Expert Bust #23 Rent money is dead money

For decades it’s been said that “rent money is dead money”. The "follow-on" has always been that you should aim to own your home rather than pay the landlord.

But it could be argued that paying home mortgage interest could be more "dead money" than rent money.

What are the chances that the place you want to live (or need to) also happens to be the best place to own an investment property?


Given there are thousands of suburbs around the country, it's unlikely where you want/need to live is also the best location to invest. It might be better to rent where you want to live and invest in the best area for growth and yield, that suits your budget.

 

Smart investors wont buy a investment where they want to live. However one of the most prudent investments anyone can make is to choose and buy your home then soon after to rent it to your neighbour - who rents yours. One of the very worst choices to make when buying a IP is to look at it like you will live there.

Rent money is dead money is a common expression when viewed in isolation. Paying $700 a week for something you will never own produces cashflow out and no growth. However when viewed as part of a strategy eg rentvesting it may make better sense.

I adopt the same view with employer car fringe benefits. You pay a premium to use a car that you will never ever own and it also really hurts debt servicing. Aftre 4 years of paying $XXX a month you will still not own a car.

 

Absolutely. I don't concern myself with finance/investing advise forums; so I didn't know 'rentvesting' was term; but I've been living this principle for nearly a decade: the property I live in is owned by my sister, and likewise I own the property my sister lives in. We each reap the benefits in terms of mortgage interest and property maintanence expenses against our respective taxes; with the benefit of knowing my principal residence is secured and the landlord won't "pull the rug from under me" at any time.

Works in theory of course - I am more tight assed in that I further rent out the rooms of the house I am in, to further subsidise my living expenses, with the downside of having to put up with some challenging people and situations at 'home'. There are some days I lament having to deal with flatmates; but I wouldn't have afforded my current lifestyle and financial independence if it weren't for the slight inconveniences I've had to face.

 

Interesting idea, renting out each other siblings properties?
Humans are just amazing with their creativity, wouldn't you agree?

 

Years ago I floated the idea with my neighbour in the units we lived in of swapping the numbers on the front doors, changing our addresses on all things relevant, then 'renting' from each other at a matched price (without actually having to move).

 

Finally another mind applying commonsense.

I rent by choice rather than nessecity and come up against this comment all the time, even by seemingly intelligent people.

I usually counter it with a comment that (PPoR) interest is also dead money.

Apparently thats not the case to those with an opposing view, despite them not actually being able to differentiate between mortgage payments, interest components, and principle components.
This is a disturbingly common conversation, so little wonder there is an unhealthy fetish with 'getting on the property ladder at all costs'.

 

Absolutely agree, but I think the 'rent money is dead money' is more generally about instructing people to put their money to work in an asset that has a high probability of increasing in value over a long time frame rather than doing absolutely nothing constructive with their money.

I see so many people that spend every cent of every pay packet on rent and discretionary items and will never own their own property OR an investment property due to the mindset if instant gratification over delayed wealth creation. I personally know a couple who each smoke a packet of cigarettes a day- they spend just under $30k per year on smoking, that's a mortgage on it's own. These are employed hard working, lovelly and intelligent adults, but who just don't prioritise their wealth creation, unlike the readers of Propertychat.

Now for us wealth creation minded here, there are heaps of opportunities to get better that average investment returns from our owner occupied properties, I'll add to Onyx_OCAU's great idea above-
when my teenager moves out I'll be moving my kingsize bed to his room which is at the rear (near to the open plan kitchen-living area) I'll put a lockable door on the hallway, and I'll rent out short term via Air BnB the master bedroom/ensuite and lounge room at the front of the property. I've also got a 64m square shed that will become vacant when he moves out- and I'll list it for hire as boat/caravan storage.

 

I think this part is key and couldnt agree more.

At least a mortgage (both of its components) is forced financial dicipline which would serve most people well.
The rent and invest elsewhere crowd requires much more discipline and the majority of the population would probably fail.

 

What many who rent long term dont consider is

1. Rent is inflation and demand driven and will increase over time. And consume a consistent % of income as income rises.
2. A mortgage repayment is generally fixed excepting changes to market rates and terms of loan (eg IO / P&I and rate) and will remain constant. It will likely fall as a % of income.
3. Equity will build and can be borrowed against

eg Fred buys a family home in 2005 for $459K in Sydney and has initial equity of approx 20% after saving for a 20% deposit + costs. The 30 year loan requires repayments of $3K a month. It is now 2021 and the loan balance is now less than what it was ($165K) and Fred still pays the loan and pays $3500 a month despite the minimum being $2500 due to rate reductions. Fred andhis neighbour are both paying similioar costs for their housing - Fred $807 a week and Wilma $810 a week. Fred's home is valued at $1.3m Fred has equity now of $1.135m. Fred's LVR is 12.7%.
Wilma next door rents a near identical home. She was paying $425 a week in 2005 and now pays $810 a week. She is finding saving to eventually buy very difficulty as the rent commitenets limit her saving capacity. She has no property equity but does have a newish car acquired using finance. She replaces it each three-four years. The last time she spoke to a broker they said this would also affect her ability to access finance for the home she can afford in a outer suburb. She cant afford to buy in the area she lives in.

So in ten years time rents could be doubled but a repayment on a mortgage may be similiar to present day. With wages growth etc the surplus is then available to use to reduce debt or invest. eg Fred's broker has assessed him and suggested he might be able to borrow $410,000 to buy a investment property that is neutrally geared with good tax loss deductions through depreciation. Fred hopes to hold this for 10-15 years prior to retirement and hopes to generate a capital gain to supplement his super. He is also considering reducing his loan repaymnets to the minimum and salalry sacriifce

This is really the long term reason why rent is dead money v ownership. The greater proble is getting onto the fast moving property train . First time buyers are seeing property prices rise faster than they can save. Strategies to buy small and build equity rather than wait and wait may be sound choices. Many people strat with a first property being far from what they seek ina forever family home.

 

Look at it this way. It depends on the costs of ownership of either a PPoR or IP. I know of someone who was working as an expat and the company provided fixed rental staff accommodation for a family of four. It is at a discounted price. They ended up investing in IPs and did quite well. They will buy their PPoR when back in Australia when the market becomes a bit rational. So, their rent money was just living expenditure. One needs to pay for accommodation one way or another anyway.

 

Couldn't agree more. Will the $ saved be placed into some kind of investment asset instead. I think that's what hard to do for most?

 

Gold post.

 

Another thing to take into consideration is that there is no CGT on PPORs.

I would be inclined to buy and not rent if my PPOR preference met the following two criteria:

1. The property wouldn’t be easy to rent (eg acreage).

2. One’s research shows that the property is likely to experience good to massive growth over time.

I have an acquaintance who bought a not-easily rentable PPOR (house on just under 5 acres) 30+ years ago for around $200,000 and recently sold it for $8M.

That is $7.8M CGT free . I don’t think they will ever rent now .

 

Another consideration is control is basically out of your hands. For eg I received an "Intention to sell" this afternoon on the current property we 'rentvest'. We've lived here for the last 3 years after relocating from NSW to Qld. Lucky for us we recently purchased a PPOR that we move into later this year.

Now just have to put up with some open homes for an asset that isn't mine. Plus a scheduled inspection next month

 

Nothing is dead money as long as it serves a purpose (from an investment perspective)

 

Chris Gray has been pumping this for well over a decade. He flicked the lightbulb on for me.

Yes, so we did not do it. It was just a fun thought experiment.