Ask Paul: Moving interstate, should we rent out family home?
Q: We 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? - Rebecca
A: 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.