Renting Makes More Financial Sense Than Homeownership

[our obsession]

Rob Williams:

Which really underpins my long standing belief that mindset is the all important factor.

This, this is the most fascinating thing, people, choices, mindsets!

How is this? How is it that such a small percentage of people get into property investing, and why is it such a tinsy percentage after that that keeps investing in property?

I don't expect an answer, I know it is many fold, how long a piece of string reply...but it is so fascinating, and then within property investors, the sheer difference of ideas, attitudes and strategies...

Mindset is very powerful, the ability to develop, redevelop, strengthen our weaknesses, learn, delegate, prioritise, it's kinda this driving force thing but also the ability to be flexible of the mind, a regroup thingo...because there is a lot of problem solving stuff to do.

The ability to turn lives around, make good out of bad, strive for the goals, mindset, mindset, mindset...is it the most powerful human trait? It doesn't just apply to property investing either. Maybe it's related to some kind of hyper survival/betterment instinct? Or is it a complex eternal curiousity? Open mind?

Mindset. What makes us what we are?

 

[crc_error]

No worries,

This is not a facetious question but, how are your shares now?

Regards JO

how is your PPOR now? have you put it up for Auction lately?

 

[josko]

how is your PPOR now? have you put it up for Auction lately?

'Sounds facetious to me CRC!

"Lately", I have put it up for auction yes.

The sign is not up, advertising is on it's way. It will be interesting I admit. I also don't expect to sell at auction, just hope to get someone interested enough to negotiate.

Worse still, the neighbour across the road passed away and her family wants to cash in! Deceased estate anyone?

VB, I used my PPOR property for leverage.....maybe a little too much!

Regards JO

 

[josko]

I pulled out all of my longer term holds abit over a year ago, since then
I have made fewer smaller trades over a shorter time period recently,
and made a small amount but managed to protect my capital and
make interest in cash along the way.
I was on a trading forum sometime ago and expressed some concern
about the XAO chart mainly that it was rising to fast, others
thought it was fine because the economy at the time was doing
so well I guess i dont need to explain how that turned out.
I admit its much easier to loose money atm and not as many buy
signals but not all stocks/sectors have seen the waterfall declines.

Thanks for replying......glad you were able to cash in a year ago.

These certainly are interesting times! I never thought I''d EVER buy shares and I actually bought bank shares about a month ago.

Regards JO


Regards JO

 

[Alex P Keaton]

...thanks Jen...that's exactly what i was trying to get across to Kim....

So Kim....do you want to claim no CGT
...do you want land tax with that too.....
...do you wish to take advantage of renting your PPOR out for 6 years (you need to live in it 1st before renting it out) and still qualify for CGT free when selling this property...as well as being able to claim the usual deductions as per IP during this 6 yr period....so long as you move back into it (after the 6 yrs) and continue its status as PPOR...?

If you continue to rent it out then ATO may never allow you to deem it a PPOR at any time.....they go on what was your 1st intentions for this property...not what you think otherwise....Accountant should help you with this....depends what you want out of it in the end....

This was also my concern...you had not quite thought this whole plan out completely...you need to because it's your steppingstone to your future investing and it needs to be setup right in the 1st place.....

Good luck Kim, just go carefully and make the right decisions in the beginning...it's an exciting trip for you I can tell....

Hi Jen, and Thorpey



I dont plan to sell the property. I'd only sell if I was in financial trouble.

The reason I am going to rent it out first is because I will be able to save more money staying at home with my parents. I only pay a small board. In the long run I think its worth it to rent it out first before moving in.

I have made an appointment with an accountant. I have a financial health check where I'll discuss all these matters. I am also going to a free wealth creation day course at work (I'm a public servant) I cant wait!! Should be excellent. I went to the first one it covered a little about wealth creation, but also managing debt and stuff. (bad debt) etc. This 2nd course will be entirely focussed on wealth creation. If your in a state goverment department get in touch with your HR and see if they run these courses. If they arn't at present, request it. I highly recommend it

 

[wakamole]

I'm certainly no accountant but I do trust that this guy, Travis Morien, knows his stuff.

http://travismorien.com/invest_FAQ/content/view/250/63/
If you DO have a PPOR I read here that (using old tax scale but easily worked out to the current) paying off your PPOR early would be like an pre tax return of over 12% guaranteed!

"Saving 7% is the same as earning 7%. Remember that as a home mortgage is not a tax deductible expense so that 7% saving is the same as earning 7% after tax. To earn this much as an after tax return you would need in most cases to make a much higher gain before tax, if you were on the 43.5% marginal tax rate 7% after tax corresponds with a 12.39% pre tax return (assuming a 100% tax liability as you would get if this was an interest paying investment - for capital gains type investments the actual tax take would be lower)."

shuffling the numbers to a bit to 9% mortgage and 40% tax bracket and it still works out @ 11% or so

 

[yieldmatters]

I'm certainly no accountant but I do trust that this guy, Travis Morien, knows his stuff.

http://travismorien.com/invest_FAQ/content/view/250/63/
If you DO have a PPOR I read here that (using old tax scale but easily worked out to the current) paying off your PPOR early would be like an pre tax return of over 12% guaranteed!

