Purchasing a quarter-acre block home has been a long-held Australian dream. However, in today’s property market, is that dream finally over and more to the point is it something worth pursuing? Yes, homeownership sounds exciting and provides a sense of freedom and belonging, however, the reality of owning your home may be out of reach for many Australians. It begs the question, is long term renting a better option? The answer, surprisingly, isn’t so clear.
Now the issue of “affordability” is a significant one, but that is not the topic of the post. Now I am not a property expert, and I don’t have a finance background. I have however dabbled in the real estate market over the last ten or so years as well as being a long term renter, so this gives me an opinion, which I’d like to share. Here are my top 3 priorities to consider when deciding, on whether to RENT or BUY in today’s market:
1. Expenses from property
As I mentioned, I’ve lived on both sides of the fence as a renter and a homeowner. One of the important things to consider when deciding to go down the path of renting or buying is the upfront and then ongoing expenses between the two.
Renting
Upfront Costs – You have to consider moving costs, your bond and most tenants would be expected to pay some form of rent in advance (2wks to 1mth).
Service Connections – Internet/phone, Electrical and Gas.
Ongoing Costs – Includes Rent, General Services and home/content insurances.
General maintenance – Is typically covered by the owner, including partial water, any broken fixtures or fittings and pool maintenance. However, some items can fall under the tenant’s responsibilities such as garden upkeep and replacement of fly wire, etc.
Buying
Upfront Costs – Similar to renting you have your moving costs, however, a deposit for a home is a significantly greater expense (Typically +10% property value). You also need to consider expenses such as Stamp Duty, Lender Mortgage Insurance (LMI) as well as Banking Fees, Legal Fees, Pest and Building Inspections. All of which can be as much as 11% of the overall property value. Service Connections are much the same between buying and renting.
Ongoing Cost – include your general services but also include, Local Council rates, additional Insurances. If you purchase within a complex of other dwellings such as a unit, or duplex or gated community, you need to consider strata type costs as well.
General Maintenance – Can be as much as 5% of the value of the property over the long term and if you own a unit and it has a lift, pool or gym, this can be significantly more.
While service connection charges rarely differ, ongoing and general maintenance costs for a buyer tend to be more, especially if in a unit. Renters can get out of paying some of these expenses as the property owner covers them. In some states, landlords are forced to pay for average water usage by their tenants.
So in summary from an expenses review, hands down renting win’s this comparison. It is going to cost significantly more in upfront costs to buy a home.
2. Commitments and limitations
In this section, we take a look at the commitments and limitations required for renting or buying.
As a renter or buyer, we all have bills to pay. However, the responsibility placed on a tenant can offer more flexibility. A person renting can choose from short term month to month leasing options or lock into a 6 or 12-month lease. They also have the added flexibility of moving on if that property doesn’t work out financially for you anymore.
On the flipside, renters also have greater limitations in many cases. The ability to have pets, smoke, or make simple improvements such as add pictures to your wall are at the mercy of the property owner.
As a renter, you also have to open your doors to rental inspections, safety checks and if the owner decides to sell, then you’re left with no choice but to move out.
The commitments required when purchasing a house also vary. You have the benefit of being able to fix some of your costs for the long term such as your mortgage repayments, which can if planned carefully offset the volatility of fluctuating banking fees. However, the majority of homeowners are locked into that mortgage for 25- year term.
Renters too face challenges with rental increases occurring more frequently, often moving up and rarely going down.
On average purchasing, a house requires greater commitment and a well thought out strategy. On the homeownership side, there are fewer limitations on what you can do with your property. While renting can be disruptive as you’re at the mercy of the landlord and limitations can be many. In my view home ownership wins this battle.
3. Wealth Creation
So who’s better off when we think wealth creation? Not so long ago the saying “rent money is dead money” was often used. Isn’t that the same for interest repayments?
What if we work on the assumption that our renter is using those savings made on their upfront costs and ongoing costs wisely and investing that money in other interests, such as term deposits or the share market? Often known as Opportunity Cost, a Renter has more flexibility in their wealth creation strategy because they can move their money based on market fluctuations. Whereas a homeowner is locking their ability to create wealth from a fixed asset, their home.
History shows that property (land) should increase in value over time. Industry trends suggest that over a ten-year period, property value could almost double. Even a well thought out strategy is not 100% fool proof as who knows what is going to spring up in your neighbourhood to boost or reduce the value of your asset. Things to look out for are, infrastructure projects, shopping facilities, new schools, or council zoning changes. These could all have a different effect on the value of your property. If the value of your property goes up, there may be options to use some of that equity for other investments.
My recommendation is not to purchase a home purely as an investment. You should be considering emotions and feelings. Unless you buy at the absolute bottom of a lull in the market and your home ownership strategy is for the short term, then avoid this way of thinking altogether.
That’s not to say that wealth cannot be created from your home, it could form part of your long-term strategy for your retirement. However, it shouldn’t be your #1 focus for purchasing a home.
So who wins the wealth creation race I hear you ask? It’s hard to go past renting again unless you’re buying a property purely for investment purposes. As a tenant paying rent, you have the opportunity to spread your risk, it’s flexible, you can invest in property if desirable, or you can put it elsewhere. Purchasing a home shouldn’t just be seen as a wealth strategy as it defeats the purpose of buying a home. Just like Darryl Kerrigan said in The Castle “It’s not a house, it’s a home, and a man’s home is his castle”.
Summary from renting or purchasing comparison
So you’re probably thinking, 2 out of 3, renting compared to homeownership win’s the battle. As I said at the start, the answer, surprisingly, isn’t so clear. As shown here, it is not just a financial decision which is generally what people compare. At the end of the day, it’s your decision. Whatever category holds the most weight for you may swing you in a particular direction. While there are solid pros and cons on both sides, ultimately it’s a personal decision best made after carefully crunching the numbers, looking at your lifestyle and what compromises you are prepared to make. You can always rent, while you go through your pros and cons. As a current renter and property investor myself, I’ve chosen to continue renting because renting makes sense to me at this point.
While there are so many things I’d love to do with the house I rent to improve it, that doesn’t bother me that I cannot. Because I love the location and it works in with my budget, I love that it’s a flexible arrangement, and if I wanted to move tomorrow, I could. I also love that I can make choices about where I invest my spare cash or spend it.
On a final note, when the time comes, and I’m in a position to buy my castle, I won’t hesitate to do so.
Author: Clinton Smith
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