Recently I’d been observing the challenges of tenant selection and the difficulty of finding rental accommodation in a market with low supply volumes. This prompted one reader to ask some questions around the idea of living in a home and investing elsewhere, versus renting or staying at home and buying and investment property. It is indeed a challenge faced by many young Australians looking to get onto the property ladder.
In fact, there are two popular investment trends that are emerging in some of the lower rental supply markets in recent years that have really taken off within the young investor community. Of course we all know of traditional “owner-occupier” approach to investing, as in, you save a deposit for your home, or “principal place of residence” (PPOR), buy and move in for a couple of years and wait until you’ve built enough equity to then buy an investment property.
But what of alternative options that young investors are doing to help get ahead, and also run from the pressure of a big mortgage repayment, while on comparatively lower (or “career-establishing”, as I like to call them!) salaries?
The notion of being a “renter-investor” came to prominence in recent years; and as someone who is a renter-investor myself, I thought I’d weigh up some of the pros and cons of owner-occupying and then investing, as opposed to renting and investing. Additionally, I started out as an owner-occupier/investor, so I’ve had experience in both.
Owning your own home and then investing:
Pro: The security of not being asked to leave after six months of tenancy.
Pro: You can personalise the space you live in and greater freedom to decorate as desired.
Con: You cannot claim any of the tax benefits of living in your own home unless…
…Pro: You rent out bedrooms to a boarder, entitling you to apportioned tax deductible expenses (effectively making your own home partially an investment property).
Pro: The advantage of being able to live in the area/suburb/street where you want to be. Renters are often at the mercy of accepting less than their ideal locale.
Con: You are at the mercy of paying the additional costs involved in home ownership (strata for units, council/water rates, house maintenance, repairs, etc) without any of the tax deduction allowances, making owner-occupying very expensive when coupled with mortgage repayments.
Investing while renting:
Pro: Cash flow month to month – it’s easily considerably cheaper to split bills and rent rate.
Pro: Probably the biggest one – you free up cashflow to save harder for a deposit on an investment property.
Pro: Many options exist within this: couples moving in together to split costs; friends can flat or house share to split costs; or simply living with parents and paying a little board can keep costs down.
Con: Insecurity of long-term tenancy. Owners can sell/move back in/even demolish the property you’re renting.
Con: Costs aren’t fixed; leases tend to hike up in rent at the end of one lease and the start of another one.
Con: Depending on whom you’re living with, the challenge of personality clashes or inconvenient lifestyle issues with accommodation sharers.
Con: Lack of freedom in personalising your home.
My view on what gets you further ahead? It all depends on your goals. Ask yourself, is owning your own home the real end result you’re looking for, or is it simply financial stability? At the end of the day, investment property is all about building wealth for your security, so do you really need to live in the security that you own? Both options will help you work towards achieving your goals – in the end you are still investing, but there’s no denying that those who can share the cost of living, even for a couple of years in that tough starting-out phase, can build equity and savings quicker, to get them up the ladder faster.
Cameron McEvoy is a property investor and maintains a blog, Property Spectator.