Should you Rent or Buy?

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Young homebuyers are faced with deciding whether they should buy their own home or continue renting while investing elsewhere.

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This strategy, known as "rentvesting," has gained popularity in recent years. In years gone by, buying your own home for your family was a no-brainer. But the landscape has really changed.

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First, let's address the homeowner grants and stamp duty concessions. While these incentives can be tempting, they do come with restrictions. You might be limited to properties under a certain price point, typically between $650,000 and $1 million, depending on your location.

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You may end up buying in an area that doesn't align with your long-term goals or lifestyle preferences. Where you buy might also end up underperforming.

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Here are three key considerations.

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Lifestyle

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Buying your first home often means compromising on location. If you're in a major city like Sydney or Melbourne, a $650,000 budget might only get you a one-bedroom apartment in a less desirable area. Is it worth sacrificing your preferred lifestyle just to get on the property ladder?

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In contrast, rentvesting allows you to live where you want while investing in areas with better growth potential.

Borrowing Capacity

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Here's something many first-time buyers overlook: purchasing a home to live in can actually reduce your borrowing capacity, because the property isn't generating income. You might argue that you're saving on rent, but if your mortgage repayments exceed your current rent, you're worse off financially.

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On top of that, investment properties offer tax advantages that your primary residence doesn't. While I'm not an accountant (and you should definitely consult one for specific advice), these benefits can significantly impact your overall financial picture.

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Long-Term Wealth

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The path to financial freedom isn't paved with emotional decisions. When you buy a home to live in, you're often led by your heart rather than your head. This can result in purchasing in areas with limited growth potential or overpaying for features you don't need.

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Rentvesting allows you to approach property purely as an investment. You can target areas with strong growth prospects and high rental yields, potentially building a portfolio that outperforms a single owner-occupied property.

Think practically

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Let's look at Parramatta, a popular area for first-time buyers in Sydney. The median unit price is around $630,000. Over the past few years - arguably one of the best periods for real estate growth - prices have barely moved from $625,000 to $630,000.

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Now, imagine taking that $630,000 and investing in a regional area like Dubbo. You could have purchased a house for $375,000 that's now worth $560,000. While past performance doesn't guarantee future results, it illustrates the potential of looking beyond your local market.

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In today's market, rentvesting often makes more financial sense. Yes, rents are increasing, but if you've invested wisely, the rental income from your investment property should be growing faster than your own rent expenses.

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Remember, average strategies lead to average results. Don't be afraid to think outside the box and you’ll be able to achieve above-average results.