Property - Buying vs. Renting, this is going to be a simply example that we will step through so that we can see the differences between buying a property and renting a property. The three scenario are below:
- Renting a house at $307 per week ($16,000 per year)
- Buying a $400,000 house to live in (hence saving rent)
- Buying a $400,000 house as an investment, renting it to a tenant and renting a house to live in
Your cash position between the first two scenario is:
- When renting from somebody, your cash outflow will be the rent of $16,000.
- Buying a house to live in, you would expect a cash outflow of $33,400 (assuming you borrow 95% and the interest rate is 8%). In addition to the loan cost, you would need to pay for the council rate, water rates etc.
You don’t need to be genius to figure out that it is not worth buying a house to live in the given market conditions above (which is quite realistic).
In the third scenario, which is hardly ever talked about in the news, newspaper, magazines, we will uncover a not so common method. First we need to go through some basic when investing in property in Australia.
In this example, an investment house would cost you $30,400 in interest payment and $3,000 expense in rates. With this investment, you will receive an income of $16,000. The net cash loss is $17,400 (16,000 - 30,400 - 3,000), in addition you will also receive a paper loss of $3,000 from depreciation, making your net loss $20,400 (17,400 + 3,000)
This is where things gets interesting, the Australia Tax Office (ATO) allows negative gearing. Negative gearing is basically the ATO allowing individuals to claim losses as tax deduction. So assuming you are on the marginal tax rate of 40%, in this example $20,400 loss x 40% = $8,160. In short, the ATO gives you back $8,160 by making you pay less tax. This mean it only cost you $9,240 (17,400 - 8,160) to hold this investment property every year.
This scenario doesn’t end here, so you buy an investment property and rent it out, which means you will need to rent a place from the market else you’ll be homeless…. Your final cash out flow is $24,240 (9,240 + 16,000) which is the cost of your investment property and renting from somebody.
What does this all mean? The gap between renting for the rest of your life and owning your own dream house is actually not as big as you think. All you need to do is think outside the box and obviously not live in your ‘dream’ home. Just make your rental property your ‘dream home’. Remember the difference between “Buy to Live” and “Buy to Rent then Rent From Others” is $8,160 ($157 per week) this could mean a car, a holiday, better furniture, more expensive rental or if you are like me, another investment property, your choices are limitless.
Property: “Buy to Live”, “Rent Forever” and “Buy to Rent then Rent From Others”
*The above is only an example and different people will have different financial situation, the example also does not include the cost of purchasing the property, such as stamp duty, conveyancing, legal cost etc.
