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Rent or buy, the real property question

Paying down mortgage debt can often stir questions about whether it's better to rent property elsewhere. Here's what to consider with tips from our experts.

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I like renting, and I like buying property, all just as long as the numbers stack up. Here’s what two money experts say to consider when you’re deliberating over whether to rent or buy property.

It’s often said that rent money is dead money, and while this has some truth to it, so too does the saying that when you buy a house using debt, you can become a slave to it, and sometimes that’s a life sentence.

So it’s important to take a brutal and unemotional look at your numbers before making any big-time moves.

The average single dwelling property price in Sydney is around, frankly above, $1-million, while the average nationally is around $695,000, according to the Real Estate Institute of Australia.

But it gets interesting when you look at rental prices, which have started to soften nationally.

The average rental price for a detached house in Sydney is around $600, but the capital city average is around $480, says property research firm CoreLogic.

Compare that to weekly repayments of about $695 based on the average mortgage size of around $540,000 in New South Wales with a 4.75 per cent interest rate over 30 years – and you can see why renting looks financially more attractive.

The math may look even better when you compare a Sydney rental property to one in a regional “Sea Change” area.

But as Natasha Janssens founder of Women With Cents notes, a Sea Change doesn’t necessarily have to be completely out of a capital city, it might just be in a fringe location or a more affordable area.

“There is a whole new breed of ‘rentvestors’ especially among the Gen Ys. These are people who prefer to rent in a more desirable location where they perhaps couldn’t afford a mortgage, and instead they purchase an investment property in the outer suburbs.

“If you have other plans for your money, perhaps it would be cheaper to rent, and the difference between the rent you pay and the mortgage can be put towards starting up your own business or another form of investment.

“Or if you don’t have a sufficiently large enough deposit, that is less than 20 per cent, and you don’t want to pay Lender’s Mortgage Insurance, it could be worthwhile to continue renting while you save up a larger deposit,” says Ms Janssens.

Tax considerations

Then there’s the tax appeal of renting and the deductions that may come from it, for people running a home based business or eligible to claim work from home expenses.

For people paying the highest marginal tax rate, it does make sense to rent while investing in property elsewhere.

Susan Wahhab author of the book Money Intelligence takes a slightly different view on renting versus buying.

As a general rule I am a “buy your own home” advocate. You can’t rent forever especially at retirement. For those who are relying on receiving old age pension, the rent could be 70 per cent to 80 per cent of their income.

“If you have not saved enough deposit, I recommend that you keep renting while saving at least 10 per cent of the purchase price and stamp duty and legal fees before you go house hunting.”

She also points out that for small business owners working from home, it makes tax sense to rent while claiming a portion of the rent, which is calculated based on the floor space used for business purposes, and yes you can include the garage if you keep a company car.

“You get to reduce your cash outflow after tax. On the other hand, if you own your home and run your business from home, you may need to claim that business portion of the mortgage and property costs against your business income,” says Ms Wahhab.

This of course is a tax effective strategy until you sell your home and end up paying capital gains tax on the business portion and this might not make it a good strategy longer term, so in this case it could again be better to rent.

Often making the decision to rent out the more expensive property can be a difficult one – especially if that property is your dream house or location and has those invisible but very real emotional strings attached.

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