Peter Switzer Daily

Rent or buy? It’s a silly argument

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by Peter Switzer

With the major banks killing to lock people into five-year fixed rate home loans, which look cheap but are dearer than they look, and as my company has launched Switzer Home Loans, I thought I should buy into this silly argument about renting or buying.

There is no way anyone can generalise about whether it's best to buy or rent because there are really good ways to be a buyer only and a renter only. It depends on your attitude to risk, your access to capital, your access to good real estate knowledge, your ability to renovate economically, your ultimate wealth-building goals, your willingness to live with building mess and bloody good luck!

On luck, you could face a period of very high interest rates, high unemployment, a crazy government planning decision, a sickness in the family and even a divorce, which could rattle a really good buy-only or rent-only property plan.

Robert Kiyosaki is a rent-only guy, and argues that you are better off renting and buying properties as a landlord. He advocates using the tax system and the capital gain on your first property to then borrow again using the tax system, and eventually build up a portfolio of many properties all being paid off by your income from working and the tax system.

It’s not a bad plan provided you stay in work and get nice pay rises. A public servant with potential could create a good plan based on this strategy.

But one thing Robert does not calculate for Australia is the appeal of no capital gains tax on your principal property. Many people have built wealth by buying the worst house in the best street in an up and coming suburb, then renovated it, pushed up the value and sold it capital gains tax-free. They then have traded up and retired with a $3 million home, then retired to a $1 million pad by the sea in the country with a tax-free $2 million plus their super. Did owning property work out there?

Capital gains

I had friends who bought what they called penny dreadfuls in Redfern in the 1970s and rented them out and they were positively geared. That means they bought them for, say, $200,000 with a seven per cent fixed and interest-only loan where the interest was more than covered by the rent, which might have been $300. So the interest bill was around $14,000, but the rent was around $15,000 and so it was positively geared. 

Now those properties would be worth over a million dollars, but they have been owned the easy way.

Of course, some suburbs don't get the same capital gain as close-to-CBD properties and so poor buyers in the wrong areas might be better off being renters-only types.

And if renters-only, say, set up a self-managed super fund and salary sacrificed to the max and bought dividend paying stocks, especially after stock market crashes, they could be miles better off than someone who simply buys a nice house in a nice suburb where the capital gain is just OK.

I have a colleague who did not like property but did buy a nice apartment in Woollahra and always bought dividend-paying stocks, re-invested all of his dividends and just let his capital roll through crashes and booms. He ended up with $5 million in his super fund with an average yield of 10 per cent, which means his wife and he now live on $500,000 a year tax-free, thanks to the wonder of superannuation!

Reading silly stories from RBA economists, who can only do these tests of renting versus buying via making assumptions can mean you close the door on the money-making options that could really help you build your wealth.

Wealth-building plan

One reason why I like buying property is that banks will lend you a lot more money and it means you can leverage off these bigger sums and it forces you to save more in paying it off. And when you get, say, 10% capital gain, you pocket more dollars when the property you own is worth $700,0000 rather than $400,000. In case maths is not your long suit, 10% of $700,000 is $70,000 and this is bigger than $40,000.

The bottom line is to create a property wealth-building plan. I like to buy a principal property and do it up for the capital gain and the nice feeling of living in a great home, which is a B-plan for retirement if super is not big enough.

When you are paying too much tax, salary sacrifice and buying a rental property can be sensible ideas.

If anyone tells you that one is better than another, they are doing it based on their assumptions but they might not be yours. I have to say I am surprised people make the biggest buy decision without a financial plan, but I guess a lot of financial planners have scared people off, which is a pity the industry needs to fix.

Finally, yes we now do Switzer Home Loans. Our variable rate is 4.79% and our comparison rate is exactly the same as we don’t add on fees. So if you dive into a new loan, make sure you ask what is the comparison rate because that is what you will pay.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Tuesday, July 29, 2014

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