Owning a Home vs Renting and Investing


Many people looking to get into the property market have heard the saying, rent money is dead money. Who wouldn’t feel the urge to jump into homeownership after hearing such a scary maxim?

In reality, the financial advantages of owning your own home vs renting aren’t so clear cut. In 2014, the Reserve Bank of Australia found that renters could end up in exactly the same place as owners, as long as they were investing their savings in a diversified portfolio.

In the video below, we explain how this can be achieved:

The Pros & Cons of Owning Your Own Home

Pro: Your Property May Appreciate in Value

It will come as no surprise to you that your home’s value is likely to appreciate over time. You could enjoy compound growth of some 7-8% year on year, so that by the time it comes to sell, your home will have grown in value substantially.

Even more noteworthy, real estate values typically grow faster than inflation, so the growth value should eventually outstrip taxes, fees, and rates.

Pro: You Can Leverage the Equity in Your Home

If your house grows in value, you can leverage the equity to reinvest in additional properties. Equity is how much of your property you own, calculated based on the difference between the total value of your property and what you owe on your mortgage.

So, if your property is worth $500,000 and your mortgage is $350,000, your equity is $150,000.

Pro: Freedom and Stability

Owning your family home means you get to do what you like to it. Décor and renovations choices are up to you and your tastes and you won’t have to ask a property manager before making changes to the property.

By owning your own home, you can also get more stability; you won’t have to worry about renewing your lease every 12 months, and you won’t be surprised by a notice to vacate.

If you are making your repayments, you are guaranteed to have a place to live and enjoy for as long as you want.

Con: Fewer Tax Exemptions

Owning your own home will allow you to avoid capital gains tax, but overall there are far fewer tax exemptions for someone who owns their home compared to someone investing in property.

Unlike a property investor, you won’t be able to claim deductions, such as the deductions an investor would get for renovating the home or on interest payments.

Con: Reduced Cash Flow

In most cases, you just won’t be making an income on your property. Unless you rent out a room of your home, there will be no regular income. You will really only make money off your home when you eventually sell it.

This means owner-occupiers sink all their earned income into paying off their mortgage. This is called an “opportunity cost”, where your savings are tied up in repayments instead of reinvesting in other opportunities. It’s not ideal if you’re trying to build your portfolio.

Investing While You Rent

Investing in property while you rent your home can be a smart move. An investment property that is generating income can eventually pay for itself.

Pro: Better Cash Flow

If you invest in a property intelligently, and collect a good rent, your tenants will end up paying the mortgage on the house, as well as the interest payments. The equity generated can be used to purchase more investment properties, allowing you to expand your portfolio.

Pro: Tax Deductions & Negative Gearing

You can claim a host of property expenses as tax deductions if it’s a rental property. This takes care of maintenance and renovation costs, rates, and much more that you would be out of pocket for as an owner-occupier.

If your property is negatively geared, you can also claim interest payments as tax deductions.

Pro: Tax Deductions & Negative Gearing

Banks are sometimes more inclined to loan more if you’re receiving a rental income. While the criteria differs between lenders, they typically factor in some 60% of your rental income when calculating your borrowing capacity.

Con: Capital Gains Tax

When it’s time to sell, your capital gains on a rental property is counted as assessable income and taxed at your highest marginal tax rate. If you’ve held the property for more than 12 months, you can get a 50% concession.

It’s important to do your research, and weigh the pros and cons and how they fit with your lifestyle, and financial position. Picking “rentvesting” over homeownership may be right for you or it may not be.

If you’re interested in learning more, it’s a great idea to talk to the property investment experts at OpenCorp.

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