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Rent is dead money. Or is it?

Rent is dead money. Or is it? Property expert Chris Gray examines being a tenant and a landlord. To buy or rent is one of the biggest questions in real estate and it gets more difficult to answer when the option of investing is added to the equation. Source: News Limited MOST high-income earners think that renting is for those who are worse off financially and that owning your home is not only a mark of success, but it is a better long-term financial decision. Everyone knows rent is dead money, right? But what if this long-held Australian belief was wrong? How do the numbers compare when weighing up a lifetime of renting versus 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: Buying your home. To evaluate this choice we need to consider the long-term costs of ­finance. Historically, the average mortgage rate is 8 per cent. Your $1.5 million buy equates to spending $120,000 a year. Option two: If you chose the ­investment path and bought three properties at $500,000 each, your ­financial situation would include an estimated 4 per cent rent ­return, equating to $400 a week after expenses. And, as the properties would be investments, 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 the demand for properties is lower than average, given they are beyond the price range of most people.                 Buying versus renting and investing by the numbers. Source: Supplied It’s likely you would pay only an estimated 2 per cent in rent. Taking this into account, it might cost $30,000 a year to rent and your ­financial position would be as shown at the top of the table above. These figures reveal that by choosing to buy three investment properties and rent a $1.5 million property, your total annual spend would be about $60,000. Remember, if you chose to buy the $1.5 million home, it would be $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 cost less. Additionally, by having investment properties you gain the benefit of tax deductions now, instead of waiting for capital gains tax free status when you sell your own home in retirement (which may never happen). But you can do better than living in a $1.5 million home. You could stretch the renting scenario further and rent a $4.5m property while investing in three properties worth $500,000 each — all for the same cost as buying one home to live in worth $1.5 million. Look at the lower part of the table. While the numbers add up, it is 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. The second biggest drawback is decorating. You may not be as free to style your home as you prefer. But most landlords will let you do anything as long as it increases the value of their property. But then again, some are set in their ways. I recently discovered an unrenovated property in Sydney’s Point Piper worth $7-$8 million for rent. The owners were asking $3000 a week (2 per cent). I offered them $2000 a week (1.35 per cent), and ­offered to fully renovate the two bathrooms, repaint and lay new carpet throughout. My advantage was my ability to renovate at wholesale prices, and the home would be to my preferences, while still saving money. But the owners renovated the house themselves. The property has been vacant for six months and the rent dropped to $2800 a week. Renting may not be for you, but if you can do away with what you think are the hallmarks of success, your property investment strategies might just benefit. — Chris Gray is host of Your Property Empire on Sky News Business channel and CEO of buyers agency Empire Source:

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