Don’t Sell, But Rent!

Tuesday, February 16th, 2010 at 15:30

Recently, a G Media colleague asked,”What should I do with my property? Should I sell and buy into another area?” The property – her principal residence – has greatly appreciated in value. Would it not make sense to sell it and use the proceeds as a deposit for another property? But my colleague wants to be in the property investment game, too. She also wants to buy another property.

If you research on the internet, you’ll find many articles about whether to buy or rent. The answer would generally be “buy” if the property market is in a boom, interest rates are low, lack of housing and so forth. But the answer would be “rent” if the general market characteristics were the opposite. The analysis between the two situations comes down to how much cash and capital appreciation you’ll receive from renting out an investment property. Then comparing it against how much cash you’ll make from investing your hard earned dollars in something of similar risk, such as a term deposit or government bonds (they pay you interest at set frequencies). But this analysis is not entirely appropriate for my colleague. She’s already got a property and should make use of it.

As an alternative, my friend could keep her current property and rent it out, use the value (equity) she gained from the property value increase as a deposit to buy another investment property. And rent the new property, too. It’s an attractive market at the moment. There’s a high demand for housing and we’ve been told there’s just not enough housing to go round. I’ve heard stories about people offering rents that are higher than what was expected! Plus, the “experts” are predicting the property market to continue to be strong this year.

So where is she going to live?! She should rent a property. What?? How does this make sense, you’re saying. It makes perfect sense if my colleague doesn’t care about not living in “her” house (which is contrary to the Australian dream). While she’s renting, she’s got two extra income streams (the rents from the two investment properties) which she should aim to be two-thirds of the total mortgage repayments (depending on her salary and how much debt she wants to have) and she tops up the remaining third with her salary. She gets to enjoy being in the property market with two properties that appreciate in value in a booming market and she can deduct the mortgage interest (not the principal repayment component) against her salary.

Anyway, this is my suggestion to her.