Saturday, December 3, 2011

Rent Money is Dead Money

I often hear young people say that rent money is dead money.  However, in many instances, it is better to rent than to buy.  This is particularly the case if you only want to live in the property for up to three years.  The transaction costs kill any possible benefits of buying.

Consider the purchase of an apartment for $450,000 in Brisbane.  The stamp duty (unless it is a first home) is just over $14,000.  The real estate agents' commission on resale (when you come to sell) is about $12,000, plus advertising costs.  This totals $26,000, or $500 a week if you own for a year, or $166 a week if you own for three years.

Plus you have to pay rates, body corporate, water and insurance, which for most apartments in Brisbane will be more than $5,000 a year (or about $100 a week).

So if you own for three years, you will be paying about $266 a week for stuff that the landlord would normally pay.

This does not take into account interest payments.  Interest is likely to be more than $24,000 a year (assuming no payment of principal), or $461 a week.

So to own the $450,000 apartment for 3 years will cost the equivalent of at least $727 a week in rent.  Of course, you can rent such an apartment for much less than this.  So if you have a $90,000 deposit, put it in the bank and receive $100 a week in interest, and rent for $500 a week, and you will be at least $327 a week better off renting than buying!

2 comments:

Annette Higgins said...

If you buy an apartment you are best to rent it out and claim all the tax deductions. Then rent a place for yourself to stay.

andew.ba said...

yes the tax deductions on your loan interest and other costs, then the depreciation of the property can save you thousands a year. I saved $4500 for the 2011 tax year. being an owner at Felix Tower.