Hi everyone.
Just a quick one. Im 22 and married both working with a combined income of around 1000k/wk. Should I invest first and continue renting or buy by own house and invest later.
Please help. steve
Hi Steve
From a purely financial point of view, you’ll probably find it better to continue renting and start buying some investment properties.However, there are emotional considerations as well. If your partner (or you) have some emotional need to be living in your own place, then that should carry a lot of weight in your final decision.
It’s really a personal decision. You can make it work financially either way.
Hi WWJD,
That really is a personal question and hard for others to answer with just the basics. It all comes back to what you prefer to do. Do you have a deposit?, Are you planning/have a family? Is there a regular income, or is it casual?
You need to work out what you and your partners goals are, both short and long term, this would be a good start. Educate yourself on financial matters,(try investment books and this forum) and then you should be able to answer the question yourself.
Good luck,
Sue [biggrin]“Be careful not to step on the flowers when you’re reaching for the stars”
Hi,
It’s important to understand the difference between an investing and a lifestyle decision.
Unfortunately, it’s not a clinical or easy decision when it comes to choosing whether or not to buy a home.
Having said that, I would encourage you to treat the thought process of buying a home and buying an investment property as two separate decisions.
Speaking from a financial perspective, wherever possible I’d encourage you to defer buying a home as the interest and ownership costs are not tax deductible, and as such need to be paid from after-tax dollars.
Practically, this makes it very difficult to be able to afford both home repayments and also save enough to pay the deposits and closing costs on investment property.
To get around this issue, some think that they will be able to use the equity in their home, which is accessed via refinancing, as capital for investing. While this may be the case, the problem with this approach is:
1. There is no guarantee that property values will rise
2. You will only be able to borrow a percentage of your equity (usually 80%); and
3. The more you borrow the higher your debt and also exposure to adverse interest rate movements.One of the principles of the MAP was ‘Cost = Sacrifice + Delayed Gratification. Steve, the issue you raise comes down to this saying. In my own case, my wife and I rented from 1997 until 2004 while we saved an invested with the view of then paying cash for our house.
Perhaps, in hindsight, we would have been better to buy something cheaper as values have skyrocketed, but to do so would have meant less investing capital and as such would have slowed down the success of our investing.
In the end, the answer to your question needs to be “do whatever brings you closer to your personal and investing goals”. To the extent that you can’t have both, all I can say is that delaying gratification has worked very well for me.
I hope this has helped.
Bye,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
(Top post Steve M^!)
Hi WWJD,
I agree with most of the comments above, and would like to add a couple. If you can afford to buy a house outright, and still have reserves or the ability to save for further investments, there should be nothing stopping you.
As this is probably not the case, I would suggest you give serious consideration to the price you are prepared to pay for a PPOR. The difference between buying something cheaper and paying it off over 10-15 years and stretching until you can’t afford to make significant additional payments over 30 years is enormous.For example 2 couples, both with a maximum weekly accomodation budget of $320 are buying PPORs. The first couple buys:
$150k over 15 years
$312 p/w repayment
$93,000 total interest paymentsThe second couple buys:
$205k over 30 years
$317 p/w repayment
$289,000 total interest payments
both scenarios assume constant 7.07% IR.After 15 years the first couple have finished paying off their PPOR and start saving or investing their $312p/w.
After 30 years, the second couple has paid off their house, spending a total of $494k.
Meanwhile the first couple have paid off their house for $243k and also invested a further $243k (or at 6% compounding, $395k).Which would you rather be?
On a personal note, a few years back my partner & I were told by a mortgage broker that we could borrow $720k to buy a PPOR on a combined pre-tax income of less than 2k per week. The interest rate was 4.99% at the time…[blink] Only time (or a couple more IR rises) will tell how many suckers took them up on the offer!
Cheers, F.[cowboy2]
PS – If my numbers don’t add up, blame infochoice.com. I’m too tired to do the calcs myself!Hi
I generally think it is better to rent first rather than buy a home to live in.
With yields so low, you could rent something in Sydney for about $400 pw, which would be worth about $500,000. To purchase something for $500,000 would involve considerable costs (not claimable) and the repayments would be huge – about $650 pw interest only. And then you have council, stata fees (if a new unit these could be another $5000 per year).
So it may cost twice as much per week to live in your own purchased home as to rent the same place.
There is also the fact that you may just spend the money you are saving on ‘living’ if renting, whereas with buying you would be forced to put it on the loan.
There are also capital gains to consider. However, if you have a rental property while renting, then you will still have access to the capital gains – maybe not tax free though.
Maybe you could buy something, live in it for a short period and then rent it out. This way you may be able to claim it as your main residence for a period of up to 6 years and still claim the deductions and yet pay no CGT if sold during htis period.
I started doing an excel spreadsheet on renting verses buying a while ago. I don’t think I really finished it, but I could send you a copy to play with.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Some great comments on this post – thanks.
WWJD, I recently read a newspaper article (SMH?) on this topic, and the authors’ conclusion was that renting was better than buying.
However, the author did say that if:
1. interest rates remained stable (ie. not rising)
and
2. house prices continued to rise (as per boom)
then you may be better off buying now.So, you need to consider whether those things are likely in today’s environment.
The only big proviso made was that you should save (and invest) the difference between what you would pay for your mortgage, and what you actually pay in rent.
When renting it can be easy to blow the extra on ‘living’. But, if you are disciplined, then saving and investing the extra is likely to pay off down the track.
Personally, I’ve chosen to rent instead of buy, which is working for me.
I would also be very interested in seeing the spreadsheet Terry, if you don’t mind!
Cheers, Fin.
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