Is your home the worst investment you will ever make?

With Australian home prices rising again, the adviser from the Partners Wealth Group is making a name for himself with provocative social media posts.

A recent post warning “your home is without a doubt the worst investment you’ll ever make” raised eyebrows in a nation where paying off the mortgage has always been the bedrock of personal money management.

What’s the problem?

“What we see across the board is that once you get a mortgage, you put all of your excess cashflows into that, and you don’t really look at any other investments until you pay that off,”

Tossol told The Australian’s The Money Puzzle podcast.

“And looking at home ownership purely through the lens of an investment, that’s when the numbers don’t stack up so much, and there’s a number of reasons for that. Number one is that nothing is tax deductible. You’re paying for it with your after tax income. You’re a bit emotional when you buy your home, so you often overpay for it.”

On Tossol’s numbers, homebuyers in the capital cities that take out a $1m loan for a house, will then pay another $1.9m over 30 years on a mortgage rate of around 5.8 per cent. It’s worth noting mortgage rates would settle near 5.5 per cent if cuts were delivered in full after Tuesday’s RBA decision to reduce official rates by 0.25 per cent to 3.60 per cent, according to the Cotality Group.

But, Tossol’s key point is that there are better investments in the market than buying a home in Australia’s expensive residential property market. What’s more, the investment costs of investing outside the home are tax deductible.

“I don’t know everyone’s situation specifically, but you should be looking at the opportunity cost of deploying that capital elsewhere.”

Tossol concedes there are aspects of owning a home that are difficult to calculate in simple dollar terms.

“There’s absolutely nothing wrong with paying down your home loan and owning your home as a consumption asset, a lifestyle asset, but you do need to look at it objectively and ask, well, if I put my money elsewhere, what returns could I be getting?

“You’re taking on a lot of leverage in paying it with your after-tax dollars. So effectively for, you know, really 10 to 15 years, all of your personal cash flows, pretty much your excess is going strictly to paying that off.”

What can you do?

Tossol recommends freeing up cash for pure investment purposes, and that does not exclude residential property investment.

In fact, he’s a strong supporter of rentvesting – where investors buy property strictly for rental and capital gains while avoiding home ownership.

“A lot of people out there say, oh, rent money’s dead money, but interest money’s also dead money. If you run the numbers on it and instead of a mortgage you direct it, say to investment properties, which are fully tax deductible…(then) property is a great investment where you can leverage returns, optimising for tax reasons and getting the best value for where you invest.

“And if you extrapolate that over 10, 20, 30 years, the actual growth ends up being far more than if you were to just live in your own home and pay the mortgage off.

“There’s a lot of individuals out there with property portfolios worth tens of millions of dollars…And the one thing I’ve found in common is that most of them don’t actually own their own homes.”

This article first appeared in The Australian as Is your home the worst investment you will ever make?