While many people think rent money is dead money, the concept of handing over your pay packet to the landlord each week may be a better financial move than you may think.
By itself, paying rent can be a futile exercise if you’re looking to get ahead, however disregarding renting as an effective investment strategy can be like throwing the baby out with the bathwater.
Consider these two scenarios:
On the one hand you have chosen to invest in your own home, paying down the mortgage from your own pocket.
On the other hand, you could choose to stay renting, purchase an investment property elsewhere and use the rent collected from your tenants to pay the mortgage on the investment property.
In each scenario you have invested in a property, and in each scenario you are paying down a mortgage. The difference lies in where the money is coming from to pay the mortgage.
While it’s true that in the second scenario you would be paying money to a landlord, you now have additional income to consider that the first scenario didn’t – rent from your tenant.
It’s this additional income that often means that renting the home you live in can make more sense financially than getting stuck paying off a mortgage on your own home. There are a number of factors to consider if you’re looking to pursue this scenario however. Let’s take a look at some of them here:
Live where you want – If you’re renting you have the major benefit of being able to choose where you want to live and for how long. Don’t like the suburb? Move on. Having a growing family? Rent a larger house. Downsizing for the future? Trade the house in for an apartment.
Live in a better home – Many people live in the home that they have chosen because that’s the limit of the mortgage they could afford to pay. Rent is often much cheaper for the same style of home though, depending on the market interest rate, and you’re also not required to pay land tax, strata fees or general upkeep of the building in order to live there.
Ability to adjust your budget – Mortgage repayments can be one of the biggest financial strains on a household. While you can slowly pay the balance down over many years, the first 10 years are often a struggle. If you’re renting though, you can adjust your budget accordingly. If your financial circumstances change you then have the ability to move down (or up) to a property that’s more suitable for you financially.
Tax deductions galore – Very simply, repayments on a principal place of residence (PPOR) cannot be deducted. On the other hand, interest repayments from an investment property are fully tax deductible so you can end up making some great savings when it comes tax time.
Greater profit potential – You love the suburb but would you invest there? While it may be a great place to live, your money may be better spent on a property in a growing area that is more likely to build your wealth faster than the area you’ve identified as ideal for your own lifestyle.
Say goodbye to entry and exit costs – Selling your own home and then purchasing another to live in will cost you about 8% of the assets value (Stamp Duty and legals plus agent selling costs). This is how much your property portfolio loses every time you decide to pick up and move. Not so with renting, where the major cost is in furniture removal and delivery.
Renting isn’t always rosy of course and there can be disadvantages that balance up the positives:
It’s always temporary – Like it or not, the home you live in does not belong to you. While this may not bother those who are more pragmatic about things, it may be much harder to bear for others who have more an emotional connection to their living space.
Potentially less choice – This is particularly the case for more premium style properties where owners are much more prevalent than renters. In this situation your dream home may simply not be available to rent. Mind you, unless you’re in a buyers market, finding a dream home can be difficult at the best of times.
Packing – Uugh! – Nothing ruins a perfectly good weekend than breaking out those packing boxes and dismantling everything you’ve spent years arranging only to have to unpack it again in a foreign place. While this can be a burden, it does provide a good opportunity to do a bit of housecleaning!
So while there are pros and cons to renting the home you live in, it’s important to remember that rent money is not necessarily dead money as long as your money is invested in the market elsewhere.
Renting a home that you may not have been able to afford the mortgage for allows you to invest in property elsewhere that does meet your budget and is earmarked for growth. Using this strategy not only creates a more affordable and flexible lifestyle but it can also supercharge your wealth.