Is a home to live in a bad investment?

I’m seeing a lot of ads online for buyer’s agents claiming that buying a house to live in is a bad investment.

One person in particular who is very prolific right now claims you would be insane to buy a home and that investing in homes whilst you rent is the way to go.

But does this claim stack up? Let’s explore some of their claims in more detail.

Investment properties generate income whereas your house does not

This particular buyer’s agent’s position is that if you buy a home to live in, it won’t generate any income for you.

Instead, if you buy a house as an investment, it can generate income which you can then use to fund your life including your rent.

This is a pretty confusing position to take.

When it comes to living on your investments, there are two variables to this.

• The first is how much you are earning from your investment (Incoming Money)
• The second is how much you spend and need to fund with your investments (Outgoing Money)

If you have only investment properties, whilst you might have more Incoming Money, you’ll have a higher level of Outgoing Money because you need to pay rent.

If you have a house to live in (potentially paid off), you won’t have the same level of Outgoing Money so won’t need to generate as much from your Incoming Money.

Largely this argument doesn’t really stack up.

Renting is cheaper than mortgage payments

The other claim this buyer’s agent puts out is that he can rent a property so incredibly cheaply whereas if he bought it, the mortgage payment would be high.

Again this doesn’t make a lot of sense.

His position seems to be that property doesn’t provide a very good income. Because of this, he can get a great property with very little rent.

But this position cuts both ways. If his entire investment strategy is property, he too would also not be getting very good rent for his properties.

I can see this argument might make sense where one market is less efficient than another.

For example, if where you rent (e.g. Sydney) the value of property far exceeds the rent, it might make sense to invest in a market where the prices better reflect the rent.

In the investment world, this is referred to as the multiple. It’s the number of years you would need to receive a profit before you make your money back on the investment.

For good investments with a large amount of upside, they tend to have higher multiples (i.e. it costs more to buy the investment in comparison with the income received).

In property, of course Sydney trades at a better multiple than Yeppoon (for example). Whilst Yeppoon may deliver more rent, it carries a lot more risk that people might eventually not want to live there which may keep prices low.

Whilst there is some legitimacy to this argument, it probably needs further nuance and a bit of reasoning as to your investment goals.

There are tax benefits to investment properties that you don’t get with the house you live in

Another claim I’ve seen is that having an investment property provides you with tax deductions whereas owning your own home does not.

This argument is partly true.

Let’s say you bought a house for $1.5M with a 5% deposit and rented it out for $800 per week. You also then rent a place for $800 per week.

In this scenario, because your mortgage interest is so high, the rent likely won’t be covering all the costs of the property plus the interest. For this reason, you’ll get a tax deduction (if you have good earnings).

In this scenario, in the short-term, you’ll be better off from a tax perspective than if you just paid your mortgage.

But this isn’t true for the entire time you hold the asset.

Eventually, you’ll start paying it down and the interest will start reducing. Once that happens, you may start generating a profit on the investment property at which point you’ll be paying tax (plus investment property costs). This means that once you pay your rent, you’ll be worse off than if you just lived in the property.

The big one that is also ignored here is capital gains tax.

Your home is exempt from capital gains tax whereas an investment property is not (with some exceptions where you’ve lived in it and only move away for a small period).

If you save a bit of tax along the way but then get hit with a giant capital gains tax when you try and sell it to buy something you want to live in, it may not be worth it.

Additional Considerations

One thing that is left out from this discussion is also just the inconvenience of renting.

When you’re a cool young couple who lives in an apartment, moving house really isn’t a big deal.

If your landlord decides after 12 months that they don’t want to renew the lease, you just put your small amount of furniture in a trailer and move to a new apartment.

But this isn’t the case for your whole life.

As you start having kids, you’ll find yourself with a lot more things that makes moving a very costly exercise.

In addition, if your kids are in school, you may not be able to get a rental near the school which would cause a lot of issues.

For some people, the flexibility of renting is great, but for others, moving every 12 months sounds like hell on earth.

What about retirement?

When it comes to retirees, there is an astounding amount of data highlighting that those without a home suffer financially.

In particular, our entire Aged Pension is set up on the basis you own a home. If you don’t, you do get a small allowance for the fact you need to pay rent but this really isn’t comparable to owning your home and receiving the pension.

Summary

In practice, I suspect the reason the buyer’s agents push not owning a home is because they want you to engage them.

This one in particular who helps you to invest wants you to not own a home because then you have the borrowing capacity to engage them for multiple properties which you may not have if you have a mortgage.

In practice, there are many great ways of building wealth and it all comes down to your particular circumstances and what makes you happy.

For some people that is renting and having a lot of flexibility. For others (and probably the vast majority) owning a home makes a lot of sense.

If you’re looking at ways to build investments and want to know how to do it in a smart way, then please reach out. We have clients all over Australia and would love to hear from you.