It’s a common belief that renting a home – as opposed to buying it – is shelling out ‘dead’ money. But there are other factors to consider, says Richard Sheppard
Undoubtedly, continuing to pay rent while not investing won’t see you achieve financial freedom anytime soon. However, if you do invest in property, it is usually better to rent the property out and continue to rent yourself.
There are several reasons for this:
- You can claim all the holding costs (and some set up costs) on tax.
- You can buy property in areas that are more likely to achieve better growth than where you want (or can afford) to live.
- You can buy at the optimum price range best suited for higher returns.
1. Claiming holding costs on tax
When you rent out a property, it officially becomes an investment property. This means you can claim all the holding costs (and some setup costs, like mortgage insurance) less rent received, as a tax deduction. This reduces the cost to hold the property. Rent will eventually increase until it exceeds the costs and then the property becomes positively geared. For high growth property in most capital cities, this will take four to eight years. Therefore, it is generally best not to live in the property during this time, other than for six months if you are a first home owner.
2. Buy in higher growth areas
Over the last five to six years, there has generally been little or no growth for property on the Northern Beaches compared with a relatively high growth in other cities. On a $500,000 property, a 50 to 100 per cent increase in growth works out at $250,000 to $500,000 more equity over four to six years. This can compound to $500,000 to $1 million over the next 10 to 20 years. That is why buying wisely is often much better than buying locally.
3. Property in optimum price range
In an investment sense, there is definitely a price range that will help you achieve a better return on investment. This price range is largely based on how much the banks will lend against certain property values, but it is also about better relative rents, more consistent capital growth, faster growth, and diversification.
The optimum price range is generally $300,000 to $525,000 – if you spend less than this then you risk poor land content and quality, but spend more than this and the banks will want a larger deposit or equity. It can take so long to save this deposit or build the equity that you risk missing capital growth in the meantime.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.