A few weeks ago (okay, well a couple of months ago) the question I was asked for column was whether renting or buying is a better property strategy. It is – as I said in the column – a tricky question to answer because there are pros and cons to both renting and buying. In fact there are far more pros and cons than could possibly be covered in a short column, so this week - and given that the the RBA has lowered interest rates again today - I thought we’d discuss the issue in a bit more depth.
Note that the question isn’t whether or not residential property is a good investment – that’s a totally different thing. Just as carefully selected, good quality shares are and continue to be a good way to increase your wealth over the long term, so too do good quality and carefully selected residential properties continue to be a good long-term investment. Provided you’re not looking for a quick buck, anyway.
Instead we’re talking about the place where you live and while yes, it should ideally be viewed also as an investment if you buy it, the reality is that many of us choose where to live based on emotion. And quite frankly, given that it may well be the biggest purchase that you ever make, I think that some people put waaaay too little thought into the whole thing. Anyway - whether to buy or rent our own little slice of domestic bliss is the question.
There are plenty of advantages to renting. For one thing it frees up some of your cashflow. An average ballpark for rental cost is around 5 - 6% of the value of the home. (So for a house worth $300,000, rent would probably be around $320 per week). That cost covers you for the roof over your head, plus any repairs and maintenance to the property. Compare that to paying a mortgage, at an average interest rate of around 7%, plus rates, plus repairs, plus ongoing maintenance and costs. Freeing up some cashflow leaves you more money to invest elsewhere, or to fund additional study, or simply to live on.
Another advantage of renting is that it doesn’t cost anywhere near as much to move. I mean yes, you might end up moving more often – but all you have to pay is removal costs and maybe the cost of a cleaner. Compare that to the cost of advertising your property for sale, agent’s fees and stamp duty.
Renting also gives you a lot more flexibility about where you live. You can change cities for work (or pleasure), you can move into an area to be in the catchment for a fantastic school, and you can easily upsize/downsize your house according to the number and age of people living in it. You can still have that flexibility by buying and selling frequently, but the costs of doing that make it impractical.
One advantage of a mortgage though is that it’s a form of enforced savings. Because while yes you can potentially be wealthier by renting and investing the difference, that strategy also requires a lot of self-discipline (ie you have to actually investment the difference, every month). Most of us don’t have that discipline – thus a mortgage, which forces you to make regular repayments, is a form of enforced saving. And hopefully your property will increase in value sufficiently in time to compensate for the interest that you’ve paid!
Owning your own home also gives you certainty about where you’re going to live. Long-term leases aren’t common in Australia, so renters can find themselves moving every year or two. And in a competitive rental market that can be a/ stressful and b/ really inconvenient. It’s one of the reasons why I’m an enthusiastic owner.
There’s also just the pure happiness factor: whether it makes good economic sense or not, we simply like the idea of owning our own little castles. We can landscape them, we can paint the walls, we can spend our weekends trawling the “open for inspections” in our neighbourhood, to reassure ourselves yet again that we got a good deal back then. Home ownership guarantees solid viewing numbers for those DIY shows on TV. Home ownership makes us happy.
Well, some of us, anyway. Others might describe being financially tied down to a property as a living hell. So where do you stand on the issue? Do you prefer to rent, or buy?
And one quick addition: please note that all comments on this topic - whether mine or anyone else’s - are general opinion only. Whatever you do, get professional, independent advice before making any major financial decisions
Note that the question isn’t whether or not residential property is a good investment – that’s a totally different thing. Just as carefully selected, good quality shares are and continue to be a good way to increase your wealth over the long term, so too do good quality and carefully selected residential properties continue to be a good long-term investment. Provided you’re not looking for a quick buck, anyway.
Instead we’re talking about the place where you live and while yes, it should ideally be viewed also as an investment if you buy it, the reality is that many of us choose where to live based on emotion. And quite frankly, given that it may well be the biggest purchase that you ever make, I think that some people put waaaay too little thought into the whole thing. Anyway - whether to buy or rent our own little slice of domestic bliss is the question.
There are plenty of advantages to renting. For one thing it frees up some of your cashflow. An average ballpark for rental cost is around 5 - 6% of the value of the home. (So for a house worth $300,000, rent would probably be around $320 per week). That cost covers you for the roof over your head, plus any repairs and maintenance to the property. Compare that to paying a mortgage, at an average interest rate of around 7%, plus rates, plus repairs, plus ongoing maintenance and costs. Freeing up some cashflow leaves you more money to invest elsewhere, or to fund additional study, or simply to live on.
Another advantage of renting is that it doesn’t cost anywhere near as much to move. I mean yes, you might end up moving more often – but all you have to pay is removal costs and maybe the cost of a cleaner. Compare that to the cost of advertising your property for sale, agent’s fees and stamp duty.
Renting also gives you a lot more flexibility about where you live. You can change cities for work (or pleasure), you can move into an area to be in the catchment for a fantastic school, and you can easily upsize/downsize your house according to the number and age of people living in it. You can still have that flexibility by buying and selling frequently, but the costs of doing that make it impractical.
One advantage of a mortgage though is that it’s a form of enforced savings. Because while yes you can potentially be wealthier by renting and investing the difference, that strategy also requires a lot of self-discipline (ie you have to actually investment the difference, every month). Most of us don’t have that discipline – thus a mortgage, which forces you to make regular repayments, is a form of enforced saving. And hopefully your property will increase in value sufficiently in time to compensate for the interest that you’ve paid!
Owning your own home also gives you certainty about where you’re going to live. Long-term leases aren’t common in Australia, so renters can find themselves moving every year or two. And in a competitive rental market that can be a/ stressful and b/ really inconvenient. It’s one of the reasons why I’m an enthusiastic owner.
There’s also just the pure happiness factor: whether it makes good economic sense or not, we simply like the idea of owning our own little castles. We can landscape them, we can paint the walls, we can spend our weekends trawling the “open for inspections” in our neighbourhood, to reassure ourselves yet again that we got a good deal back then. Home ownership guarantees solid viewing numbers for those DIY shows on TV. Home ownership makes us happy.
Well, some of us, anyway. Others might describe being financially tied down to a property as a living hell. So where do you stand on the issue? Do you prefer to rent, or buy?
And one quick addition: please note that all comments on this topic - whether mine or anyone else’s - are general opinion only. Whatever you do, get professional, independent advice before making any major financial decisions
Home values are on the decline. Photo: Nicolas Walker