The great Australian dream is to own your own home. There are countless books and articles written about how to achieve it and even a movie about saving it. It’s the largest purchase many of us will make in our lifetime and owning it is a rite of passage: proof you have finallygrown up and are putting down roots.
However a growing number of people are questioning whether we should bother. With the price of homes rising and median home prices in some suburbs well out of reach of many potential homebuyers it is certainly a dream worth reconsidering. The problem with the alternative however is you’re simply paying down someone else’s mortgage and not accumulating any assets of your own. That is unless you consider a third option which is renting where you live and buying property as an investment only.
It’s an interesting alternative and one worth considering if you are able to remove the emotion around owning your own home. So what are the pros and cons of renting where you live and purchasing properties to invest instead?
The obvious down side of this strategy includes not owning your own home which is something many people are emotionally connected to. However if you can put that aside, there are a few more cons to this strategy:
- Instability: Being a perpetual tenant means you are at the whim of your landlord who may decide to sell the property, renovate it or move into it themselves. This might be a deal breaker if stability is important to you, especially if you have a family and don’t want to move around.
- Any Improvements are lost. Many people like to put their own stamp on a place however if you’re renting any material changes invariably needs landlord improvement and often can’t be taken with you when you go. So money spent on a home you’re renting is often a wasteful exercise.
- Capital Gains Tax Unlike owning your own home which is a capital gains tax exempt asset, when you sell an investment property you will almost always have to pay capital gains tax.
Of course with any downside there is usually an upside. With this strategy the pros include:
- Rental deductions If you run a business or aren’t provided somewhere to work by your employer you may be able to claim a percentage of the rent you paid during the year. If you claimed a percentage of your ownership expenses and you owned your own home there would be capital gains consequences however with a rental, there’s no such problem.
- Costs are deductible Many of the costs associated with owning and renting out an investment property are deductible including interest. This means the cost of owning the property is reduced by the tax deduction you receive. With most people purchasing their own home today having a fairly high mortgage this means the true cost of ownership is often hundreds of thousands of dollars more than the purchase price which is often not factored in when they’re working out the profit they’ve made.
- Asset is income producing: Your investment property is income producing which in many circumstances means there is not a significant shortfall each week. This may mean instead of only being able to afford one asset, which is often your home, you can afford multiple investments as they are not reliant on you to pay the bills. This may mean you can leverage growth and diversify your risk in different suburbs or with different types of properties
- You are not tied down to one asset. This may seem like a strange one but there appears to be a growing trend especially amongst younger people not to be tied down for years to one location. They want to experience multiple locations or be able to move if their job requires it. Renting your home and having investment properties means you’re still building wealth but you’re not restricted to the one location.
- You don’t have to pay maintenance costs and if you do they may be a tax deduction. As any home owner will tell you, the purchase price is only the start of putting money into your pocket. There are the costs to maintain your property as well as the costs to upgrade as things wear out. If this is your home there is no tax deduction but if it is your investment property you may be able to claim these costs either in full or over a number of years. Of course, with the home you’re renting you generally don’t need to put your hand in your pocket at all for any maintenance or repairs.
- You need to sell your home to realise your gain. Most people can probably tell you, quite proudly, how much their home has gone up in value and how much equity or profit they have made. The thing is, the only way they can realise that profit is to sell their home which, let’s face it, most people would be fairly reluctant to do.
For many of us, owning our home is a decision we make as much with our head as with our heart. It is truly a mindset shift to consider renting instead and choosing to purchase properties that will only ever be for investment. However if you can remove the emotion, it’s an interesting strategy and certainly one worth considering.