Why tenants should buy.

Why tenants should buy.

Now the official interest rate has been cut to 1.5%, the argument for a tenant to buy rather than rent has never been more compelling.

Let’s take a typical 2 bedroom, 2 bathroom apartment around Carlton, Richmond, South Yarra, or South Melbourne with a capital value of say $650,000 and rental value of $600/wk ($31,285 pa). That shows a 4.8% gross (4% net) return to the owner

In this example, the tenant is paying $31,285 in rent and has no other property costs. But let’s assume that tenant now owns the apartment, and borrows 80% ($520,000) of its value, at an interest rate of 4.25%. They would pay $22,100 interest only p.a. and now they are the owner, the OC (body corp) costs and rates of say $6,000 p.a. This totals $28,100 per year in interest and costs. Even if you add in the opportunity cost of the deposit ($130,000 at 2% = $2,600) that is $30,700 p.a. which is still less than what that tenant was paying in rent.

The other key input to this argument is the future movement in capital values. The AFR reported today on recent numbers from HIA showing non housing residential sales rose 11.3% in June countering a recent BIS Shrapnel report of more doomsday proportion. What we do know is that some property will perform better than others and so a buyer needs solid expert advice in buying the right property.

The case to buy also assumes the tenant has access to the equity component ($130,000 plus costs in the earlier example). But that aside the numbers are very compelling provided the interest rates remain low. Most economic commentators are suggesting we adjust our investment expectations for an extended period of lower returns and lower growth which all points to sustained low interest rates. If interest rates do rise it will be to temper a growing economy which generally take property prices and wages with it.

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