Why buy when you can invest?

Originally published on Linkedin.

People looking for a place to live in major Australian cities might soon reach the point that renting while they hold investment properties is the superior alternative to buying a property to occupy.

Renting has its share of challenges, but for those that wish to live in the inner cities, the expense of buying a property could far outweigh what an investment could do for them.

As noted in the Sydney Morning Herald, housing affordability across Sydney and Melbourne is collapsing. The report noted that the jump in Sydney’s median house price, now at $1.3 million, would mean that a household with an annual income of $135,000 will spend more than 45 per cent of it on their mortgage. That’s up from 36 per cent just a half year ago.

You could spend that money more wisely…

For the same deposit and purchase costs, an investor could take $1.3 million and purchase three $400,000 properties in high-growth areas. Over the course of approximately 10 years, with 7% p.a. house price growth, it’s feasible that the investment portfolio would double in value to around $2.6 million, with potential passive income of over $100,000. Here’s an example of this in action.

At that point you may well want a lifestyle change out of the city, and it becomes that much easier to pack the bags and move when you’ve been staying in a rental property all this time.

Meanwhile, rental properties have increased in price too, though the growth has been nowhere near as explosive as with mortgage costs. As a percentage of income spent on a residence, people living within the hearts of cities are better off with renting.

Of course, there are risks to doing so. Rental vacancies are at historic lows (though there are signs that that is easing). There is also the likely need to move more frequently when renting.

Don’t be pressured

Something that people should definitively be on the watch-out for is the pressure to buy, regardless of affordability. Real estate agents and social pressure can combine to convince buyers – especially less experienced buyers – to acquire property in sub-optimal areas when the competition is too fierce to pick something up in their first-choice area.

This is something that buyers be wary of and a trap they should avoid falling into. The chances of ending up with all the investment being placed into a lemon are considerably higher when people go with their “plan B”, and often this comes with a sacrifice to lifestyle and amenity to do so.

Renting a property in the ideal location while owning investment properties is a perfectly valid and strategic approach to the current property market. Those investments may have a greater long-term value, and, in the meantime, the rent will consume less of the monthly income while providing you with a more ideal place to live.