Renting Makes More Financial Sense Than Homeownership

[The Fence]

So what is interest/holding costs?

And this CG has been paid for by you via years of non-tax deductible interest and holding costs indexed by inflation!

PPOR is compulsory saving at pretty average appreciation rates. Much better to rent and save the difference to lever for further investing.... though you'd need to be disciplined and know a fair bit about what you are investing in....and many people aren't.

I understand the rent v's PPOR argument and have acknowledged since....but to invest in shares (with your leftover rent mony) that can just disapear like recently was my main point......which you didn't include in my quote......

For me, renting was dead money and paying off PPOR to get equity to borrow further was essential....for me....

I also do not wish to be at the whim of a landlord....it's enough to be at the whim of banks and everything else.....but that is the difference in this discussion....what people feel emotionally with their decision....

Like I said, I'm all for more people renting.....

 

[Alex P Keaton]

Hi everyone




Since buying my unit, i've been trying to decide whether or not to move in straight away and make it my ppor or lease it out first off then move into to claim the first home buyers.

I've decided to move in and make my 1st property my ppor for a couple of years. Then in 1 - 2 years time I will convert it to an ip. I need to get out on my own again. Need my independence!! Plus dad is hard to get along with sometimes. He is irritating. I need my own space.


It was either go with what was best financially for me. Leasing it out, or what was best emotionally for me. I've decided to go with the latter. My happiness is the most important thing. Ok I wont save that extra $10 K. But I will ensure I keep to a budget and with the 20 K I have saved already. I should be ok.


I'm really getting excited about moving. Will move December or January, depending on things at work.

 

[RumpledElf]

Good on ya Kim, making decisions is good for the soul.

We've had the same kind of dilemna on and off since we bought our IP - it is in an extremely nice location within walking distance to everything, is where we want to start a new business, is a very nice house etc but it is much smaller than my current PPoR. We read the capital gains page on the ATO website - since we are likely to make well over $100k CG on this house - and you tend to be very sticky if you rent the house out before you use it as a PPoR, which I noticed several people warning you of on some of your other threads.

So looks like we're moving at the end of the year too, once the house is a bit more habitable. My huge old PPoR will end up being a storage unit for all our excess stuff that won't fit in the cottage, and we can reverse what we are doing now and go back there on weekends to finish the Bathroom From Hell off. Much lower CG there if I ever decide to sell, and I've had it since 2003 so I get the 50% reduction.

 

[The Fence]

Yes well done Kim, you will be in a great position after the two years, so long as you pay as much as you possibly can off that house to give you equity for further purchases....it's your building block...so build on it.....

We did exactly the same thing....lived in it for a couple yrs, did additions/renos, then rented it out for the 6 yrs (claiming all expenses incl interest) then "bought" it back as an IP (get it revalued at this point in time) continuing renting ......and Cap gains tax starts from AFTER that first 6yrs renting it out.....hence my penchant for owning before renting......

As I see in this thread, there are many ways to skin a cat...so each to their own....

 

[Alex P Keaton]

I had a meeting with an accountant (specialist in ip) this morning and she asked what I wanted out of my session.

I told her I bought a property and that my plan was to live in it as a ppor for 1- 2 years so as to claim the fhog and stamp duty exemption, and then convert it into an ip. I asked her if we could work through some hypothetical’s based on renting out my unit in a couple of years time.


After doing the calculations she explained that because I have a $177 K loan and already have about 70% equity it wouldn’t be very profitable for me to rent it out. It would be a different story though if I had borrowed the whole amount. (which was approx $250 K Purchase price) So based on her calculations basically I wouldn’t be any better off to rent it out and then go rent somewhere myself.


She was saying that for people on higher incomes it is a different story because they are taxed at a higher rate. One of her clients for instance was making $12,000 by renting accommodation himself whilst leasing out his property. Because of the fact that it was negatively geared, and he was on a higher income and the highest tax bracket of $45%. It made sense for this guy to do it.



She was saying the best option for me is to wait for 7-10 years time when my property doubles in value, and in the meantime I will be saving as much as possible into my offsett account. I'll save $300 a fortnight into my offset.


So my plan is to keep my property as my ppor and in 7-10 years time when my unit has doubled in value. I will release the equity out of it to buy an ip. If I do decide I want to move closer to home I will just rent something. Meanwhile my unit’s value will be increasing.


