In todays Money Morning: A young fella after some advice Why renting is like buying groceries How to make over sixteen grand a year on a rental property Making a profit on someone elses house
Tenants: Make $16,140 a Year on Your Rental Property
Money Morning reader, Daniel Karanges writes:
Being a young fella (23) I am still living with my parents saving as much as I can to buy my first house. I am also to be married in October. (Now I think you know what Im going to ask.) We would love to be in our own home around the time we get married. Now, my parents taught me well about money, how it works and to always get the best price for your hard earned money. We really don't want to rent because it's just dead money and pays the land lords house off instead of our own.
Now the big question. Should we be waiting till the new year or longer to get the best price on the biggest investment in our life?
In today Money Morning well explain why rent money isnt dead money. We know that goes against conventional wisdom. But well explain all shortly...
First, we have to admit. Buying a home and moving into it is one of the most exciting things you can do in life.
For your editor its third, behind meeting and marrying the missus (Canada Day, 1995 and Easter Monday, 1997 respectively), and seeing two little nippers being delivered down the chimney by a stork.
However, while getting married and having nippers is expensive, it comes nowhere near the cost of buying and maintaining a home. So while the urge to buy a home sooner rather than later is strong, wed say: ease up there young fella.
Because now well show you exactly why rent money isnt dead money
Why renting is like buying groceries
Rent is simply the price you pay your landlord to provide you with shelter.
If it goes towards paying the landlords mortgage, so what?
Think of it this way. When you buy fruit and veg from the green grocer, do you say, Tsk, thats just dead money. Im helping him pay off his business loan...?
No. Most people are happy to pay the grocer. Because the alternative is planting and cultivating veggies at home it means back-breaking work weekends of hoeing and digging pulling out weeds only to find youve just pulled out half your lettuce crop by mistake!
Or how about this
When you pay for petrol to fill up the car do you say, Tsk, thats just dead money. Im helping the petrol station owner pay off his business loan?
Of course not.
Not when the alternative to filling your car up with $30 of petrol in less than a minute is to spend millions of dollars exploring your own oil field and then spending millions to build your own refinery and to then mine all the minerals and chemicals needed to turn it into petrol
Even if you did all that, how much would you save? Not much. You might save 10 or 20 cents per litre but what youve saved in dollars is offset by what youve lost in leisure time or productive work time.
So, put that way, paying a bunch of other people to do that for you, in return for paying $30 for a tank of petrol doesnt seem such a crazy idea.
Just as you outsource the growing of veggies and production of petrol, renting is just outsourcing the provision of shelter.
Profiting from property without negative gearing
Besides, if you know anything about investment properties, you can comfort yourself in the knowledge your rent wont help the landlord pay off his or her loan
Because chances are theyve got an interest-only loan. The rent youre paying is less than their monthly mortgage repayments.
So, rather than demonise the landlord, thank them. After all, theyre providing you with a house for a lower cost than if you bought the house yourself.
In fact, theyre providing you with shelter below the cost price. Its the equivalent of the local milk bar buying chocolate bars for $2 wholesale and selling them to you for $1.50 retail.
One day theyll go bust until then make the most of it.
Let me give you an example. And youll find the same scenario in any Australian suburb
You can buy this house in St Kilda for $720,000 to $770,000.
Or you can rent this house a few doors away for $465 per week.
If you buy the house with an 80% mortgage itll set you back $40,320 per year in interest charges. Yet if you rent the house down the street itll set you back just $24,180 per year.
In cash flow terms, thats $16,140 youll save each year. In other words, youre making more from the rental home than the landlord like we say, thank your landlord!
It money you can shove into a bank accountearning around 5?6% each year in interest that $800 a year. Even more when it's compounded.
Make a bigger profit than your landlord
But even better than that, youre making a profit from someone elses house today.
The landlord doesnt make his or her profit until they sell if theyre lucky. Whereas youre saving thousands of dollars a year or hundreds of dollars a week.
Thats money going straight into your bank account rather than straight to the banks bottom line.
Money you can use to buy a brand-new double bed, wardrobes, a dining table, a new car, TV... or a crib, bassinet and car seat for when your nippers come along.
So, to sum up: explain to us again how saving $16,140 a year is dead money
