Owning your own home is a quintessential part of being an Australian, and the idea of home ownership was sold to us for decades as being a smart financial move. It’s easy to see why: home ownership gives us a sense of security; it is free from capital gains tax; it provides a hedge against inflation; it’s just the way things are done here, mate.
Purchasing your own home can mean borrowing money at unprecedented levels and stretching yourself to your financial limits, so the coin has well and truly flipped and we are now being told that ‘#rentlife’ is the new way of living and the smartest financial move (probably), especially in capital cities.
The truth is that neither renting for life nor buying a residential home is fundamentally good or bad, smart or dumb, and what you end up doing will depend on individual circumstances together with rent prices and interest rates.
But perhaps it is time, as we move well into the 21st century and see many property market traditions beginning to change, to rethink home ownership and how best to protect your financial future.
This article explores the benefits of renting rather than buying, because buying a home to live in just for the sake of tradition, especially if you’ve crunched the numbers and they don’t add up and you’re going to be house poor, is fairly pointless. Rent money is not dead money, as is often touted; after all, that rent money gives you a place in which to live.
There are a number of good reasons to invest first and worry about buying a home later, if at all.
Getting into the market now. You might not have enough of a deposit to purchase your dream home in your dream suburb, but you may well have enough to purchase something cheaper somewhere else. This means you can start building on your wealth sooner rather than later and move closer towards achieving your financial goals.
Living where you want. As the location in which you want to buy a home is most likely out of your price range, it makes more sense to rent in the neighbourhood of your choice - where rental yields are probably low which in turn makes it cheaper to rent rather than pay a mortgage - and buy an investment property in a more affordable location where the buy-in price is lower and rental returns are strong.
Building wealth faster and easier. Many investors find that the cost of servicing their investment property is minimal, with the rental income and tax concessions covering most, if not all of the cost of their loan commitments and other expenses, while at the same time building precious equity, which is key to financing future purchases and accruing wealth.
Buying smarter. When you have a rational investment mindset from the get-go and don’t purchase based on emotion and sentiment, you are much more likely to set yourself up for a fruitful wealth creation journey. A well thought-out investment property purchase will accelerate your wealth-building process much more effectively than will the property you might choose to make your home.
Australian investors are rewarded by the government. Conservative government projections put our population at an expected 30 million by 2030, and all of these people need somewhere to live! Our country has a great need for well-located residential property to house the expanding population, and Australian tax laws are friendly to people who invest in real estate. You can write off investment expenses against taxes, lowering your tax bill and offsetting the shortfall between your rental income and holding costs. As well, depreciation can earn you thousands of dollars over a period of several years and can turn a negatively geared property into positive cash flow.
Sometimes it’s just smarter to rent, but whatever you decide to do it is critical you do your research, get educated and go over your numbers. Working with a team of professionals is at the absolute core of being a successful property investor.