I am also going to save $300 a fortnight into my offset account. I wont touch the money in the offset. If I save $300 a forntight in 10 years time I'll have around $80,000. She was saying that I will be able to accumulate the 2nd ip and subsequent ips a lot faster once i have the a large amount of equity in my ppor. It takes a while to get from property 1 (my ppor) to buying my next property (ip #1)


Once the IR comes down to 6% I'll fix in my rate for 5 years or more if allowed ? The years will pass by and I'll still be paying at 2008 cash prices, and as I save more money in my offset my repayments will go down even more. Though If I were to rent a similar property the rents will just keep on increasing. In a few years time they will be higher than what im paying in mortgage repayments and will onlly keep rising.

 

[asdf]

It is disappointing as we have always rented while holding investment properties and would like to stay around, but we are now changing our strategy and buying own home in different part of town and selling some of the investment properties. Hopefully it will be a good change for us.

Forget the eastside mate. $750 a week for a dump is a joke. Theres way too many people over there anyway. Went down your way over the weekend and by accident happened to be on the sculpture walk. It was so packed, it was worse than walking down Oxford St during mardi gra. Takes you 20mins to drive from Bondi to Alison Parade... ridiculous. Come over the bridge to Gods Country...

 

[Ausprop]

gees Kim.... what makes your adviser so sure your property will double in value in that time frame? and if that guy earns so much money why is he stuffing around with some feral renting his house all to save $12k? one good trashing and it will cost him all that and more. I have managed to score 2 this year already.

have an objective think about all this

 

[BayView]

Rent is dead money, no investment at all.....wasted cash....

Renting is not dead money; it is an unavoidable cost of living - unless you can buy a house to live in.

The cost of living attached to buying a house (assuming the standard 80% loan and 20% deposit) is usually more than renting.

For many, the scenario of renting and and also buying an IP as their first property for say; the first 5 years of ownership is going to be a much better return when you consider the tax benefits and depreciation etc attached to the IP.

Most people rent for a few years before they buy their first PPoR, and they are paying tax all this time; never getting any of it back. Then their mortgage comes along, as well as the holding costs - all with no tax relief.

If you have to rent, and have to fork out for this cost of living, why not have a tax advantaged investment at the same time to accelerate your wealth building?

 

[The Fence]

Sounds great to me! More renters...
All good!

 

[steveadl]

gees Kim.... what makes your adviser so sure your property will double in value in that time frame? and if that guy earns so much money why is he stuffing around with some feral renting his house all to save $12k? one good trashing and it will cost him all that and more. I have managed to score 2 this year already.

I was actually toying with the idea of leaving our new Enfield place vacant once the vendor moves out and making use of it ourselves. The interest rates cuts are going to give us more cash than the rent would have, and no fuss with tenant.

Only problem is, without it producing an income, the debt won't be tax deductible. Oh well, still good to have an extra $15k odd in revenue for the year, fingers crossed we find a good tenant!

 

[Witzl]

So my plan is to keep my property as my ppor and in 7-10 years time when my unit has doubled in value. I will release the equity out of it to buy an ip. If I do decide I want to move closer to home I will just rent something. Meanwhile my unit’s value will be increasing.

Kim,

since you already have equity in your PPOR - why dont you refinance it and use that equity as the deposit on an IP now? Why wait all that time for your PPOR to increase in value, whilst at the same time all other properties are increasing in value?
If you increase your exposure now, you will reap the rewards of CG on not only your PPOR, but also on your IPs.

I am also going to save $300 a fortnight into my offset account. I wont touch the money in the offset. If I save $300 a forntight in 10 years time I'll have around $80,000. She was saying that I will be able to accumulate the 2nd ip and subsequent ips a lot faster once i have the a large amount of equity in my ppor. It takes a while to get from property 1 (my ppor) to buying my next property (ip #1)

I dont agree that its hard to go from property 1 to property 2, especially in your case where you have so much equity.

YOu are in a similar position to what we were about 1 year ago. We have a townhouse we were living in, which had a $225K loan against it. We moved out, and got it revalued for $315K.... so we took out a new loan for $285K (about 90% LVR), and we are now using that $60,000 as the deposits for two IPs.
We just looked at a place yesterday which we've negotiated for about $230K. It will rent for about $270/wk. Based on interest rates of 7.75%, that will cost us about $60/wk - chicken feed!

