Uncensored Money: Ask Mel Anything – Student Loans & Funding Big Purchases
Melissa Browne: Ex-Accountant, Ex-Financial Advisor, Ex-Working Till I Drop, Now Serial Entrepreneur & Author, Financial Wellness Advocate, Living a Life by Design | 27/04/2023
Welcome to the ‘Ask Mel Anything edition’ of Uncensored Money.
In the ‘Ask Mel Anything’ series, Mel answers your questions in the hope you realise you are not alone and that it helps to increase your financial literacy and confidence.
In this episode of ‘Ask Mel Anything’ Mel answers questions about whether it’s smarter to rent or own your own home and how to ensure your family is in the best overall financial position possible now and in the future?
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So today's version of Ask Me Anything, we have two very different questions, but the first one, I think in Australia, and I know globally in the Western world, we are looking at rising interest rates. And one of the things I think more and more people are looking at is they're weighing up, do I own a home or do I rent? Which is actually smarter at the moment?
And so I've had three different questions come in that are a version of that. Is it smarter to be paying off my home or should I rent? Should I be looking at buying my own home or should I rent? Should I be looking at buying an investment property or my own home? So I thought I'd bundle up all of those types of questions and basically look at the question of should you rent or should you own?
And I wanna preface it by saying that a few years ago I conducted some research for a book I was writing. And the book ended up being called Unf*ck Your Finances. And I was really surprised to discover that the top two things we want from our money are freedom and options.
And the reason I guess I was so surprised is because I expected, certainly in Australia where the majority of the survey respondents were, I expected owning my own home would be top of the list. But while that was important, it was number three. Above that sat freedom. And options. And I guess the reason I was taken aback by these, those findings is because for many of us, while we might be giving lip service to wanting freedom and options, how we are behaving with our money tells quite a different story.
And maybe it's because home ownership is such a deeply ingrained part of Australian culture, or maybe it's because many of us feel like home ownership is right of passage and we haven't truly grown up and started financially adulting if we don't own our own home. Or maybe it's because we still believe that home ownership fills the need to provide a safe and secure place for our family.
Or I can walk around and hang pictures up. Whatever the reason I'm finding that our behaviour when it comes to bricks and mortar is in almost opposition to our strong desire for freedom and options. It's why I love this question so much, and I love that today more and more people are asking the question, do I rent versus do I own?
And I liken that to more and more people are asking the question today, do I want kids? Do I want to get married? All of the norms that we had, we're questioning them all which is why I really love this question.
So I wanna start by saying that part of the reason I love this question is when I was a financial advisor, I was seeing couples who were seeking mortgages of one and a half million to secure the home of their dreams.
And I'm talking young couples, which with interest rates, which as they were back in the day 8%, and they're crawling towards that now, meant that mortgage repayments in some suburbs were very similar to the rent being paid. And what I wanna do with this question is I want to unpack what an alternative to owning your own home could look like. Because I think we all know the benefits of owning your own home. We grew up with that. That's something that's been handed down generation to generation in Australia. What I want to do is look at, okay, if I looked at not owning my own home and renting instead, what could look like? And why are the reasons I might consider an alternative?
What I wanna say is, what I am not a fan of is by choosing not to own your own home, that you don't do anything, or that you don't include the property market as part of your investments. Because what we wanna do is have that diversified portfolio where we are investing in shares and property and bonds, or cash and bus potentially a business. It's a beautiful diversified basket.
If we don't include our own home in that, then we are going to want to potentially look at some other type of property investment, and that investment might be a rental property. It might be residential rental, commercial, an apartment, a townhouse. It might be a listed property trust with exposure to office or other sort of premises, but it's making sure that we're still including property as an investment.
And that's called rentvesting. It's where you rent where you live, and you own an investment property instead. So there's an official term for it, and it's called rentvesting.
So here are a few reasons why you might consider that. The first is negative gearing. So in Australia, the current tax laws allow you to claim the shortfall between interest, expenses and income earned on a rental property on your tax return.
So this essentially means that the refund or tax saving received is reducing the cost of ownership. So if you buy your own home, none of those costs in Australia are deductible. I know in the States it's a different story, but in Australia, none of those costs are deductible unless you take, and unless you take in a boarder, there's no one helping you pay the rent.
