Rent or Buy: Are you aware that your approach to renting versus buying in real estate can have a lasting impact on your financial future?
Whether you’re a first-time buyer or looking to grow your investment portfolio, it’s important to not only understand all your options before purchasing a property but also to ensure that your buying approach best suits your financial goals and circumstances.
There are two buying approaches you could consider: “Buying to rent” (also known as rentvesting), or “buying to live”. Both investment strategies have their own pros and cons, and there are valid reasons as to why someone would use either one; there is no “right” option because the most beneficial option for you ultimately depends on your wants and priorities.
This leads us to the question – rent or buy: which buying approach best suits you?
Table of Contents
Benefits of the “Buying to Rent” Buying Approach
This buying approach is when you invest in one property while living in another rental property yourself. In today’s housing market, it might feel tempting to buy your first home as soon as possible. However, the “buying to rent” buying approach has plenty of perks, which is why it’s a strategy that’s steadily gaining popularity, particularly among first-home buyers:
- You can buy an investment property in an area where you can afford a property, and rent in an area where you actually want to live. For example, you could buy an apartment in our Atchison & Kenny development in Wollongong that has prices starting from $520,000*, allowing you to pay a smaller deposit but still achieve strong rental returns. Compare this to buying an apartment in the Sydney CBD, which has a current median price of $1,140,000 (according to realestate.com).
- When you buy to rent out the property, it becomes very cost-effective because your mortgage is being subsidised by someone else paying rent. This allows you to build equity within your property while not having to pay down your own mortgage.
- When buying an investment property, you could qualify for a generous tax break. According to the Australian Taxation Office, certain investment property expenses can be claimed as tax deductions. One such expense is the interest repayments on your loan (which is also why interest-only loans are such a popular choice among investors).
- Rentvesting allows you to live a flexible lifestyle, which makes it the perfect buying approach for people with short-term living aspirations who still want to make a long-term investment. This is because when you rentvest, you’re not locked into living in your property, so you’re free to move around or live somewhere else that caters to your needs.
- After owning the property for a while, a new revenue stream will open up over time. The rent on your property will eventually outgrow your mortgage repayments and become a new cash flow for you.
Benefits of the “Buying to Live” Buying Approach
This buying approach is when you live in the property that you buy (otherwise known as owner-occupied). Here are some reasons why someone would choose this approach:
- You have the option to renovate the property into your dream home. Owning your home gives you the opportunity to make any and every change to the property to better suit your needs. If you were renting a property, you would have limited options to make changes.
- You may be entitled to take advantage of first-home buyer schemes. There are many government initiatives available for first-home buyers in Australia, as the government wants to help as much as they can to help you achieve the great Australian dream of owning your own property. In NSW, this includes first-home buyer grants and stamp duty concessions and exemptions, which could help you save a considerable amount of money.
- You won’t be paying off someone else mortgage. When you rent, you are ultimately paying off someone else’s mortgage and not your own. So if you purchase your own property, you would be building up your own equity.
- When you decide to sell your owner-occupied property, you will generally avoid paying Capital Gain Tax (CGT). Investment properties usually attract capital gains tax at the time of sale, whereas your owner-occupied property is CGT-free.
When making the decision between buying an investment property or a home to live in, there are a few questions you should ask yourself first. What stage of your life you are in? Where do you see your future heading? What are your financial goals?
If you like the idea of being able to live in a property and make it yours, then you may be better off buying an owner-occupied home. On the other hand, if you love living a flexible lifestyle, don’t want to commit to living in the same property for a while and are interested in building a new wealth stream, rentvesting could be your best option.
Rent or Buy: What Factors Should You Consider?
When deciding between rent or buy, several key factors come into play. One of the most critical aspects is a clear understanding of your current financial and personal circumstances. Some factors to take into account when making this decision include:
- Your available finances and your willingness to commit to regular payments.
- Your ideal property type and must-have features.
- Long-term savings goals and financial planning.
- Location and convenience of your future residence.
- Available tenancy or home loan agreements.
- Property condition and the potential for modifications.
- Pet policy and parking availability.
- Any additional costs that may arise.
- Negotiation possibilities with the landlord or property manager.
Keep in mind that your lifestyle and financial situation may evolve over time. Lengthy commitments can lead to conflicts if unexpected changes occur. Therefore, having a clear plan for your future is vital when choosing between renting and buying.
Is it better to rent or buy?
The choice between rent or buy is a complex one, as it involves various factors such as your financial situation, lifestyle, family requirements, investment objectives, and risk tolerance. It’s advisable to conduct thorough research and seek advice from a qualified expert. To assist you in making an informed decision, we recommend speaking with one of our specialists.
You can explore our home loan tools and calculators to determine the amount you could potentially borrow and estimate your repayment amounts. Additionally, our home loan product selector can help you identify the most suitable loan type for your needs.
Furthermore, you may qualify for the Home Guarantee Schemes, which can make it possible for you to purchase your first home.