On our recent visit to the Eyre Peninsula, we heard a recurring theme: “We’re looking a buying a property in Adelaide”. This is no surprise, as the banks are more deeply leveraged into residential lending than ever before. We have seen the slice of bank residential lending swing from roughly 30% of all loans in the early 1990s to nearly two thirds currently. Around 33% of all monthly loans written are now for investment properties.
Our response to everyone was the same. Forget about whether you think property will be a good investment for the moment. In fact, it doesn’t matter what investment you are thinking about. The question you need to ask yourself is “what am I trying to achieve?”
Talking about a property in Adelaide – is it for the kids to live in while they study? Is it for you to stay in when you travel? Would you eventually look to live there in retirement? The answers to these questions are much more important than what suburb you think would be nice. If lifestyle is more important, then this should be more of a focus than investment returns. Of course, the other alternative is to rent.
I scrunch my face into a ball when I hear the term “rent money is dead money” – not because I am pro-renting or anti-buying but because this statement is inherently flawed. Why? It makes the assumption that the cost of renting and repaying a mortgage are equal, meaning you may as well spend this money to pay off your own house. This would be great if it were true but we all know this is hardly ever the case, especially when you add in the other associated costs of home ownership. Another forgotten factor is that some people choose to rent because it suits their ever-changing lifestyle. This is akin to taking a taxi for a short journey because it is more convenient than buying the vehicle.
Renting and buying both have vastly different costs and lifestyle implications that will be judged differently depending on an individual’s situation at any given time. A blanket statement such as “Rent money is dead money” does not factor in the opportunity and flexibility that renting provides over ownership, nor does it take into account the surplus money that can be saved, invested or blown elsewhere that would have otherwise been spent on mortgage repayments and other costs. Using the same logic, one could easily make the same ridiculous statement about paying interest to a bank. Is that not dead money too? Maybe, maybe not. It all depends on your situation and what you are trying to achieve.
In the end you need to ask yourself what is most important and be willing to accept that there are good and bad financial and lifestyle implications associated with both options.