For decades it’s been said that “rent money is dead money”. The idea has been to own your home rather than rent it. But that doesn’t make sense from a financial perspective. It is actually far more likely that:
“Home mortgage money is dead money, not rent money”
It is more beneficial from a financial perspective to rent where you live than to own.
The problem with owning your home is that it’s highly unlikely it’s the best asset your money could buy at any point in time. Out of the thousands of suburbs around Australia, what chances are there that the suburb you want or need to live in, is also the best suburb for your investment dollars?
And once that property market falls out of favour, perhaps goes through a slump, will you offload it like any other underperforming asset? Or will you be tempted to hang on to it since you live in it?
What’s more, there are numerous tax benefits for investors that home owners cannot claim:
- Mortgage interest
- Repairs and maintenance
- Council rates
These all make owning a rental property tax efficient compared to owning your home.
Owning an investment property while renting where you live is called “rent-vesting” because you’re renting while you’re investing.
I first started rent-vesting in 2004. I had 6 investment properties back then, but I didn’t own my principle place of residence. I realised that it was better to own in a growing market and rent close to work, family & friends.
Also, I prefer living in a unit because of the ease of maintenance. But houses make for better investments.
I was able to claim a tax deduction on all the expenses these investment houses incurred which was very tax efficient. But more importantly, they grew in value at a faster rate than the value of the unit I was living in.
Also, the yield on the houses I owned as investment properties was actually better than the yield my landlord was getting.
Not all roses
Occasionally, as a renter you’ll get a notice to vacate. And while you’re renting, you can’t renovate to your personal taste.
Is it worth it?
The difference in growth over the next 5 years between a carefully chosen investment property and the value of the property I’m renting as a tenant, could literally be hundreds of thousands of dollars.
Some markets will be flat while others are booming. I don’t need to live in the booming suburbs, I just need to invest there.
But that period of accelerated growth doesn’t last forever. I’ll offload if I don’t think future growth prospects are as good as I can get elsewhere. It’s easier to sell an investment property than it is to move.
Rent money is not dead money. Home mortgage money is more likely to be dead money because it’s unlikely to be the best investment you could own for your money.
If you’re struggling to get into the property market, especially because you’re in pricey spots like Sydney, you can own an investment property elsewhere in the country for half the price. And depending on your timing, you could end up with twice the growth.
Owning your own home might be considered a luxury since it could be holding you back financially.
“Home may be where the heart is, but you should own where the ROI is”
Jeremy Sheppard is head of research at DSRdata.com.au.
DSR data can be found on the YIP Top suburbs page.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.