Renting: For Richer or Poorer?

For rent real estate sign in front of the house with the title 'Renting is dead money'

Most high income earners think that renting is for those who are worse off financially and that owning your home is not only a marker of success it’s a better long-term financial decision. Everyone knows renting is dead money – right? But what if this long held Australian belief is actually wrong? How do the numbers actually compare when weighting up a lifetime of renting Vs buying? Who at the end of the day is likely to be better off?

Consider this scenario: If you had the opportunity to borrow $1.5 million and had the choice between buying your own home for $1.5 million, or buying three investments worth $500,000 each and renting your home, which option would you choose?

Option One – Deciding to buy your own home. To evaluate this choice we need to consider the long-term costs of finance, and historically the average mortgage rate is 8 per cent. Doing the math your $1.5 million purchase equates to spend of $120,000 per year.

Option Two – If you choose the investment path and purchased three properties at $500,000 each your financial situation would look something like this: An estimated 4% rent return, equating to $400 per week after expenses. Also, as it is an investment, you would get a tax rebate on any losses.

Still needing a place to live you then decide to rent a $1.5 million property. At that price range the demand for properties is lower than the average, given they are out of the price range of the majority. It’s likely you would only pay an estimated 2% rent. Taking this into account, it might only cost $30,000 to rent per annum.

The sums look like this:

Investment property rent earnings $500k x 3 x 4% $60,000
Mortgage costs $500k x 3 x 8% $120,000
Loss before tax $60,000
Loss after receiving a tax rebate $30,000
Costs of renting a $1.5m house at 2% $30,000
Total Cost $60,000

The above figures reveal that by choosing to purchase three investment properties and rent a $1.5 million property, your total annual spend is approximately $60,000 and if you choose to buy the $1.5 million home, its $120,000.

This example shows that while both options allow you to live in a $1.5 million property, in the long-term renting (while investing in property) will actually cost you less. Additionally, by having investment properties you get the benefit of tax deductions now, instead of waiting for capital gains tax free when you sell your own home in retirement, (which may never happen).

But you can actually do better than just living in a $1.5 million home! You could actually stretch the renting scenario further and rent a $4.5m property while investing in three properties worth $500,000 – all for the same cost as buying just one home to live in worth $1.5 million!

Consider the figures for renting a $4.5 million property:

Investment property rent earnings $500k x 3 x 4% $60,000
Mortgage costs $500k x 3 x 8% $120,000
Loss before tax $60,000
Loss after receiving a tax rebate $30,000
Costs of renting a $4.5m house at 2% $90,000
Total Cost $120,000

While the numbers more than add up, it’s worthwhile considering the disadvantages of renting. Security comes first to mind. You may be forced to move from one property to another every few years at the whim of your landlords. And then there is the actual move. But of course, if you dislike the turmoil of moving, you could go on a short holiday and hire professional removalists to do the hard work for you.

The second biggest drawback is decorating; you may not be as free to style your home as you prefer. However, the majority of landlords will let you do anything as long as it increases the value of their property, rather than take value away.

But then again, some are set in their ways. I recently discovered an un-renovated property in Point Piper, Sydney worth between $7-$8 million for rent. The owners were asking for $3,000 per week (2%). I instead offered them $2,000 per week (1.35%), plus offered to fully renovate the two bathrooms, repaint and lay new carpet throughout. My advantage was my ability to renovate at wholesale prices, plus the home would be to my preferences, while still saving money. However the owners ended up renovating the house themselves and the property has since been vacant for six months, with the rent dropped down to $2,800 per week.

Renting may not be for you personally, however if you can allow for a shift in your mindset and do away with what you think are the hallmarks of success, your property investment strategies might just benefit.

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