Rent out the fam­ily home

Money Magazine Australia - - ASK PAUL -

QWe

are about to re­lo­cate to Mel­bourne from Perth for five years. My hus­band will earn about $140,000 and I will earn about $40,000 a year.

We have a home in Perth, near the city, worth about $750,000. Our mort­gage is $350,000. We could rent this for about $420 a week. We have about $300,000 in su­per. We also have two young kids. Rent in Mel­bourne will be $600-$900 a week.

We thought we would like to keep our house in Perth if pos­si­ble, but could sell this if we de­cide to set­tle in Mel­bourne af­ter a few years.

Can you ad­vise on how to man­age the Perth prop­erty while we pay rent? Should we pay in­ter­est only (then pos­i­tive cash flow), or also pay off the prin­ci­pal, which will mean we have a lot of in­come tied up in rent and the home loan? Hi Re­becca. Given your move to Mel­bourne may not be per­ma­nent and you may be back in Perth in five years, I agree with keep­ing your home and rent­ing it. I am re­ally sur­prised that your rent would be only $420 a week. This is quite a spe­cific num­ber so I as­sume you have checked with an agent. I know Perth sales and rentals are slow at the mo­ment but $420 a week is around $22,000 a year, or about 2.9% of the value of your home. As it is close to the city, this is lower than I would ex­pect, so I would sug­gest a sec­ond opin­ion.

But even if it is $22,000 a year, I’d keep up the prin­ci­pal and in­ter­est if you can. Your in­ter­est should be 4% or a bit lower, so that’s $14,000 a year. Add in­sur­ance, agent fees and main­te­nance and I think you will still be close to break-even on a prin­ci­pal and in­ter­est loan. If that stretches the bud­get I am quite happy for you to go in­ter­est only, but if pos­si­ble I’d re­ally like you to keep re­pay­ing that loan. If you are back in five years, a de­cent chunk of your loan will be gone. It cre­ates wealth au­to­mat­i­cally.

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