Rent vs buy

[holtk5]

Hello everyone,

My partner and i are currently saving for our first home. I am very keen in the future to invest in property. For now i am learning all i can.
I have read recently that it is better financially to rent and buy an investment property first, before buying your own home to live in. Any comments or suggestions????

 

[Simon]

Depending on the examples you can prove either argument!

What value is the emotional side of owning a home? Other advantages include the CGT exemptions, stamp duty exemptions and FHOG. In fact you only need to occupy the place for 6 months to get all the benefits and then you can rent it out and rent yourself.

Your rent you pay is after tax dollars - so unless your investment property is of higher standard in quality or location then you will go backwards.

Have you determined what your goals are for the medium to longer term?

 

[holtk5]

ok, thanks Simon.
Our ultimate goal is to have enough passive income to only work if we want to through property investing. By December this year we will have enough saved for our home deposit. Is it a matter of waiting for the equity to grow in our home before we purchase our first investment property, or use the home as security for an investment loan?

 

[Ricardo29]

""Is it a matter of waiting for the equity to grow in our home before we purchase our first investment property, or use the home as security for an investment loan?""

smart thinking i say. its what a lot tend to do, and often works well enough.
sophisticated wealthy investors will hammer the rent first and buy IP's point, but thats a bit removed from the real world for someone just staring out. nothing wrong at all with a home you want and work for and love when starting out in life....its a great thing.

(the one caveat i do put on such is buy a home with an eye on the future....almost treat the first home as a stepping stone or an ip itself and dont settle for a beautiful suburban family home that will do nothing above the norm over time. eg...tough it out, live in a dump, do it up, renovate, go for land, and all such things which will ensure greater than normal growth.

few years down the track, then get cracking onto bigger and better things, upgrade the home, use the equity, use your higher income etc to start the IP mission etc. life's long..plenty of time

 

[alexlee]

My partner and i are currently saving for our first home. I am very keen in the future to invest in property. For now i am learning all i can.
I have read recently that it is better financially to rent and buy an investment property first, before buying your own home to live in. Any comments or suggestions????

Buying IPs first makes financial sense because rental yields are lower than interest rates, and many things are deductible for an IP.

Having said that, a PPOR has a lot of emotional value.

It partly depends on your situation and what you expect in the next couple of years. If you, for example, plan to have children soon, you might prefer the emotional value of having your own home. However, if, for example, you plan to work overseas or expect / want to move interstate, then it may make more sense to rent a cheap place and buy IPs instead.
Alex

 

[want2bewealthy]

Put it this way,
Heres a typical situation.

a $225,000 loan for an investment property,
repayments of $1400 per month, equal to $16,800 per year.
If you rent this preoperty out, you will of course owe that per annum [unless you use an offset account to tame repayments.

You rent it out for say.. $270.00 per week, after management fees you make $900.00 per month, that means youre negatively geared and can reap big tax benefits/deductions.

after 1 year, youve paid out a total of $6000.00, from your own pocket, the tennants have paid most.
THEN, tax time comes around, youve been smart and had a depreciation report done and are claiming that each year, plus the initial costs of getting it written up, [will pay for itself within the first year] you would recieve approximately $3500,00 back from your investment, not including your personal work stuff, if you did lots of repairs then youll naturally be entitled for more.

After 1 year, youve only really paid $2500.00, thats not much considering your property may have grown in value by say around... $40,000, could be more, could be much less, it all depends on what youve chosed to buy and as to how much demand there is at the time.

Your borrowing capacity will rise and you can "withdraw" money/equity from your loans over time to reinvest [thus recieving more tax deductions] or simply spend it on whatever you like [youll be paying tax]

Investment is a great road to wealth, I wish you all the best and hope you do decide to go ahead with investing.

 

[alexlee]

Are we assuming a $250k property? Just a few comments on the above:

You’re losing $900 BEFORE tax. Note that the tax deduction only softens the blow. You’re still losing money, just less than it looks. Don’t get too excited about losing money: you should still try to lose as little as possible. However, the money you’re losing should be less than your capital appreciation long term.

I don’t think appreciation of $40k on a $250k property (16%), unless you do renos (which will cost you money) is at all typical. Long term, expect about 7-10%.

Refinancing and redrawing means you pay more interest. If it’s for income producing purposes it’s deductible. Yes, your deductions increase but so do your interest expenses. The point being: the deduction only makes the cost less. You still have to decide whether what you’re investing in with the borrowed money will return more than your interest cost.

If you spend the money on a TV, etc. you will NOT be paying tax, at least not on the actual refinanced amount. Your additional interest expense just won’t be tax deductible and therefore to pay, say $700 in interest would actually require salary of $1,000 (assuming 30% tax rate).

Investment IS a great road to wealth. Personally, I have bought IPs for 7 years and I’m only now planning to buy my PPOR.

However, be realistic about it and your figures. Tax deductions on CASH expenses (anything you fork out cash for) just decreases the cost: it’s still a cost so you have to think what you’re getting in return. NON-cash deductions (depreciation, mainly) IS a net benefit, but only if you didn’t overpay for the property in the first place. Be clear on what happens with refinancings (as a general rule, don’t use refinancings for personal expenses until you know what you’re doing). Property appreciates by 7-10% a year over the long term. Anything more than that is gravy but should not be assumed. Don’t go buying assuming you’ll make 16% a year: you’ll be disappointed.
Alex