Renting where you want to live while investing where you can afford might actually help you to get ahead in the long run.
Blogger: Cam McLellan, CEO, OpenCorp
Today’s post is for all those who have decided to forego buying their own home for now and continue renting while 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. 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 your 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 pay for itself or, as a worst-case scenario, it might cost you $100 a week after rent and tax; that’s about $5000 for the year.
In terms of what you should be spending on rent, let’s say for comparison’s sake that 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 comes down to an assessment of cash flow. If you were to rent a really nice property for $500 a week, you would have an extra $14,000 in your pocket.
While you probably want to spend some of these savings on your lifestyle and pat yourself on the back for making a great financial decision, you should put most of the money towards reinvesting. If you spend $4000 on a holiday and nice pair of shoes or set of golf clubs, and put $10,000 back into holding another two properties, obviously the compound growth will 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 just comes down to what you want. Even if you bumped your rent up to $600 a week or $30,000 a year, you would still be $10,000 better off.
In summary, rent somewhere that you love and put your money back into investing until you have amassed a strong portfolio that can help you pay for your own home. Good luck.