I am currently living with a housemate and my living expenses are very low. I am however considering moving out on my own and renting something small but nice… for around $350 per week.
As a result of an inheritance, I am expecting to have around $400,000 in the near future. I would like to invest it.
I am considering buying an investment property.
What are the pros and cons of renting out my place but living in a rental myself? Would it be financially wiser to live in my own place?
yes it is good to have no debt but with one paid off property most likely you will stuck with one, but if you invest wisely, you can have two and more (taking out capital, use it to get another one, tax saving, etc etc etc)
contact an accountant / adviser
Thanks for that. I was even considering buying two investment properties, and making sure that rent income covers at least the minimum mortgage repayments, and using my salary for rent and living expenses. Or would this not make any sense?
Easier than reality, try take random one and then calculate make sure all costs, factor in vacancy rate, a bit higher interest rate, etc and you will find you need to pay 70% to break even. Especially with strata cost!
That's why most investors only have negative gearing properties
Have fun trying to find a cashflow positive property, let alone two in the current climate.
That's why most investors only have negative gearing properties
Not necessarily, cashflow positive properties do exist but they're far and few. Again, the recent price hike didn't help things and push rent down and prices up meaning your yield got slimmer again.
Use the money to buy a place to live in, then if you want an investment property use the equity to get a loan which can be negative geared.
Interesting thread, I'll be keeping an eye on this one. Also my condolences for your loss.
Thank you.
Thank you all.
Should I take into consideration how much my rent would be as opposed to how much I could rent my own place out for? Or does it always make sense to live in own property?
It really comes down to where you want to live and if you can actually find a place in that area for around $380k. Coz there are things like stamp duty and various fees and whitegoods/furniture if you don't own any.
I agree with those that say put that money towards a place for yourself. Then purchase an investment property down the track against your equity and negative gear. (assuming you have a reliable job) Although there have also been recent discussions again about removing negative gearing (again).
I'm not an expert or anything and this is just my opinion and i'm going to type this out from my own understanding of the situation. I see two scenarios here and i'm going to make several assumptions for arguments sake:
- Property is an apartment
- Cost of property = 400k
- Neutrally geared investment property (holding expenses = rental income)
- Excluding potential for capital gain/loss because the same value will apply in both scenarios.
Scenario 1: Buy Investment Property to rent out and rent for principal residence.
Expenses: $350 per week rent = $18200 per year
Profit/loss from investment property = $0
Tax refund: $2873.80 (Calculation below)
Leaving a net expense of $15326.20
In this scenario you can claim deductions on your investment property. A list of deductions you can claim are listed here: http://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/in…
These deductions would be most beneficial if you are at the border of each tax bracket. For most people it'd be between $37,001-80,000. For example if you earned $82,000, you'd be paying $17,820.80 in tax. Now let's assume you are eligible claim a total of $8000 in deductions thereby reducing your taxable income to $76,000, you will now be paying $14,947 tax. This is a $2873.80 reduction in the tax you pay.
Scenario 2: Buy own property.
Unfortunately you can't claim deductions on your principal place of residence unless you are using any part of it to produce rental income.
Strata: $600 per quarter = $2400 per year
Sinking $200 per quarter = $800 per year
Council $250 per quarter = $1000 per year
Water $180 per quarter = $720 per year
Total expenses per year: $4920
I may be over simplifying it so i'm happy for others to add some input as this will be invaluable information for me as well.
Note: There are other options than what i've given e.g. buy your own place but rent out a section of it. That is if you don't mind having a room mate (perhaps if you don't mind your current roommate, they could be paying you rent. It would also allow you to claim some deductions as well)
End of the day, do your research and speak someone qualified before making your decision.
Now if we look at Scenario 1 again but with a positively geared property (assuming 80% occupancy rate):
Scenario 1: Buy Investment Property to rent out and rent for principal residence.
Expenses: $350 per week rent = $18200 per year
Rent from Investment property = $400 per week = $16400 per year
Taxable income = $82,000 + $16,400= $98,400 - $8000 (deductions) = $90,400
Tax paid: $21,395
Net income = $77,005
After paying rent = $77,005 - $18,200 = $58805
Scenario 2 tax:
Taxable income = $82,000
Tax paid = $18,287
Net income = $63,713
Disadvantage with buying your own place is mainly that none of the interest on your loan or expenses on property are tax deductible to you, with an investment property your expenses (incl interest) are tax deductible. I think that is the main benefit of having an investment property and renting.
Disadvantages of renting for me would be not being able to modify the place I'm living in, the quarterly inspections are pain and then the instability of the rental (we've been renting a place for a year and have just been notified owners want to move back in).
If there is a winner and loser in the rental game, then by you being a tenant and a landlord, you will be a winner and a loser. Not logical.
Put it all towards your own house. I have had both and I paid of my last house when I sold my investment property and was debt free for 5 days, then I bought another investment property. I miss those 5 days.