"Saving 7% is the same as earning 7%. Remember that as a home mortgage is not a tax deductible expense so that 7% saving is the same as earning 7% after tax. To earn this much as an after tax return you would need in most cases to make a much higher gain before tax, if you were on the 43.5% marginal tax rate 7% after tax corresponds with a 12.39% pre tax return (assuming a 100% tax liability as you would get if this was an interest paying investment - for capital gains type investments the actual tax take would be lower)."

shuffling the numbers to a bit to 9% mortgage and 40% tax bracket and it still works out @ 11% or so

Yes - Travis is spot on. The tax thing is important - as he says you save 7% or more after tax which is pretty good when looked at on a pretax basis.

Here is another source (albeit far more pro renting) where the tax impact is mentioned:
http://www.bubblepedia.net.au/tiki-index.php?page=HousingMyths

A footnote to this point is the effect of tax complicates the analysis. Investing your money in your own house gives you a tax free return - shelter (or not having to pay rent if you like). Investing your money elsewhere and using the proceeds to pay rent generally attracts a tax liability depending on your own circumstances. Nevertheless due to the enormous gap between rental yields and interest rates even after the most severe tax effect it is hard to argue against renting.

The tax impact varies though depending on your own circumstances. I am on the highest tax bracket but my wife is a stay at home mum. So the tax impact is not so great - we can rent and park the capital elsewhere and not pay significant tax. Of course there is a limit to this - if there are enough investments in my wife's name she will also be on the highest tax bracket - but that is many years off! You would need nearly $2M in investments I think to get to the highest tax bracket just on income! So one way to look at it is while the tax impact is minimal you can take advantage of renting, once it becomes significant go ahead and buy.

edit: afterthought - not sure about the 7% post-tax figure though. Wouldn't it be the current rental yield? that is, you are saving 4% (in the top end anyway) post tax by investing capital in a PPOR rather than renting the house.

 

[Trogdor]

edit: afterthought - not sure about the 7% post-tax figure though. Wouldn't it be the current rental yield? that is, you are saving 4% (in the top end anyway) post tax by investing capital in a PPOR rather than renting the house.

Its a good point.

For example, if you spend 20k pa on rent, you would need to earn from investments 20k / (1 - marginal tax rate) to be able to pay tax, then your rent.

E.g. for somebody on 30%, 40%, and 45% tax rates:

20k / 0.7 = 28.5k (30% tax)
20k / 0.6 = 33.3k (40% tax)
20k / 0.55 = 36.36 (45% tax)

So for somebody on the highest tax bracket they actually would need 36.6k investment income to pay 20k rent.

However, all of this neglects tax benefits from various investment types (i.e. dividend franking credits, IP depreciation allowances, etc..) which usually erodes a lot of this gap!

 

[eastside]

I have read the posts with great interests, and of course to be able to invest in property and get ahead one must have a certain determination and mindset and be prepared to sacrifice for long term gain.
However in certain parts of Sydney, to be able to rent is becoming a harder achievement than to buy. We have gone from paying $450 per week for a house, to $750 per week in the space of 3 months, and now the house 3 doors down from us has just had its rent hiked up to $2200 PER WEEK. That is $2200 per week rent! They will probably get away with it, because it is nearly impossible to find a home to rent now where we are, whereas 3 years ago you could not even attend the open days of all the houses listed as there were so many to choose from.

As such the following statements:

Which really underpins my long standing belief that mindset is the all important factor.

This, this is the most fascinating thing, people, choices, mindsets!

Need to be qualified to be exempt from certain areas of Sydney.

It is difficult getting the time off work to find a new rental, and the 12 monthly lease is a big stress factor knowing that you may have to move out and try and find somewhere new in another 12 months. Who wants to spend their annual leave doing that? I would just like to point out to all of you that not everyone can move way out west due to their job requirements (such as being on call). If you ask for a 2 or 3 year lease you get turned down (we tried several times with no luck, offering to pay lots more rent to get some stability). Some forum members might be interested to hear that people are switching jobs (or just walking away from them and moving overseas) as they are so stressed by the housing market in Sydney.
Renting while you buy investment properties is a great idea and worked really well, but in Sydney is no longer practical. We practised it ourselves for years. But now you need to change your mindset if you want to have annual leave left for a holiday, not to compete at opens.

 

[Peter Parker]

However, all of this neglects tax benefits from various investment types (i.e. dividend franking credits, IP depreciation allowances, etc..) which usually erodes a lot of this gap!

Plus the different yields obtainable. Eg you can rent in a posh area where you're paying your landlord only 3-4% (based on current value) but buy IPs that yield 6-7% or more in ordinary areas.

