By Cam McLellan
Today’s post is for all of those who have decided to forego buying their own home for now and continue renting, whilst building a strong portfolio.
As I have discussed before, there are benefits to renting and investing. You can rent where you want to live and accumulate a portfolio of investment properties rather than owner-occupying your home. Check out WOD 122 if you would like an in depth explanation of renting versus owning.
In the old days they used to say that of the income you earned, the tax man would take a third, a third would be used for living expenses and the remaining third would go to mortgage or rent. For example, if your home was worth $600,000 and your interest rate was 6 per cent, principal and interest would cost you $45,000 a year, as an owner occupier. Under today’s conditions if you bought an investment property instead, it would probably be paying for itself or as a worst case scenario it might be costing you $100 a week, after rent and tax; so that’s about $5000 for the year.
In terms of what you should be spending on rent, let’s say for comparison’s sake, you were renting a property worth $600,000. As a worst case scenario, you would be spending about $500 a week or $26,000 a year. So you would be spending a total of $31,000 for rent and to hold your investment property, rather than $45,000 to live in your own home. It purely comes down to an assessment of cash flow. If you were to rent a really nice property for $500 a week, straight away you would have an extra $14,000 in your pocket.
While you will probably want to spend some of the money you’ve saved on lifestyle and patting yourself on the back for making a great financial decision, you should put most of it towards reinvesting. If you spend $4000 on a holiday and nice pair of shoes for the wife, or golf clubs for the hubby and put $10,000 back into holding another two properties, obviously the compound growth you would get on that would be phenomenal.
So you really can rent a property of the same quality or better than the one you might buy as an owner-occupier and still have a bucket load of cash to fund your lifestyle and investments. It really does come down to whatever you want. Even if you bump your rent up to $600 a week or $30,000 a year, you would still be $10,000 better off.
At the end of the day, this is a better way to use your money. Rent where you want to live and make sure you put the surplus towards something worthwhile which will grow in value.
In summary, rent somewhere that you love and put your money back into investing until you have amassed a strong portfolio and it can help pay for your own home. Good luck.