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In the following example we step through the differences between:

• Renting a house at $307 per week ($16,000 per year)
• Buying a $400,000 house to live in (hence saving rent)
• Buying a $400,000 house as an investment, renting it to a tenant and renting a house to live in

Renting from others you would expect the only cash outflow to be the rent of $16,000. Buying a house to live in, you would expect to have an outflow of $33,400 (assuming you borrow 95% and the interest rate is 8%). In addition to the loan cost, you would need to pay for the council rate, water rates etc.

You don’t need to be genius to figure out that it is not worth buying a house to live in given the market conditions.

In the third example, which is hardly ever talked about in the news, newspaper, magazines, we can see a slightly different scenario. The investment house would cost you $30,400 in interest payment and $3,000 in rates expense. However you will receive an income of $16,000. The net cash loss is $17,400 however you will also receive a paper loss of $3,000 from depreciation, making your net loss $20,400.

This is where things gets interesting, the Australia Tax Office allows negative gearing and will give you a tax refund of your highest marginal tax rate of the total (cash and paper) loss amount, in this example $20,400 x 40% = $8,160. This will make your investment property cash loss drop from $17,400 to $9,240 ($17,400 - $8,160). This mean it only cost you $9,240 to hold this investment property every year.

This example does not end here, taking the investment property loss of $11,240 and adding that with the rent you will need to pay to live in a rental property will bring your total after tax cash flow to $25,240 ($16,000 + $9,240).

What does this all mean? The gap between renting for the rest of your life and owning your own dream house is actually not as big as you think. All you need to do is think outside the box and obviously not live in your ‘dream’ home. Just make your rental property the dream house. Remember the difference between “Buy to Live” and “Buy to Rent, Rent From Others” is $8,160 ($157 per week) this could mean a car, or a very expensive rental house, or maybe a holiday, or another investment property, the choices are limitless.

*The above is only an example and different people will have different financial situation, the example also does not include the cost of purchasing the property, such as stamp duty, conveyancing, legal cost etc.