I would advocate a variant of the rent+invest approach. It’s especially for people on modest incomes who still want to live in a handy suburb.

It is to live in a conveniently-located rental home and buy investment properties.

As a rough rule of thumb, if rental yields in the area you want to live in are the same as interest rates, buying is reasonable value, given the benefits of ownership. But if rental yields are much less then you’re financially better off to rent your own home.

Wealth either comes from rental income or capital growth. For the former you want the rental income to exceed costs (if not now, then in 5-10 years). For the latter you want to build the biggest portfolio that you can afford so that even if it only goes up by 5% you’ve gained tens of thousands or more.

Property investors get a mixture of both, but generally rental income brings in the thousands, while capital growth brings in the tens or hundreds of thousands (it’s also taxed lighter than job income).

Despite the First Home Owner Grant, buying your own home is expensive, with the mortgage (non tax deductible, unlike in the US) expensive.

The cost of servicing a property is very roughly 10% of its purchase price per year. If it’s your own home, you’re the only one paying that cost. If it’s an investment, then you’ve got rental income (3 – 6% in a capital city is typical) plus deductions from the taxman (which can include deductions for which no payment is required, such as building depreciation)!

So instead of shelling out 10% of the property’s value, you end up pay out just 3-5% for the identical property.

Which means that rental properties are about half to a third of the cost of the same property if bought by an owner occupier.

So if you could afford to buy one property as your own home then you can afford to buy two or three of the same if rented out. Most people might get 5% appreciation on a $300k house, or $15k pa. But if you have 2 or 3 properties then for the same servicing costs you get $30 or $45k gain pa.

If something happens to you then it’s more resilient as there’s tenant income as well as job income. And if job income is low the extra rental income helps banks qualify you to borrow more.

Hence if the bank says no to an owner occupied house you want to buy on the basis of insufficient income, make it a rental and the $10k or so pa extra rent income might get you over the line.

But it gets much better. If you want to live in a ‘good’ inner or bayside suburb, you pay your landlord around 3 or 4% yield. While you go out and buy in outer metro or regional areas and get double that yield from your tenants.

If the yields are near interest rate levels (8%+) then servicing costs are negligible and it’s easy to buy multiple properties. And chances are there’ll be enough left over to buy a few shares and maybe a rental in a ‘better’ area as well.

The 5% rental yield quoted is a reasonable figure for a cheaper flat in an inner area or a basic house in an outer area. However smart buying can net you over 6% or even 6.5%.

This is for Melbourne – Perth might be harder. Suitable rentable houses within 40km of Melbourne start from around $130k, though a purchase budget of $160k will give many more choices.

Paying your landlord 3% and get 6 – 10% is great.

OK, so property in outer suburbs won’t appreciate as fast as inner areas, and as mentioned capital growth is important.

But consider that the same person who is struggling to buy a $300k house to live in might be able to comfortably sustain a diverse property portfolio nearer $1m (allowing for a bit of time and capital growth).

So you don’t need much growth for the portfolio to work harder than the average Aussie worker – 5% appreciation gives $50 000 pa.

Add to that $50k from rental income. Rental income will rise by CPI while interest will fall in real terms. So you won’t be paying out as much.

So eventually you have this big portfolio that sustains itself with little cash input from you. And you don’t need to be stuck to your job as much as if the mortgage was on your home only.

This is the nearest thing to perpetual motion I know of.

Compared to just a job income of (say) $50k and a big mortgage on your own home with no investments, the above is a no-brainer. That is unless you have other reasons to buy your own home.

I have studied the disparaties of wealth between Australians (a report came out recently). The biggest factor was not whether you went to a private school or even if you have a degree.

It’s whether you own your own home. There is a difference of something like 20:1 between renters and owner occupiers. This was followed by employment status (Employed/self-employed/retired versus not in labour force) followed by age.

It is from these surveys that people like Paul Clitheroe get their conclusions and for the broad brush they’re right. But when we talk about smaller groups like 1-5% of the population, other approaches, such as described above can be much more powerful.

There is still a strong emotional component in buying a house, though, especially for my wife – but even she is starting to think that this can wait until we’re significantly older (and until we can buy the kind of house we want without borrowing anything and without spending every last cent we have).