The Advantages of Renting vs. Buying in Sydney: A Personal Perspective
This article explores the decision between renting and buying property in Sydney, Australia, with a focus on the "Rentvesting" strategy – renting a home to live in and investing in property elsewhere. It shares a personal experience of moving to a new rental property and the reasoning behind choosing to rent rather than buy.
Choosing a Rental: A Long-Term Investment
One key factor in selecting the current rental was the landlord. She had owned the property for 37 years, signaling a long-term investment perspective. The assumption was that finding a quality tenant was more important to her than maximizing rental income. This ultimately led to securing a favorable deal.
Further research revealed the landlord to be a Sydney-born interior designer now residing in the United States, traveling the world with her husband, who has Chinese heritage. The rent paid contributes to their retirement income, highlighting the benefits of long-term property investment.
Investment Returns: The Power of Time
The property was purchased in 1988 for $354,000. At that time, the median house price in Sydney was around $141,000, and the median apartment price was $118,000. Currently, the property is estimated to be worth at least $3 million. A nearby apartment recently sold for $4.8 million, although it had waterfront views.
The median apartment price in the area has increased from $118,000 in 1988 to over $2 million today. Assuming a current value of $3 million, the annual return on the original $354,000 investment is approximately 6%.
The original investment of $354,000 in 1988 was considered expensive for the time. However, the investor's long-term vision has resulted in significant returns. Roughly 12% represents the initial investment, and 88% is profit. Factoring in leverage (mortgage), the actual cash outlay was likely less than 3% of the total value.
Considering a conservative valuation of $3.5 million, the annualized return reaches about 6.4%. If the initial investment represented only 10% of the property value, then the return on the invested capital amounts to a staggering 50 times the initial investment. This underscores the importance of long-term property investment.
Renting vs. Buying: Which is Right for You?
The article addresses the common dilemma of whether to buy or rent a home, particularly for new arrivals or those working hard in Sydney.
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Buying: If you have a stable career and a desire for a settled life, buying a home can be a good option. The property can appreciate over time and provide a sense of security.
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Renting: If your financial situation doesn't allow you to buy what you want or you need more freedom, you may consider renting a place you enjoy while investing your savings.
The Benefits of Rentvesting: Lifestyle, Flexibility, and Cash Flow
The author prefers renting because buying a suitable home in a desirable area would tie up all available capital. Rentvesting allows for investment of capital into assets and provides:
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Lifestyle: Renting allows you to live in a location and type of property that aligns with your lifestyle preferences, even if it's beyond your current buying power.
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Flexibility: Renting offers greater flexibility to move as needed, without incurring significant transaction costs like stamp duty (property tax). Each home is usually worth around 3 million dollars with a 5% tax, which means 150 thousand.
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Cash Flow: Renting can be significantly cheaper than paying a mortgage, freeing up cash flow for investments or business ventures.
For example, a $2.5 million mortgage at 6% interest would result in approximately $150,000 in annual interest payments. Renting a similar property can cost less than half that amount, freeing up capital for other opportunities. With the savings, one can support several of the properties the individual may buy for investment.
The Downsides of Renting
The primary disadvantage of renting is dealing with property managers, which can sometimes be challenging. Unlike owning a home, renters have less autonomy and may face restrictions.
A Glimpse into the New Rental
The author describes their new three-bedroom apartment, which serves as both a residence and an office space. Key features include ample light, views, and proximity to their child's school.
The location provides stunning views of Sydney landmarks. Despite these advantages, the rent is a relatively affordable $1,300 per week, making it a worthwhile choice compared to purchasing a similar property.
Conclusion: Is Rentvesting Right for You?
The article concludes by inviting readers to share their thoughts on Rentvesting and whether they would prioritize buying a home or investing first. A free report is offered to first-time homebuyers for further guidance.
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