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Advisor: Renting? Here’s how to build wealth

If rent money is dead money, as the old adage goes, then a lot of Aussies are not using their money as well as they could.

As The New Daily has previously reported, the number of renters is sharply on the rise. As house prices climb, more and more Australians face the prospect of being long-term, if not lifelong, renters – and risk ending up with a smaller nest egg in retirement as a result.

Start small, minimise your losses and maximise your wins

When homeowners put part of their salary into their mortgage each month, it’s essentially a form of forced savings. Renters, in contrast, are paying off someone else’s home loan, putting them at a relative disadvantage when it comes to building wealth.

Renters also miss out over the long-term because they aren’t locking their money into an asset that can grow in value over time. (Not their asset, at any rate.)

In addition, they miss out on significant tax deductions, such as interest repayments, maintenance costs, rates, insurance, agent’s fees, depreciation, and negative gearing (where costs exceed rental income).

For those struggling to save for a deposit, or whose financial circumstances don’t qualify them for a loan, own house or rental property could well be an unachievable dream.

Mark Kelman, author of Become a Property Millionaire in Your Spare Time, warns that it is likely to become harder for university graduates to secure home loans from financial institutions due to higher tuition fees and crushing debt.

“I would caution anyone from going to university and committing to a $200,000 debt, if that’s what it’s going to cost… because that will set you back in regard to serviceability,” he cautions.

So what can renters do to build their wealth? The New Daily investigates.

Superannuation

Chris Morcom, director of wealth management firm Hewison Private Wealth, says that those who can’t afford the property market should think about voluntary super contributions.

“If they’re working, then salary sacrifice is going to be a great option for them,” he says. “Availing themselves of the government co-contribution could also be a way to help build up the kitty as well.”

Business

Mr Morcom says that there are really only two types of assets that grow over time – property and business.

If purchasing a house isn’t an option for you, then the best and least risky alternative is probably the stock market.

The figures show that equities can sometimes outperform real estate. In the decade ending in 2012, Australian shares made before-tax returns of 8.9 per cent, trumping the 6.5 per cent return on residential investment property.

You might even consider starting your own business. Mr Morcom warns, however, that the risks of failure are high.

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Fixed interest investments

Bonds and term deposits are another option, although this form of investment may struggle to keep pace with inflation.

“One could argue that you would be better-off buying shares in the bank, and compounding the dividends,” Mr Morcom advises.

While shares and property were the top two performers in the 10 years to 2012, fixed interest investments still earned a reasonable 6.3 per cent – much higher than the 3.8 per cent for cash.

Precious metals

Precious metals like gold and silver are at a disadvantage to the property market because they rely solely on fluctuations in supply and demand to make gains, instead of being able to generate rental income.

To succeed with this strategy, you’d need to know a lot about the market. But there is money to be made, especially if you buy during periods of economic stability and then sell when everyone else panics and wants to channel their funds into safe haven commodities.

It’s not all bad news for renters

For those priced out of the property market, the news isn’t all bad.

Josh Masters, author of Why Property Why Now, says that the key to building wealth is to pick a strategy and focus on becoming an expert in your chosen field.

“Start small, minimise your losses and maximise your wins,” he advises. “Learn as much as you can about that investment class and become an expert and you’re bound to [get] a higher return.”

Learn as much as you can about that investment class and become an expert and you’re bound to [get] a higher return

Besides, there are some advantages to being a renter. You can avoid rates, maintenance costs, debt repayments, a deposit, stamp duty, land taxes and the bother of being a landlord.

Mr Masters is a strong advocate for property investment, but acknowledges the downsides.

“There’s a number of reasons you might want to avoid the property market altogether – not wanting to sacrifice income or living standards, avoiding any heavy responsibility that comes with a mortgage, even fear of a major market correction or crash,” he says.

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