Should you rent or occupy?
The simple answer is “it depends”. We’ve all heard the comment “rent is dead money” and certainly if you are the sort of person who does not save, then buying instead of renting is a form of ‘forced savings’. However, if you are thinking about your financial future and are committed to investing then almost certainly renting will be a better option (so long as you invest at the same time). It works out cheaper to rent and invest than to buy and occupy because of the tax advantages of negative gearing. Here’s a simple example to demonstrate*.
Annual cost to buy and occupy a $450,000 apartment:
| Mortgage interest |
($28,600) |
| Capital repayment |
($4,650) |
| Body corporate fees |
($4,500) |
| Rates |
($2,000) |
| Insurance |
($1,500) |
|
Total out of pocket expenses |
$ 41,500 or $788 per week |
Annual cost to buy a $450,000 investment property and rent elsewhere:
| Investment loan interest |
($28,600) |
| Body corporate fees |
($4,500) |
| Rates |
($2,000) |
| Insurance (including Landlord) |
($2,500) |
| Less rental income ($300 per week) |
$15,500 |
| Pre tax loss |
($22,100) |
| Less tax credit (see workings below) |
$9,330 |
| Plus rent elsewhere ($300 per week) |
($15,500) |
| Total out of pocket expenses | $28,270 or $544 per week |
Tax credit workings |
|
|
Pre tax loss |
($22,100) |
|
Building allowance & depreciables |
$9,000 |
|
Total deductions |
$31,100 |
|
Tax credit |
$9,330 |
(*The above example assumes you are on the 30c marginal tax rate,
interest rate of 6.7%, and 4 weeks vacancy for the investment
property. If you are on a higher tax rate the savings will be greater)
