Which is better - To live in your own property, or rent it out and rent separately

[BLTN]

Hi all,

This is an issue that comes up somewhat frequently and I've tried to analyse it from time to time. I was just seeking some input from people on here as to what their views are. I am trying to work out whether it is better to live in one of your properties, or rent it out and rent somewhere separately. Let's start with some assumptions:

- Interest repayments each year of say $20K
- Rates, building insurance and maintenance of say $4K combined total each year
- Rental return of $500/wk = $26K per year
- Similar rent of $26K per year if you chose to rent elsewhere
- Marginal tax rate of 35%

Now on paper, whether you choose to live there or rent it out and rent separately, both seem to have the same approximate cost of $24K per year:

- Renting it out while renting somewhere separately incurs $50K in costs, but yields $26K in income (with exactly $26K in offsetting deductions) resulting in a $24K loss for the year.
- Living there incurs $24K in costs, but yields no income (or deductions), resulting in a $24K loss for the year.

However there are other considerations:

- You might choose to rent somewhere cheaper for say $200/wk
- You might choose to rent a room in your house even if you do live there.

Ignoring the CGT impacts for now (as you could claim the property as your MR in both instances, provided you don't have another one), is there any real benefit of one approach over the other? Also ignore lifestyle factors, and the fact that living in your own home gives you more certainty about your living arrangements (i.e. you can't get kicked out).

Just wondering what people's views are on this? I had always thought that it was more tax effective to rent separately and rent out your house, but the numbers don't seem to support this unless you have a favourable combination of the following:

a) There is a big difference between the rent you could collect from your property and the rent you would personally pay if you chose to rent somewhere yourself
b) There is a large depreciation deduction available on your property
c) The property is negatively geared

 

[LoneWolf]

So in summary, you can considering having someone else's paying for your mortgage, while at the same time you taking on and pay for someone else's mortgage?

 

[thatbum]

Ah the age old debate. I swear there was thread on this recently - and everyone has their 2 cents.

Mathematically speaking, I think its actually pretty clear that renting is better once you factor in the typical residential yields in most capital cities in Australia. I think you perhaps have forgotten to factor in that you can rent a better house than you can buy for the equivalent equivalent mortgage interest payments + capital opportunity cost.

The disparity gets even bigger if you are choosing to live in bigger and better houses.

Its those other non-financial factors that can make the line blurry.

 

[beachgurl]

When we rented in Sydney we were much better off financially. Rental yields are quite poor in comparison to house prices around here. If my hubby was ok with renting and there was good stock to choose from, it would be a no-brainer for me.

If I decided to move back to the coast the price difference would be massive. For the cost of my current mortgage I could rent a little house in the lower eastern suburbs.

From the perspective of a lender you'd generally have increased borrowing capacity too, as the majority load the interest rate of your home loan. On the condition that your property gets reasonable rent, there should be a noticeable difference in capacity to borrow for future investments.

 

[Terry_w]

Renting is usually better from a financial point of view especially in the early years as once depreciation and borrowing costs are taken into account there is often a loss which can then be used to reduce other income.


However over time rents rise and depreciation etc decreases and it will then be more expensive to rent a similar house.

 

[DaveM]

From a pure cash flow point of view, renting usually wins in the short to medium term.

But one of the main advantages of buying is you fix your cost of living for the future. Repayments kick along based on the price paid (unless you continually access equity), so in 10 years when rents have gone up by CPI+ every year, and for the next 20 years etc after that, you are still paying the same mortgage amount while renters are paying more and more in relative terms.

 

[almostthere]

I came up with exactly similar number just recently ..but finally choose to go with renting it out and rent myself separately..just to avoid the hassle of moving and for the convenience of being closer to work (though just by 2kms ) ..but no financial benefit as such ...

Here is my thread :

http://somersoft.com/forums/showthread.php?t=101526

 

[D.T.]

Renting for me would be
-cheaper (save money)
-closer to work (save time)
- increase borrowing power for IPs (non deductible debt)

Yet I still choose my own place for the certainty of not being kicked out and for lack of inspections.

