Expert Advice by Paul Wilson
“Rent money is dead money”. You’ve heard it before and there is some truth to it – rent money can be dead money. But sometimes, renting your home is actually the best way to get ahead in the property market. It may sound like I just contradicted myself, but let me explain…
Let’s say Tim rents his home (or a series of homes) for 20 years. They are nice homes, affordable, clean and tidy – but they are always rented. For two decades, he helps to pay off someone else’s mortgage and he has no asset of his own at the end.
I think in this situation, it would be accurate to describe his rental payments as “dead money”.
His next-door neighbour Chris is also renting. Chris has also been renting his home/s for 20 years. However, Chris also owns an investment property. In fact, he owns a few of them. In this case, in my view, Chris isn’t throwing dead money at his living arrangements.
Instead, by renting Chris is able to leverage his money so that it works harder and smarter. By renting, Chris can cap his bad debt and as I teach in my book 7 Deadly Mistakes Property Investors Make – and How to Avoid Them, leverage is the ultimate way to create wealth. For people like Chris, renting is a very strategic and savvy choice that allows them to leverage their money by maximising how effectively it can work.
The truth is, often the house that we want to live in – the one with extra bathroom, two living spaces and a lock up garage – may be out of reach if we want to buy it. But, it can be affordable to rent.
To put a real world spin on it, consider the Sydney suburb of St Leonards. Located right on the train line, it’s about a 20-minute journey from the CBD and is a popular suburb with young professionals, couples and small families.
Here, a two-bedroom apartment will set you back at least $700,000. On a principal and interest mortgage at a modest interest rate of 5.5% (assuming a 10% deposit) that equates to around $800 per week – not including associated property ownership expenses such as council rates, insurance and strata fees, which would bump this figure up closer to $1,000.
To rent that same home, however, would cost you around $600 to 700 – a saving of $300 to 400 per week, or $15,000 to $20,000 annually. Therefore by renting, you can afford to live in a home that would be much more expensive as a homeowner.
Instead, you might decide to buy a one-bedroom apartment in the same suburb, at a cost of $450,000 to $500,000. You now own an investment property in a growth suburb, but you’re able to write off the majority of your ownership expenses to tax.
Better still, you’re living in a bigger home more suited to your needs. In this scenario, rent money is definitely not dead money. On the contrary, renting could be your best decision, as it will help you to both live the lifestyle you want and get ahead financially – a win-win in anyone’s book.
Paul Wilson is an Independent Property Investing Expert and the founder of We Find Houses, Educating Property Investors & We Find Finance. Paul has been educating and coaching investors since 2001. Paul provides valuable, independent guidance and support by teaching strategies on how you can invest successfully while protecting yourself from commission hungry sales agents and property spruikers. Protect yourself with knowledge, contact Paul today for a complimentary consultation on 1800 600 890 or email firstname.lastname@example.org
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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.