Buy a Home or Rent and Invest?

Suzanne and George, 40 year old professionals, hoped to buy their own home in Sydney. The apartment they were in love with cost about $1M, but they only had $100,000 as a deposit.
The bank would lend them $900,000 with a 30 year P & I loan.
However, they couldn’t imagine themselves spending the rest of their lives paying off their home and then at 70 turning around and needing to sell it to fund their retirement.

Build or rent and Invest

Buy or Invest and Rent?

Through buying a $1M investment property portfolio they were able to achieve:

  • They could afford to rent where they wanted to live!
  • They had tenants and tax benefits being used to pay off their property portfolio.
  • They had significantly more disposable income!

Suzanne and George have accelerated their wealth creation. If they had bought their own home, they would have faced being cash strapped for the rest of their working lives and for their retirement.
Instead we created a plan for them for ten years, that enabled them to replace their salaries and set themselves up for retirement while they lived the lifestyle they choose.

For those that like the strategy and the numbers…

Results:

Estimated $220 pw in additional income from the rent or $11,400pa.
Estimated $30,000 in depreciation in first year, giving $9,750 as a tax return.
Income: Total of $21,150 in first year. This additional income can support repayment of the loans.
Costs: Actual rental cost of $34,000 pa compared to required $75,000 pa if they had bought their own home.
Capital Growth: Capital growth is the increase in value of the property. It is not evenly distributed over the property cycle. Different areas rise and fall at different rates. The investment property suburbs had an average capital growth rate of 6% in the last 12 months and so did their target suburb for their future home.
Total: They have an additional $21,000 to direct to future investments; and, discretion in spending or investing over $41,000 in after tax income. They have a capital uplift that can be realised at their exit strategy by strata titling one property. Plus their investment properties and their ideal home suburb tracked at the same rate of capital growth over the last 12 months.

EXIT STRATEGY OPTIMISATION

Current capital growth 3-5%. Increasing demand, above average population growth forecast for 15+ years.
One property could be strata titled immediately. Conservatively estimated at $88,000 increase in value.

HOLDING STRATEGY OPTIMISATION

Gross rental returns of 6.5%.
With the additional capacity to meet future increases in interest rates.

ENTRY STRATEGY OPTIMISATION

Two areas chosen for diversity of economic drivers.

This reduced the risk and increases options if they needed to sell at any point.

Assumptions: The increase in value is conservative. The median price of existing properties in this suburb was $280,000 in November 2014.
We have simply assumed the market value of the strata titled properties as 2 x $280,000 = $560,000. They paid $462,000 and had strata costs of $10,000. This realises $88,000.
In reality, new properties are selling for more. Typical new 3 bedroom properties were priced at about $427,000 on similar sized land to half their block. It is very likely their properties were worth more than $280,000 for the 3-bed side and maybe about this price for the 2-bed side. This would create additional profit.
This illustration is a compilation of the investment portfolios of several clients and is provided to demonstrate the pathways these couples have taken to arrive at their destination through renting and investing.

DOES THIS SOUND LIKE A SOLUTION FOR YOU?

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