To Buy Or Rent and Invest In Property
Amidst all the bullish market hype over 2013 from the media about the Australian housing market, housing remains a slow growing investment. RP Data noted that capital city home values fell over consecutive years; by 3.8% in 2011 and by 0.4% in 2012. Home ownership nonetheless remains an inevitable rite of passage and everyone dreams of owning one. Fortunately, instead of spending enormous sums of money on an investment that could be getting average returns, you can adopt a strategy that will help you reap the best of investment property. This strategy is that of buying a house and renting it to someone else while you live in another rental property.
Strategy that is a two way streak
This strategy will help satiate your desires of owning a home and hence climbing the property ladder while at the same time help you trim down on your living expenses as someone else gets to pay your mortgage! The trimming down on your living expenses may not appear very obvious at first. Let the numbers do the talking:-
Invest in property using a $500,000 house
Let?s take an example of a $500,000 two bedroom apartment Sydney South. On one hand, you can choose to place a 20% deposit ($100,000) and pay the deficit of $400,000 in a series of monthly mortgage repayments of around $2,500 over 25 years. On the other hand, you could buy the entire home for $500,000 and then rent it out thereby earning taxable monthly rental income of around $2,000. The tax aspect should not be a cause for worry because you can actually claim the interest on the $2,500 monthly mortgage repayment which can be deducted from your taxable income. Your monthly living expenses may reduce further thanks to offsets such as good old depreciation (a non cash tax deduction ? ask an adviser or accountant about this).
The main downside is that you?ll then have to find somewhere else to live. The exact location and nature of this rental apartment is entirely up to you. Just keep in mind the purpose of this whole buy-and-rent arrangement is to save on some precious dollars. It is rather evident from this example that you do not stand to make mega short term profits from the entire buy-and-rent arrangement. Potentially, the days of making huge gains in the housing market may be long gone. For those of you eyeing humongous gains, you could be better off sticking to a long term plan, allowing capital growth of your investment property to compound over time.
Benefit of negative gearing
Thanks to the buy-and-rent strategy, you get the benefit of negative gearing and the ability to offset mortgage costs. This offsetting will in turn reduce your overall monthly expenses. This is what is referred to as the benefit of negative gearing for a rental property that is purchased using mostly the banks money.
Flexibility brought by this strategy
Most people spend several years in rental homes before graduating to their own homes. Using this strategy, you can scale up in the property ladder while still living in rental homes. Moreover, very few people buy a home and live in it forever. The allure of a better, grandeur home is always a goal for many Australians. Most people therefore sell their existing homes and buy their ?dream homes?. The problem of buying and selling houses boils down to the unnecessarily heavy costs. You are bound to spend on stamp duty, real estate agent fees and moving costs just to mention a few. These costs are typically in the region of $20,000 to $40,000 depending on the purchase price and location. These costs would be significant if aggregated for a person who bought and sell houses over his or her lifetime. Thanks to the buy-and-rent strategy, you are able to buy multiple properties in your lifetime with the option of downgrading or upgrading as your income dips or rises without incurring property transaction costs.
Strategy Not For Everyone
This strategy may seem controversial and is certainly not the road to riches. However, not many strategies out there provide more cost effective solutions to fund the need for a retirement funding solution and a decent place to live without the unnecessary costs and headaches that can go with it.
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