By Peter Switzer
Is home ownership all it’s cracked up to be? Fairfax’s economics writer, Jessica Irvine, has taken us through the hidden costs of owning a home. As per usual, it’s written to a very readable standard for someone who’s a card-carrying economics tragic but it only looks at one side of the equation: the cost side.
So, what I want to do here is look at the other side of home ownership: the hidden income opportunities of being a homeowner.
Irvine has pointed out the costs, which include the following:
- The interest costs, especially if interest rates rise.
- The actual high cost of real estate nowadays.
- The rent slug versus interest repayments when rates inevitably rise, possibly to 6.5%.
- The fact that you’re just paying off interest for a long, early part of the loan.
- No 20% deposit and as Jessica points: “A $700,000 home loan taken out with only a 10 per cent deposit will cost $15,000 in lender's mortgage insurance, paid upfront, or sometimes capitalized into the loan.”
- Stamp duty, which is concessional for first home buyers but the thresholds are set to hit yuppies, who buy more expensive properties compared to battlers.
- Conveyancing, building and pest reports, etc.
- Once you’ve weathered the cost impost of buying a home, you then have council rates, water rates, possibly strata fees, etc.
- And finally, there are all the lifestyle costs that you have to cut to make your payments. I often say someone should GST their lives to find 10% worth of cost-savings, which can be used to help cover the costs of making money.
And that’s the point of my story today: the costs that Irvine are weighed down by ignore the income potential that you inevitably can make.
Of course, some people buy badly in the wrong area. They don’t improve their property; they buy at the wrong time and can even sell at the wrong time but most home-owning ‘lifers’, who have endured the costs that Jessica is concerned about now as relatively new homeowner, know you feel the costs in the short-term but, over time, you’re happy with your investment in bricks and mortar.
Here are hidden or not so hidden income gains from home ownership:
- Capital gain — our first home that we bought in Paddington in 1979 for $54,000 would now be worth around $2 million!
- If I’d kept the place and lived in it, I would have pocketed around $1,946,000 capital gains tax-free! (Maybe $100,000 of renovation costs would been needed but the pay-off is still pretty damn good).
- We used the sale of the house to trade up into two other houses, where we borrowed to renovate each time. All these gains are capital gains tax-free.
- We used the value of our assets plus higher incomes, that come to most couples over time, to buy an investment property that not only gives capital gain and rental income, it helps reduce our overall tax bill, which is just like income.
- Our valuable asset was used to borrow for our business dream, which now employs over 50 employees.
- In the age of redraw facilities, our business borrowing can come out of our repaid home loan, at home loan interest rates. So our costly first home becomes our banker — and you couldn’t expect a nicer banker anywhere in the world!
- You could use the equity in your home to collect other investment properties or to invest in the stock market. You could actually redraw funds from your home loan to buy shares, so you can create a margin loan where the lender — you — wouldn’t come calling for extra money as banks do if the stock market falls.
- You can redraw money from your loan to pay for private school fees, if that’s your desire, and it means you can use your equity in your loan to better manage your cash flow. The greatest killer for households and businesses is cash flow management and having a nice big loan that you have paid a fair bit off can be a great backstop.
I could go on but home ownership’s incomes well outweigh the costs, though in the early years before capital growth in the value of the property and income growth from what you do, it seems like the costs are hard to cop.
Robert Kiyosaki, in his book Rich Dad Poor Dad argues that you’re better off being a renter where you want to live for your personal life but be a collector of investment properties, using the tax system to make it work. In simple terms, he says buy an investment property, say for $500,000, and when it goes up to $600,000, so your equity in the property is now $100,000, apply for a new investment property loan to get your second property.
It’s basically a good idea but things can go wrong. However, the argument is pretty clear-cut that the income pay-offs of home ownership trump the costs by a thousand miles. The early steps in home ownership can be hard yards but soon with an asset that has risen in value, as most do over time, you’ll driving and laughing all the way to the bank.
And if your property really does well and you have a redraw facility, you could be that banker!