If you're looking at this and you go, oh, the rents where I live is lower. And maybe, I don't even know where I want to live ultimately, and I think that's gonna be the case for the next 10 years. Cause we don't wanna buy something and think that we wanna sell it in three years time to fund a home purchase. If you're going to buy any sort of investment that's a property, that's a long-term purchase, which is where you need to really think long and hard if this is a strategy for you. But if you definitely wouldn't even consider buying my own home in the next seven to 10 years, then sure, this could be something that you think about.
But if you are tempted to buy your own home, then bringing in a boarder, putting in a granny flat, turning it into an asset that can become a bit of a rental property to you might be a hybrid approach.
And that is where I'm so not a fan of this OR that. The question I always wanna ask is, could I do this AND that? And sure, you might not love the idea, but hey, you might choose to bring in a boarder for 12 months just to help you build in a buffer. I knew as someone when I was growing up, she was a single lady. She had a double garage. She converted that quite cheaply into a one room with a bathroom accommodation and just like a shelving for a kitchenette. Didn't have an oven, had a microwave, and she rented that very cheaply out to a young guy. And eventually he got married and he and his wife stayed there for a while to save money. But it was security for her and they had their own entrance, and it meant that she was bringing in some extra dollars to help pay that mortgage. And I think that's where we can be creative like this. In Queensland a lot of people when they buy a property, if they're looking at land, wanna buy land large enough that they can put a rental put a granny flat at the back and suddenly it's, I could live there and I could earn an income or I could stick someone in the home and someone in the granny flat.
And yes. I said at the start, that question was, own my own home OR rent? But why can't it be both? And that's where I always wanna provide that creative answer.
So the second reason why you might wanna consider renting versus owning your own home is you're spreading the risk. So our home is often our most valuable single asset, which for many of us, means that most of our wealth is tied up in it.
And of course, the problem arises when the size of our mortgage means the ability to diversify our risk is diminished, meaning there's not enough spare cash to also invest in other things. We simply can't afford to invest in investment property, shares or paying an extra super. So instead of sinking all of our funds and all of our available borrowings into one large mortgage, it may make more sense to buy a couple of cheaper investments across different suburbs or asset classes and therefore spread the risk.
Or, and this is where I'm always gonna provide an alternative is, instead of buying the dream home, you might look at buying an apartment and an investment property instead, or a townhouse and investment property or a home a suburb away from where you really wanted and an investment property. I really wanna challenge you that it has to be this OR that, and for you to ask the question, could it be this AND that?
Of course, the third reason why you might consider renting versus owning is liquefying your assets on retirement.
If we are living in our most valuable asset, it can be emotionally difficult to have to move out of it in order to access that equity upon retirement, or if we can't afford to hold it at retirement or even before retirement. There's an old adage that I talk about a lot that says you can't eat your house. Meaning I might have this super valuable home, but if that's all I've got, unless I'm prepared to sell it, I can't eat it, I can't live off it. So by choosing to rent, we can potentially downsize when we reach retirement without having to sell assets, which may not be in our best financial interest to realise the gains from at that particular time. And isn't that emotional tug then as well to go, oh, I don't wanna sell my home?
The fourth one is that sometimes rent can be cheaper. In some suburbs, particularly if there is a glut of apartments being built, renting can actually be cheaper than the cost of owning that apartment or that home. In that case, while you may be emotionally where you wanna own your own home, it simply makes more sense to not purchase an asset where there is an oversupply and potentially a smaller chance of capital growth. This also is the case if you really wanna live in a particular suburb, but the cost of buying in that suburb is astronomical and would mean that you are quite literally choking on debt and unable to do anything else.
And I know some property experts, so Chris from the Property Empire is one that does this. And Pete Wargent from Buyer's Buyer is another one that does this. Both super smart guys, both of them rent where they want to live, and they buy properties in other areas.
And both of them have said to me that, of course, they could now afford to buy in those areas, but they would choose not to because it would take up too much capital. Which is nuts, right? If the experts are choosing not to do it, then it's considering what actually is right for me?
The final one is freedom to move. If we truly say we want freedom and options, the ability to have a sabbatical or for one parent only to work full-time, to send our kids to private school, donate our time to charity or travel regularly, then committing to a large mortgage is potentially gonna rob us of that. And instead, by choosing to rent and instead invest in a rental property, you still can have an asset class. It's bricks and mortar. But you have the ability to upsize or downsize your rental accommodation according to your other life goals, or even get rid of that rental accommodation entirely. I could name so many people that I know are doing this at the moment where they are house sitting or pet sitting. And by doing so, they have got rid of the entire cost of housing and they might do that. I know some people that have done that for five years. I know some people that have done it for 18 months. So your stint can be as long or short as you want. The question is, what are you prepared to suffer for?