The person who can afford only 1 PPOR suddenly is able to afford 2 IPs in the same area, or probably 3 or 4 IPs in a higher yielding area, the last two options if they rent their PPOR.

The supposedly lower growth of higher yield areas can be offset by either of smart buying, value-adding or being able to afford a bigger portfolio (as rents cover most expenses), so the dollar value of growth can still be high with more sooner.

 

[silversands]

Hi all.



Just wondering why in Margaret Lomas' e.g Vince and Stephanie don't have increased rent factored in over the 10 year period? I wouldn't want to be their LL! $36 400 yr 1 and still $36400 in year 10.

Margaret offered a great case regarding the pro's of renting vs buying but what a whopper of a flaw!

Regards Jodie

 

[wally]

We have gone from paying $450 per week for a house, to $750 per week in the space of 3 months, and now the house 3 doors down from us has just had its rent hiked up to $2200 PER WEEK.

What suburb is this? or what is the market value of the properties?
I wonder what the repayments are on the $2200 pw property

I can understand where you are coming from though, its not fun search for a rental place in sydney at the moment.
My plan was to rent for 5 years while still "young and free" and maximise IP exposure but i am probably going to buy a PPOR next instead and bite on the lost cashflow. Too much stress and hassle.

 

[Peter Parker]

Hi all.



Just wondering why in Margaret Lomas' e.g Vince and Stephanie don't have increased rent factored in over the 10 year period? I wouldn't want to be their LL! $36 400 yr 1 and still $36400 in year 10.

Maybe I struck it lucky - my rent was $115pw in 1998 and just $125pw in 2008!

But assuming Vince and Stephanie bought IPs then the rent increase would be more than compensated for by received rent increases on their IPs (assuming the IPs purchased aren't unrentable dumps).

 

[devo76]

Rent makes more financial sense if you save or invest the difference. Its as simple as that.

 

[crc_error]

If you rent, you pay 3-4% of the property value PA.

If you buy, you pay 8% to the bank plus thousands of dollars of your own money.

If you rent and invest the difference, you should make 14%PA from your investment over the long term.

Or rent, and BUY IP.

 

[silversands]

Nice going Spidey,

I'm glad you're on such a sweet rent ride! But you'd think M. Lomas would've factored in at least some rental increase - considering rent was to begin at $700p/w. I can't see to many ss'rs not even passing on inflation costs!

fwiw I think renting is a better option for those not being emotive, but I would have expected a more accurate example.

Regards Jodie

 

[rogue]

What if some of your shares happened to be
Rent is dead money, no investment at all.....wasted cash....

So what is interest/holding costs?

PPOR is CG free investment giving a lever for further investing....

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.

 

[eastside]

In response to Wally's question, in regards to my earlier postings in this forum,
the suburbs we are renting in are Randwick/Queens Park/Bondi Junction/Clovelly.
I can understand that people not familiar with the area may be under the impression that for $750 we are renting a 'flash' place but that is not the case.
The place that was $450 per week had a leaking roof, we lived with buckets and mould for over a year and whenever we requested repairs the agent told us 'be glad you have a house and stop whining'. So we moved out to another house where we paid $560 per week, and within a month the owner evicted us after having a D/A approval come through to build units. We moved again, each time there were fewer and fewer rental houses to pick from, we now pay $750 for a 2 bedroom house(no garage, no pool, no TV aerial so very poor TV reception - nothing 'flash') the door locks were broken and we repaired them ourselves when we moved in. And may I pre-empt the repsonses on this forum by explaining that we wanted to stay in the area because we work long hours on call close by, and also have needy elderly parents living in this area who require caring which with the long hours we work we just do not have the energy to drive long distances to look after. However we are now looking at moving everyone (the entire family, several households) from this part of town as it is obvious that this is no longer an area suitable for renting, even though we have lived here for many years. The area is too expensive to buy in, houses range from 1 million to 3 million, so of course if you do want to live in this area it is still cheaper to rent. But also very stressfull now with the housing shortage.
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.

 

[our obsession]

Eastside:

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.

I sincerely hope it works out okay for you and the family too, sounds like it's been pretty stressful times.

 

[CHISEL]

It's not all about "money"

At times i feel a percentage of people on these forums are some kind of investing mutant who care only for their yields and how many IP's they can hold at once!!! RAHHHHH

Im sorry but i don't see how any normal successful settled person would choose to rent instead of buy a PPOR. Who wants to live in someones IP where they can be kicked out on a whim or have agents check up on them - that must be very unsettling.

It's called having a BALANCE people.


!

ok180

This view is probably based on the product you invest in.

My wife an I always have the view that If we are comfortable living in our I.P. the we buy it.

Their are a couple of urban myths about renters.

one of them is most renters live in apartments or high rise.

In fact although most apartments comprise renters, Most renters rent houses.

CHISEL