Better off to rent than to buy property?

[POSSUM THE CAT]

Robo The rents in the past would more than pay all costs & pay off the mortgage. Rents today will not go anyway near it at todays low interest rates. Let alone the amount you would have to put in at normal interest rates. My first rental mortgage was $16.21 per fortnight on a ten year term. Rent was $26.00 per fortnight this was the early 1970s Nowdays the rent would in most cases barely cover the interest & property was increasing at afar greater rate than now.

[fungus pudding]

I hope you are wrong FP, what makes you think this will happen now when it hasnt happened in the past 70 years or so?

The way up has never been in a straight line. Never will be. I've always liked this graphic illustration from a couple of years back.
http://www.youtube.com/watch?v=kUldG...wY_hA&index=36

When analyzing prices over a few decades remeber the more modern a house/building is the better equipped it will be, and look hard at capital and maintenance costs other than purchase. e.g. has roof been replaced in the time analyzed? how many kitchens? Bathrooms? Recarpeted? It's never ending.

[fungus pudding]

Fungus Pudding I think you'd still have to class a real asset like domestic property as an investment, it just may not be a great one.

Sure, but the returns are not simply financial.

[fungus pudding]

Firstly, house prices will not continue to appreciate in the same way as they have over the last 20-30 years. Demographic changes practically guarantee that. Consider this:
- in the past 30 years the average household income has shifted from a single income, to a double-income household as women went to work and stopped being stay at home mums, thus fuelling the ability of a household to service a much larger mortgage, and driving up house prices. Unless polygamy becomes legal (or children start living at home forever), there is no way that a double income household is going to become a triple or quadruple income earning household. So the ability to service ever larger mortgages is now capped, and thus prices are also capped.
- in the past 10-20 years the baby boomers hit their peak income earning abilities, and enabled them to service multiple negatively geared property mortgages as they 'saved" for their upcoming retirement. The influx of boomer property investors into the market drove up prices, now the trend will reverse as boomers sell property investments as they retire. Retirees with no income cannot service negatively geared property investment mortgages.
- the crash in share markets over the last 10 years has decimated many super funds, investments and savings. Retirees will be forced to get cash to fund their lifestyle by unlocking their property investments, this means selling up (unless reverse mortgages suddenly become all the rage, but in the absence of capital growth most banks will steer clear of those anyway).

So anyone who thinks that history will simply repeat ad infinitum, needs to rethink.

If you are good at investing, then I suggest you put away every spare cent you have and invest it until you have enough to buy a house outright, with cash. Then buy yourself a home that you will be happy living in for the next 10 years or so. Then take an interest only line of credit on the house to reinvest back into the market (assuming you can get a return on investment over and above the cost of borrowing). This makes your mortgage payments tax deductible. So you can have your house, make low payments on an interest only tax deductible mortgage, and receive a cash income (or capital growth) on top. This is called having your cake and eating it too :-) Another advantage of doing it this way is that if you lose your job or can no longer work you can simply sell your investments and pay back the mortgage, you wont ever lose your house to the bank.

The hard part is accumulating the cash in the first place - achieve this, and everything else is a breeze. It took me 8 years.

Spot on. I first started investing in early 70s and only in residential property. In no time I was able to make a good living at it. I got out of that a few years back and hold only commercial property. Times have changed, and will not be seen again for one hell of a long time. This is compounded by the fact that buying res. property as an investment now means competing with all sorts of brainwashed heroes who think it is easy - well it ain't any more.

[Sideshow Bob]

Then buy yourself a home that you will be happy living in for the next 10 years or so. Then take an interest only line of credit on the house to reinvest back into the market (assuming you can get a return on investment over and above the cost of borrowing). This makes your mortgage payments tax deductible. So you can have your house, make low payments on an interest only tax deductible mortgage, and receive a cash income (or capital growth) on top. This is called having your cake and eating it too :-)

Nice post KW, but can you explain a little the line of credit and then making mortgage payments tax deductible? Don't really understand - would you have to trade as a company?

I got home ownership in just under 10 years. Except the other half bought the house. I just paid for it......


Cheers
SSB

[lou]

Hi Sideshow Bob.

The tax deductibility of a loan depends on the purpose of the loan. For example if you get a mortgage to buy a house to live in the interest expense is a personal expense. If you get mortgage for the purpose investing the interest expense is a business expense and therefore tax deductible.

You don't need to be trading as a company to claim interest expense. You can claim it in your own name. If you have equity tied up in your house you could quite easily use a revolving credit facility for investing.

[fungus pudding]

Hi Sideshow Bob.

The tax deductibility of a loan depends on the purpose of the loan. For example if you get a mortgage to buy a house to live in the interest expense is a personal expense. If you get mortgage for the purpose investing the interest expense is a business expense and therefore tax deductible.

You don't need to be trading as a company to claim interest expense. You can claim it in your own name. If you have equity tied up in your house you could quite easily use a revolving credit facility for investing.

I'll just poke my nose in and qualify that. The investment has to be likely to produce taxable income in the foreseeable future. IRD have declined interest claimed where there is no chance of profit from the yield, and have deemed the investment to be purely speculative, or for capital gain.

[lou]

I'll just poke my nose in and qualify that. The investment has to be likely to produce taxable income in the foreseeable future.

The investment has to have the intention of producing taxable income.

IRD have declined interest claimed where there is no chance of profit from the yield, and have deemed the investment to be purely speculative, or for capital gain.

If investment is purely speculative they would be consider a trader, and would have to return profits or losses on the eventual sale. You would still be able to claim the interest.

It is the doggy situations that you have to steer clear off. The kind of situation are only done for a tax benefit, and will never make a profit.

[fungus pudding]

The investment has to have the intention of producing taxable income.



If investment is purely speculative they would be consider a trader, and would have to return profits or losses on the eventual sale. You would still be able to claim the interest.

Not quite. I was involved with one instance of a commercial property with a long lease without a rent review. The owner was certainly not a trader - never sold anything - yet his interest claim was denied. If you are familiar with the AMP/Woolworths properties that was generally the case also. The IRD used to send form letters asking about residential real estate investments, e.g. was it rented to a relative, how long before it was expected to produce a profit etc, althought they seem to have given up on that lately.

[Sideshow Bob]

Thanks FP & Lou for your time in answering my query.

Cheers
SSB