 

[DaveM]

Yet I still choose my own place for the certainty of not being kicked out and for lack of inspections.

And for ease of access to the front kerb

 

[BLTN]

Thanks for all the replies. It looks like I pretty much had the right factors in my analysis, although I hadn't considered servicability. This is actually a big one for me given my low income relative to my equity.

I think the decision to live in briefly and then move out is probably optimal for my circumstances, as:

- I could (and would) choose cheaper alternative accommodation
- New building means high depreciation deduction
- Increased rental income should give better serviceability

The property will probably be highly positively geared though (and depending how I set it up, might not even have a mortgage) - on this basis, it is far more effective to live in it rather than rent it out. I will just have to see how this goes and how I set it up in terms of whether it is better to live in it or not.

 

[citystar]

When I started my investment property journey I took it one step further. I lived in shared accommodation which is a huge sacrifice of privacy but splitting rent, water, electricity and internet four ways makes a huge difference to the cash flow. I only did that for a few years, this gave me the deposit for my first two investment properties along with other budgeting strategies. I then moved out and rented my own apartment and slowly saved for the third investment property. Mind you, I did all of this while single and without kids. This is an important thing to note. Several years later I no longer live in a rental, it was time to buy a house well below market value that needed a good renovation. Enjoy renovating the house I now live in because I can choose to renovate the interior exactly the way I want it.

 

[BLTN]

When I started my investment property journey I took it one step further. I lived in shared accommodation which is a huge sacrifice of privacy but splitting rent, water, electricity and internet four ways makes a huge difference to the cash flow. I only did that for a few years, this gave me the deposit for my first two investment properties along with other budgeting strategies. I then moved out and rented my own apartment and slowly saved for the third investment property. Mind you, I did all of this while single and without kids. This is an important thing to note. Several years later I no longer live in a rental, it was time to buy a house well below market value that needed a good renovation. Enjoy renovating the house I now live in because I can choose to renovate the interior exactly the way I want it.

That is exactly what I would do (see the first point in my post above) - there is no way I would pay $400-500 per week rent!!

I'd most likely share a 2 bedroom apartment with someone (say $200-250 per week tops), or possibly rent a room for sub $200, but I'm not sure I'd want to live with too many people either.

Of course, I could always rent a room in my own place if I choose to live there, but that has tax implications that make the whole situation quite complicated.

 

[Bandita]

It depends on your age, your lifestyle, and your family situations (i.e.kids??)

Renting out our properties and renting ourselves was/is absolutely the best way for us to go (financially) when we were DINKS, we saved bucket loads, bought more IPs, did very well.

Then we had kids we bought/moved into our own PPOR, and stopped renting.....kids just change things. They are far more expensive, and you have a gut nesting instinct to keep them secure and stable, which usually means if you can afford it, you want to keep their home stable, which can often mean a PPOR that you live in. You don't want to rent if you don't have to.....but you will save far less once you stop renting.

Saying that, I feel in the next few years, we may rent out our PPOR and rent ourselves.....I struggle with this a lot, we shall see!

 

[Bandita]

Oh, and when we rented, we always rented for less than our IPs did

 

[albanga]

I have been thinking this same thing but my numbers just do not seem to stack up in favor of moving out? Can anyone shed some light on my situation to see if I have missed something?

My situation is quite unique though as I own my property 50/50 with my brother. We both lived in the property since settlement for over 1 year so are CGT but he has since moved out and is now renting with his new partner.
I have remained and now pay him $140 a week (which is about $50 for his half below market value but he has stuff kept for storage, pays no management fees, maintenance as I fix the problems, (i realise he could claim this) no vacancy).

My current mortgage IO is 280+140 rent is $420 a week.
Now if i were to rent out the property at market value I could get $190 - 10% holding (20% but half with my brother) so round it to $170 a week. If I then deduct that from the mortgage it would mean I would be -110 per week. So really it leaves me with $310 extra to try and find a rental property.

Now i understand I would get tax benefits which I am unsure how much as it is an old house but let us say it is $60. That means I now only have $370 to find a rental property with which would mean a worse property not to mention the hassles of renting.

Am I perhaps missing something?