The current Australian property market has reached a significant milestone, with the average property price surpassing the $1 million mark. Coupled with prevailing mortgage interest rates around 6 per cent, potential homeowners face critical decisions in determining whether to buy or rent. This choice holds substantial financial implications, potentially leading to wealth differences running into the hundreds of thousands of dollars over the long term.
### Renting vs. Buying: The Financial Equation
To analyse the better financial strategy between ownership and renting, let’s examine a property valued at the national average of $1,002,500. The average rental yield across Australia is approximately 3.7 per cent, which equates to annual rental costs of $37,092 if one opts for renting. In comparison, owning the property incurs similar ongoing costs, including maintenance and insurance, amounting to about 1 per cent of the property value.
For those buying the property for personal habitation, annual mortgage interest payments would be approximately $60,000, along with ongoing property costs totalling around $10,250 per year. This results in a total expenditure over ten years of about $702,500. However, it’s important to factor in property appreciation. Based on a historical average growth rate of 6.3 per cent, the property’s value is projected to rise to around $1.85 million over the same period, resulting in a net gain of approximately $147,500 after deducting holding costs.
### The Rentvesting Strategy
Alternatively, consider a “rentvesting” approach, where individuals purchase the same property as an investment while renting another similar property. In this scenario, the annual costs associated with the investment property would mirror the buyer’s direct costs, leading to an annual net cost of roughly $33,082 after accounting for rental income.
Furthermore, rental property owners can benefit from tax deductions on holding costs. Depending on individual income taxes, one could foresee tax savings between $10,586 and $15,548 per year, significantly reducing the effective cost of owning the property.
Over ten years, the total costs associated with rentvesting range between $586,380 and $636,000, which could translate into wealth creation exceeding $116,000 compared to the situation where one buys a home to live in.
### Conclusion
The analysis indicates that while home ownership offers stability and security, rentvesting may grant greater financial freedom, enabling more wealth accumulation over the long term. However, it’s crucial to remember that practical execution is vital. Merely opting to rent in hopes of future investment without follow-through could lead to missed opportunities.
For those contemplating the property market, a comprehensive assessment with a financial advisor is advisable. Making informed decisions can significantly impact one’s financial trajectory. For anyone requiring assistance in navigating these financial waters, expert advice is available to guide through these complex choices.
### Disclaimer
This information is general and does not account for individual financial situations. It is essential to seek professional guidance tailored to personal circumstances before making financial decisions.
