Rent vs renovate

By Alex Brooks

Splashing out big dollars to turn your tired old home into a palace of your dreams isn't always the most financially sound choice. Sure, it's wise if you plan to spend the next 20 years in the home, but if you're uncertain of where your job will land you, the schools you may need to be close to or the business opportunities that are coming your way, then it might not be so wise to renovate.

Every dollar borrowed to fund a renovation is not only eating away at your home equity, but costing you interest. Sometimes - just sometimes - renting your dream home could be wiser than splurging on an expensive renovation.

In Australia, you are allowed to rent another property for up to six years while still claiming  your main home as your principal place of residence. That means you won't have to pay capital gains tax when you eventually go to sell. And, hey, renting for a while can give you a taste of the features you'd really like to try in your home.

Could renting be a smarter move than renovating? Only your lifestyle, finances and future plans can answer that. But there are some good reasons that renting remains wise for first home buyers and upgraders. Here’s why:

1.    UPGRADERS MIGHT FIND IT CHEAPER TO RENT THAN RENOVATE

Most home owners with good equity and a desire to upgrade to a bigger and better home are sitting on their hands right now waiting to see what the property market does.

“There is a big red stop sign for those people to upgrade because they are worried about job security or where the market is going,” says Macquarie Bank’s interest rate strategist Rory Robertson.

There is little doubt that if you are paying a hefty mortgage on a premium, expensive property that renting may be a wise option.

2.    INVESTORS KEEP RENTING AFFORDABLE

Property academics say Australia’s negative gearing tax laws have encouraged over-investment in residential property, with Australian Tax Office figures showing most investors lose an average 30% each year to hold an investment property.

This is a boon for renters as some investors are now suffering low yields of less than 5% and could potentially secure a better return on their capital by putting money in the bank.

Low rental yields are a time in the property cycle when it’s cheaper to rent than own – even with massive government incentives like first home grants and low interest rates.

While experts like BIS Shrapnel are predicting rents will rise in most capital cities over the next few years, it can be worth taking advantage of low yields now to rent while you save more for your first home purchase.

Like all property markets, there are suburbs which will be counter-cyclical to the low-yield story.
Many of these have been identified in a Commonwealth Bank report which reveals the Australian suburbs where it’s cheaper to buy than rent.

It’s always important to research locations to discover the cost of renting versus the cost of buying.

3.    ESCAPE THE HIDDEN COSTS OF HOME OWNERSHIP

Australian property is known for expensive transaction costs – that is, the price of buying and selling can cost $10,000 or more each time once you factor in stamp duty, agent fees, advertising costs and government charges.

Home owners also have to pay for building insurance, council rates and maintenance while renters simply pay one fixed fee to incorporate all those charges.

A major advantage of renting is to be free of all those hidden costs.

Another advantage is that tenants are able to move house quickly to take advantage of a better job opportunity – they usually only have to give a month’s notice to move out.

A home owner has to take time to prepare a property for sale, market it and then wait six weeks or more to settle before getting their hands on the cash from their home.

What’s more, tenants who work from home can claim a portion of their rent as a tax deduction whereas home owners who do the same thing make themselves liable for Capital Gains Tax.

4.    SECURE A GREAT RENTAL DEAL

Just like buying a home, rents are negotiable in price – particularly when demand is greater than supply.
Most capital cities are seeing top-end rental properties decline in price as corporate demand falls and wealthy executives rent cheaper properties.

Try these tips to secure the best rental:

• Set a budget and then consider where and what you can rent. What size property do you need and which facilities do you need to be close to? How much can you save on travel and commuting costs by relocating to a more convenient areas?
• When rental vacancy rates are tight – as they are in many capital cities – it is worth being prepared when you inspect properties. Have your payslips, bank statements and your drivers licence ready so you can quickly fill out an application if you like the property.
• Don’t forget to sign your rental condition report and take photos of your rental property when you move in so there is no dispute about any breakage fees when you leave.

© 2007 Alex May