long as you are saving and investing in something sensible.
 
Renting seems very good on paper so 2 years ago so rented out PPOR and rented a bigger house instead. Now moving back into own place and feeling much better for various reasons

1. Lost of home ownership, totally lost interest in doing the garden or fixing up stuff at home to make it more comfortable since never really able to call the rented place home, despite it being brand new and more spacious etc.

2. Property managers treats tenants as 2nd class citizens! the contrast can't be more in-my-face being both a landlord and tenant at the same time...

3. Inevitably you will rent a bigger better place than your PPOR because it is cheaper, thus render the financial savings a moot point

Now, despite a smaller place, its my own and I get excited on the endless little projects to make it better on the weekends :)
 
Tomorrow we are going to inspect the property for rent once again - this time taking DH to see it for first time. It's 'wow' factor is a big yard, single storey, level, safe for kids, one extra b/room. The downsides are much more basic than ours, no internal rooms bar kitchen face north, so are darker and colder.

Will let you know!

Also the doubt is: the intangible thing about living in one's own place. However little one likes it. At least this excercise will help clarify what we really want.

Cute: my DH thoroughly cleaned and tidied our house on the w/end....so I'd like it so much that I wouldn't want to move. He's happy here but he wants me to be happy too. Awwww....:p
 
Being happy is one of those little intangibles that you really should take the chance to get, if the chance comes up. If you think the rental will make you happier, renting wins.

Do check that you can have a long lease though. I've been kicked out of several rentals in my time from landlords selling, and we have some people wanting to rent our current house next week who are, surprise surprise, being kicked out because the landlord wants to move in.
 
Considering about 95% of your mortgage is interest alone, you are not really paying off your property (except maybe $2000-3000 per year). If you were renting, you could save over $10,000. Now, over 3 yrs, you have a $30,000 deposit which saves you about $60,000 over the life of your next loan... plus insurances, rates, body corps etc etc. Property is not going up in value, so renting makes sense all round.
 
Dazz said:
Nah, Y-man is just pulling your leg. If your property is being rented out, you still don't get to deduct the interest on the loan. Hell, if that were true, everyone would be doing it - right - and the Banks would go bankrupt.


Y-man, you're very naughty for leading Elke up the garden path like that.


.
Click to expand...

I Know, I was hoping she'd take the bait ;)

Even worse, she might go and do research and find

http://www.ato.gov.au/individuals/c...001/002/002/013/003&mnu=44869&mfp=001&st=&cy=

:)

The Y-man
 
smartinvestor said:
Considering about 95% of your mortgage is interest alone, you are not really paying off your property (except maybe $2000-3000 per year). If you were renting, you could save over $10,000. Now, over 3 yrs, you have a $30,000 deposit which saves you about $60,000 over the life of your next loan... plus insurances, rates, body corps etc etc. Property is not going up in value, so renting makes sense all round.
Click to expand...

I'd be careful with actual numbers, as everyone's situation will be different. Also, the proportion of loan repayments going to interest and principle respectively vary with time.

I'm all for considering a rent and invest strategy, but the problem is that most analysis doesn't look much past the first year of ownership.
 
You must log in or register to reply here.

Similar threads

V
PPR to IP - Recommended things to take care of to make tax time easier in future
Replies
5
Views
2K
Vixs
V
E
How to manage a PM??
Replies
2
Views
1K
Elke
E
K
Rent Increases Brisbane <10km Suburbs
Replies
17
Views
3K
Ed Barton
E
A
bathroom reno by accident
Replies
12
Views
2K
Angel
A
C
Bathroom renovation advice
Replies
6
Views
2K
Chic not shabby
C
Back
Top