So if you are looking at it going rents are climbing. I love the idea of maybe buying my own home one day, but actually I'm just gonna be choked on this mortgage. Why not house-sit and buy a home? The place that you ultimately wanna be your home, put tenants in it, and then you've got a win-win for yourself. Someone else is paying it off. You'll eventually live in there, maybe in one year or five years down the track, but in the meantime, you get to enjoy this sort of nomadic lifestyle. And yes, it might be painful in that you might get stints of 12 months, but you also might get stints of three months where there's some permanent moving. But if you can strip the entire cost of rent out, then hey, I think sometimes that short term suffering is worth it.
So I hope that I've made you think around home versus rent because we default to owning our own homes, certainly in Australia, in the same way that we default to get a job, get married, have kids, blah, blah, blah.
You know that path. When now more than ever, we live in an age where there is no set path, and it's figuring out actually what's the right approach for me, which is the approach I take when it comes to money. It's figuring out where am I now? Where do I want to be? What do I want my life to look at? What do I want this one precious, beautiful life to look like? And then creating the finances to suit that rather than waking up one day and going, oh, how did I get there? Here completely robbed of choice with golden handcuffs on because I've inadvertently robbed myself of choice.
So the second question is wildly different.
So it's how and where does a woman in her fifties who has spent the last 15 years at home bringing up three kids, get a handle on the family finances? My husband has a really well-paid job but he's risk-averse. We have no savings or investments. I'm now working again, I wanna understand finances more so I can drive our financial future. I wanna make our money work for us and hopefully create some generational wealth. At the very least, ensure we can help our children to follow their interests and dreams and enjoy our lives together. I guess put simply, how do I ensure our family is the best overall financial position possible now and in the future? Who do I need to talk to? You, an accountant, a financial planner, a mortgage broker, or all of the above? Not sure where or how to start.
So first of all, I love this question because here's the thing. The best time to start is now. You are not too young. You are not too old. The best time to start is now. And I know so many people in this midlife period where they're looking at it going right, I need to get moving and I need to start skilling up on this because if not now, when? And I am the one that is going to save myself and build that legacy for my family if I have one.
Where I would start is by financially educating yourself because finances is a skill and the problem that I find with financially upskilling yourself is we didn't learn finance at school. We didn't learn money at school and we've picked up bad habits and myths and messages along the way that aren't necessarily helpful for us.
So there's a bit of undoing we wanna do and a redoing. And you know what? You could get all of that from Googling and reading a whole bunch of books and podcasts. Or you can come and do my eight week My Financial Adulting Plan and the doors open in just over a week, and you can get all of your financial education in one place, including creating your own financial plan, learning about investing, et cetera.
And from there, you can either choose to do that yourself. So you can either choose to then go on and invest for yourself. You can choose to run that financial plan, or you might decide to take it to a financial planner and say this is what I wanna do. Can you help me bring this to life? Because you might be time-poor. You might have the agency to say I know what I want. And I know where I want to invest. I just want my handheld while I do it. But you've got the agency instead of just handing it all over and going, oh God, I hope they're doing the right thing by me.
So I would figure out, I think the first thing you need to do is increase your financial literacy and create that plan around how much is enough? Where do you wanna go? What are your goals? What are your dreams? And then you can either enact it yourself or you can get professionals involved.
One, if you're looking to borrow. So just say as a result of doing that plan, part of it was great, I wanna borrow either to fund an investment property or shares or a business or what have you. Then a mortgage broker would come in at that point, and I'm always a fan of talking to a mortgage broker before you're ready. So when you do my course by the time we get to the property module, we've got a little black book of mortgage brokers to help you with that if you don't know a great one.
But I think what people do often is jump into the professionals without having that financial literacy themselves, and then you're just relying on them, right? You're just hoping that they're doing the right thing by you versus having that agency around, this is where I am, this is what I wanna get to, and if I still choose to engage a professional in which a mortgage broker would absolutely be one of those, an accountant would absolutely be one of those, and a financial planners are perhaps, then you have the confidence to be able to work with them to understand what they're saying. But literacy, the financial literacy, to see it through with them.
Plus you can bring your kids on that journey as well so that as a family, you are not just creating intergenerational wealth, you are creating the ability for them to create their financial wealth. You're increasing their financial literacy. Everything they missed out at school, you are providing for them now, which I mean, I don't know what a better financial gift is than that.