Why You Should Rent Your Property Rather Than Sell It

April 7, 2019 3:20 pm Published by Leave your thoughts

If you own your home and you feel like you’ve already outgrown it, you may be thinking about selling. It could be a good idea to ditch that plan, however, as it’s not your only option, and as we’ll explain in just a moment, probably not the best one.

To have and to hold: The net worth relationship

Property is one of the most important tangible assets you can possess. When measuring wealth, the thing to look at is not strictly just your bank balance, but the overall net wealth picture.

When you hold real property, it has greater real worth than currency. It’s a bit complex to explain how that works without going into a huge amount of detail. In a nutshell, it is a simple fact you can check on any decent finance site that money loses value over time while property typically doesn’t.

To put that as simply as possible, the value (buying power) of $1 today will probably be less in five years, however a piece of property would be expected to increase in value at a faster rate than the currency is devalued (resulting in a net gain). Holding onto property, therefore, normally preserves net wealth better than exchanging it for cash.

A passive income producing asset

Passive income is income you receive without significant effort. Rental income is passive income because normally you don’t have to do anything except bill the tenant. If you have a property manager handling the rental for you, you don’t even need to bother with billing.

Obviously, passive income is highly desirable, and property rent is one of the easiest forms of passive income to produce.

Rental income is also less volatile and more predictable than most other forms of passive income. Unlike other passive income sources such as royalties, shares, and managed funds, you have direct control over the amount you receive.

Currently in Australia there is a housing shortage in most areas, which provides market conditions that favour landlords. That doesn’t mean you can set outrageously high rents, because there is a limit to what people can afford to pay, or what they’re willing to pay. It just means there are plenty of tenants and a healthy market.

Reduce your tax burden

While you’ll need to consult an income tax specialist or accountant to determine the full measure of advantages you can create for yourself, there will be numerous tax deductions available to you as a landlord.

You’ll be able to claim all the input costs involved in renting and managing your property, and that can include things which actually increase the value of the property such as renovations, repairs, and replacements. You’ll also be able to claim management fees and other reasonable costs.

There will certainly be other deductions available to you as well, so talk with your accountant or financial advisor to discover the possibilities. You may be surprised what you find out.

You still own the property, no matter what

This is the most important point of all.  If you upgraded your home to a new dwelling, and you simply sold your old home, you’d no longer have the old home. Supposing that some great disaster resulted in you not being able to live in the new home any more, if you had already sold your first home, you wouldn’t have any place to go.

Keeping your first home gives you options you wouldn’t otherwise have, and that alone is a great reason to do so.

You can do this even if you only have one home

If the value of your first (and only) home is relatively high, there is a clever strategy you can employ that will allow you to own it outright sooner than would otherwise be possible. Best results are possible when you have a home with very high value.

All you need to do is move out of your home and be a tenant in a home with a lower rent value than your own, and pay the difference in the rents into your mortgage, either in addition to your regular mortgage payment, or instead of the portion of your salary that would normally be used to make the mortgage payment.

Example:

Rent you pay: $800 per month

Rent you receive: $1400 per month

Difference: $600 per month

Normal mortgage payment: $1000 per month

Now you can either:

  • Pay $400 from salary and $600 from rental income to meet mortgage obligation, or
  • Pay $1600 to meet mortgage obligation

The first option allows you to create savings of $600 per month which could be used toward investments. The second option will allow you pay your mortgage off much more quickly and save a small fortune in interest.

If the balance of your current mortgage is around $125,000 and you have between 18 and 19 years of payments left on it, at 7 percent interest your minimum monthly payments would be just under $1000 per month. Paying that extra $600 per month would take approximately 10 years off the mortgage (it would be fully paid up in just 8 years and 5 months), and you would save $57,458.76 interest.

You will, of course, have to account for additional income of $16,800 per year on your tax return and pay taxes on the non-deductible portion, so it’s not pure profit. You would still be likely to come out way ahead compared to if you just remained living in your mortgaged home.

The rental option is nearly always the best

You have plenty to gain by renting your property, especially if you make sure you have a reliable property manager and landlord’s insurance. Choosing to hold your assets means you have the additional options that a higher net worth provides, and you can always make the decision to sell later.

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This post was written by Technical Underwriting Centre

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