Do you want to get on the property ladder and live where you want but the cost of living there is just too high for your budget? Want a flexible budget and take advantage of tax deductions to increase your take home pay? Rentvesting may be for you. It’s nothing new, but means you purchase an investment property and rent a property for yourself rather than buy a property to live in.
So let’s consider the basic finances of a lifetime of renting where you want to live versus buying? Everyone knows rent is dead money right? Let’s compare these two options below if you could borrow $1,000,000.
- Use your borrowing potential to buy a home for $1,000,000 – no investment properties:
In this option you need to consider the long term costs of finance which includes the mortgage interest of approximately $68,200 per year. This is based on taking the long term interest only of the average of banks non discounted standard variable owner occupier home loan rates over the last 10 years of 6.82%.
- Rent a home for $1,000,000 and buy two investment properties at $500,000 each
If you chose this option you would return say 4% rental income x 2 = $40,000pa plus you would get tax rebates on stamp duty, mortgage interest and other expenses/losses reducing your income tax payable each year.
If you then rent a $1,000,000 property to live in, it would cost you about the same as the rent you are receiving. However by choosing to buy 2 investment properties and rent a place to live, your annual cost is NOT the same as it does not include the tax rebates you will receive and it is costing you much less than the $68,200 in mortgage interest as an owner occupier in option 1 with no tax rebates either.
This shows that while both options allow you to live in a $1,000,000 property, in the long term, renting (while investing in property) will cost less. So it’s worth considering the advantages of property investment.
If you would like to talk to us at The Home Loan Company about this, now is the time while interest rates are low.
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