In your position, you have a $170K loan, on a $250K house. A 90% LVR will give you $225K loan, which is $55,000 in your pocket to use as deposits for your next IP purchases.

Once the IR comes down to 6% I'll fix in my rate for 5 years or more if allowed ? The years will pass by and I'll still be paying at 2008 cash prices, and as I save more money in my offset my repayments will go down even more. Though If I were to rent a similar property the rents will just keep on increasing. In a few years time they will be higher than what im paying in mortgage repayments and will onlly keep rising.

Well, i would counter that by saying that if you bought another IP or two now, you will still be paying 2008 prices on your loans, with a lowering interest rate, and an increasing rental income.

Pretty soon you will be MAKING money from your IPs, instead of just sitting in your little PPOR waiting for CG on a measly $250000, when you could be sitting in your PPOR (or a nice rental place) waiting for CG on $750000!!

Big difference between $250K and $750K.

Think about it, and perhaps see what that accountant thinks.
Then ask that accountant just how many IPs she has.

 

[HiEquity]

Kim,
..........
Think about it, and perhaps see what that accountant thinks.
Then ask that accountant just how many IPs she has.

Hi Kim

I tend to agree with the accountant regarding living there versus renting it - on a low income the balance gets skewed towards living there, particularly with a lesser loan amount. No tenant hassles and you get to do what you want to your own place while living there which is pretty nice.

I also agree with Witzl that your accountant's strategy for further acquisitions is unnecessarily conservative. Having said that, you don't need to be in a rush either as the market doesn't seem to be going anywhere in particular at the moment. It would just be good to have the strategy all worked out so you can pounce on some opportunities when they arise.

Maybe you could use this with Rixter's system of one property per year so you still have some powder dry if the market tanks and you're not left completely high and dry either should inflation drive prices up. It's about risk management and giving yourself some room to manoeuvre. Your savings to date have already given you some breathing space which is to be commended.

 

[josko]

Hi Kim

I tend to agree with the accountant regarding living there versus renting it - on a low income the balance gets skewed towards living there, particularly with a lesser loan amount. No tenant hassles and you get to do what you want to your own place while living there which is pretty nice.

I also agree with Witzl that your accountant's strategy for further acquisitions is unnecessarily conservative. Having said that, you don't need to be in a rush either as the market doesn't seem to be going anywhere in particular at the moment. It would just be good to have the strategy all worked out so you can pounce on some opportunities when they arise.

Maybe you could use this with Rixter's system of one property per year so you still have some powder dry if the market tanks and you're not left completely high and dry either should inflation drive prices up. It's about risk management and giving yourself some room to manoeuvre. Your savings to date have already given you some breathing space which is to be commended.

Better than my accountant who kept telling me to never sell when I was getting close to line.....

But seiously...room to manouver being the operative word. One property per year is not unsustainable, I believe, with todays prices..even when they are dropping.

But using your equity as long as you CAN AFFORD it, is great advice. Go easy and get used to being a landlord for a year or two at least. You may not have to wait 7 -10 years and you certainly don't need to wait for it to double.

As to renting again, I will soon be that renter and have realised we can claim alot of it back. Considering both hubby and I work from home alot.

Regards JO

 

[Witzl]

Both Jo and HiEquity are right - only do what you an afford, and what suits your investing style and go as fast as what you are comfortable with.

Rixter's strategy is quite safe and balances out the risks, as HiEquity pointed out.

With your ability to save, combined with a long term strategy in place - you are going to do really well i think

 

[Alex P Keaton]

Kim,

since you already have equity in your PPOR - why dont you refinance it and use that equity as the deposit on an IP now? Why wait all that time for your PPOR to increase in value, whilst at the same time all other properties are increasing in value? If you increase your exposure now, you will reap the rewards of CG on not only your PPOR, but also on your IPs.


I dont agree that its hard to go from property 1 to property 2, especially in your case where you have so much equity.

You are in a similar position to what we were about 1 year ago. We have a townhouse we were living in, which had a $225K loan against it. We moved out, and got it revalued for $315K.... so we took out a new loan for $285K (about 90% LVR), and we are now using that $60,000 as the deposits for two IPs.

We just looked at a place yesterday which we've negotiated for about $230K. It will rent for about $270/wk. Based on interest rates of 7.75%, that will cost us about $60/wk - chicken feed!

In your position, you have a $170K loan, on a $250K house. A 90% LVR will give you $225K loan, which is $55,000 in your pocket to use as deposits for your next IP purchases.



