Ask Paul: Should we keep paying $1500 a week in rent or buy a house?
Dear Paul,
We are a blended family with four children: an 18-year-old with special needs, two 13-year-olds and a 10-year-old. We have two mortgages on two units between us, with estimated equity of $750,000.
One unit has been valued at about $1.25 million and the other at around $630,000. Both are in good areas and are tenanted. We both have reliable jobs and have a joint income of $260,000 before tax.
We pay $1500 a week in rent on a five-bedroom house in Sydney.
We have around $170,000 each in superannuation. Neither of us has any credit card or other loan debt.
Are we better off keeping our rental units and continue renting for a period, or would we be better off selling both of our properties to buy a house? We need to stay in the area we are in due to our kids' school locations and work-related commitments. With rents going up, we are concerned that this money would be better paying off a mortgage. - Kate
This is a very interesting question, Kate. The challenging bit is mixing investment return prospects with security and lifestyle.
Historically, in most areas, houses have outperformed apartments. This is no surprise. Property is a depreciating asset, which is why the tax office lets you claim depreciation on an investment. It certainly won't give you depreciation on land, because it rarely depreciates.
So, land is your primary 'value driver'. While a property on your land is great - it produces income - but it is not the cause of capital appreciation. Obviously, a home will nearly always have more land than an apartment, hence the disparity in returns.
But we need to balance this. Your apartments not only produce rent, they have leverage in the form of a mortgage, and the mortgage interest is tax deductible, unlike
a home mortgage.
My guess is that if you sold both units and bought a home for the same value, around $1.9 million, you are likely to have a better long-term asset as you own more land. But your cashflow will be much worse. You will have no rent and no tax deduction on mortgage interest
Then, though, we have to pop another number in your calculation. No rent!
My advice here is to get out your calculator (a glass of red might help) and run your numbers. There is nothing wrong with investing and renting. In fact, many will argue you may create more wealth while maintaining better cashflow. But like you and your husband, I'm a family sort of person. Vicki and I have always loved the fact that, large mortgage or not, we owned a house.
Arguably the bank owned more of it than we did, but it was ours. We were paying it off, we felt secure and no one could tell us they were selling our home or moving back in
and forcing us back onto the rental market.
There is not a lot of investment logic here. But for us, the security of owning our home was paramount. So, in your shoes, we'd do exactly that. Sure, we'd calculate selling costs, any CGT, buying costs and stamp duty, impact on our cashflow and so on.
We are not you and you are not us, so it is your call. But if Vicki and I could make it work, we'd be in our own home and investing once we got the home mortgage under control.
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