Think about it, and perhaps see what that accountant thinks.
Then ask that accountant just how many IPs she has.

Hmmm perhaps I should see someone else, get a 2nd opinion. I want to be relatively conservative/safe, but maybe I could afford to do this in a couple of years time instead of 7-10 years. I want to build a bit more of a buffer in my savings account first. I have 20 K in there atm. Perhaps when my property is valued at $300 K I could then go buy an ip. I'd have $123 in equity then, and your right i would own two properties to ride the next boom.
I just dont want to overcommit myself. I'm on a lowish income.

 

[artemis]

Just a few comments to those who make the points that renting is bad because you have to move all the time and there are always inspections.... i think thats a pretty lame reason.
If you're a good tennant, your landlord will want to keep you. You can also request to have longer leases, and openly discuss with your PM/landard the fact that you wish to stay as a long term tennant. Why would a landlord want to get rid of a good tennant??
Inspections are also there for your benefit as much as the landlords. If things are aging and in disrepair, an inspection will notify the landlord. Plus.... they are once every 3-6 months. Big whoop.

hmmm!
i was an excellent tenant in all three properties i rented.
the landlord could NOT afford to keep the property, and thus sold to an owner occupier.
this happened three times.

nothing to do with how good or bad i was, just sheer finance.

having to find another place to rent was distressing to say the least. having to go to open inspections, at times with a multitude of other people in the same boat as myself, was at minimum stressful.

please don't trivialize the rental process.
good tenant does NOT always equate to long term lease

 

[Witzl]

I think thats just a case of terrible luck!
However, if i was in your shoes i would probably say the same thing.

I guess Im lucky in that ive never been in that situation.

 

[RumpledElf]

After doing the calculations she explained that because I have a $177 K loan and already have about 70% equity it wouldn’t be very profitable for me to rent it out. It would be a different story though if I had borrowed the whole amount. (which was approx $250 K Purchase price) So based on her calculations basically I wouldn’t be any better off to rent it out and then go rent somewhere myself.

This makes no sense. If I have 50% equity in my IP and it is rented out, it should be far more profitable than if I had a 100% loan. Negative gearing means you are *losing* money on your house, not that you are gaining it, and it has nothing to do with your income. Sure you claw some of it back in deductions and the deductions are more if your income is higher, and some of the outgoings may be depreciation schedules so not actually 'real' money going out, but the whole point of negative gearing is that you have more outgoings than incomings and in anyone's definition that is NOT profitable.

And the posters above are right, you have $20k in savings and $55k in equity already you could put on another house that if chosen correctly could pay for itself. That's not to be sneezed at. Waiting 10 years before you dip into that equity seems kind of ... pointless. Might as well just rent and save the difference, you'd get ahead faster like that. Shame you didn't buy a 2br house, you could have rented out a room to a mate and saved a minor fortune.

 

[Witzl]

Hmmm perhaps I should see someone else, get a 2nd opinion. I want to be relatively conservative/safe, but maybe I could afford to do this in a couple of years time instead of 7-10 years. I want to build a bit more of a buffer in my savings account first. I have 20 K in there atm. Perhaps when my property is valued at $300 K I could then go buy an ip. I'd have $123 in equity then, and your right i would own two properties to ride the next boom.
I just dont want to overcommit myself. I'm on a lowish income.

Do what suits you, and your personal risk profile.
I would prepare myself with a plan now though, as suggested by others already, so that when you are ready, you know exactly what to do, how to do it, and you can pounce instantly.

If for you thats 2 years away, or 2 months away - thats entirely up to you.

Me personally - i would be buying another two IPs with that equity, and maybe renting out a room to a student in your PPOR (if you have the space). However I dont know what your cashflow position is, so its really not my place to say
You need to work out what you can afford in cashflow terms, as the deposit seems to be a non-issue for you with the equity you have.

I also agree with Rumpledelf - that comment from the accountant doesnt make any sense to me. I think your accountant is thinking like an accountant, and not an investor.

 

[vbplease]

hey Witzl,

Just thinking out aloud - your strategy sounds a bit aggressive for the current conditions. If you intentially negative gear now, you may be waiting a while for capital growth to catch up. Worst case scenario, prop prices fall more than 10% and your 90% LVR changes to more than 100% - how likely would the bank want to foreclose? not sure..

But property prices falling at all is anybodies guess..