Renting vs Buying

[daddy_4_eyes]

I've had this debate with many people, and no one ever believes me when i say that financially you're better off renting than buying. Even had some close friends of mine ask me for advise in regards to getting a second property, and when I told them they can't afford it and they should consider alternative investment options or repaying their existing mortgage first, they got really offended (apparently telling someone they can't afford a 2nd property is offensive ).

Anyway, I'd be interested in others thoughts on renting vs buying. I'm currently renting and investing the spare cash but am considering purchasing a property in the next 12 months. If I could get a housemate paying a little rent it would probably be really beneficial.

 

[daddy_4_eyes]

Here's a good article for the average person:


Rent not a dirty word

By Anthony Keane

April 30, 2007 12:00am
Article from: Herald-Sun

OWNING your home is not always a better financial option than renting despite the slogan, "Rent money is dead money."

Most people view their home as their biggest investment, but is home ownership the best financial decision?

Are we financially better off renting, and channelling the money we save in stamp duties, council rates and maintenance costs into a high-growth investment such as the share market?

In some cases, the answer can be yes.

The average return from residential property in Australia during the past 10 years is 11.4 per cent compared with the average return from Australian shares of 12.7 per cent, according to the Australian Direct Property Investment Association.

Then there are the many thousands of dollars of costs involved with home ownership. Buying costs, renovations, rates and taxes all far outweigh the $30 or $50 it costs to buy and hold a share in a blue chip company.

Disadvantages of ownership
Comparing the advantages and disadvantages is tricky, as there are so many variables. These include:

Rent money is dead money - if you do nothing with the money saved by not owning a home. Only if you invest it in growth assets such as shares will you benefit.

A home can be valuable as a base for other investments. People can borrow against the equity in their home to buy other investments, usually at a lower interest rate than if they use margin lending to buy shares.

Shares are much more volatile than property and attract capital gains tax when sold for a profit. There is no capital gains tax payable on the family home.

People who rent and work from home may be able to claim a tax deduction on some of the rent they pay.

Security a factor
Fortunately for the real estate industry, home ownership is more than just a financial decision.

"Putting financials aside, there's no doubt that, for many people, owning their own home provides security, peace of mind and the chance to live out the great Australian dream," AMP financial planner Mark Borg says.

"There are always other factors that will influence your decision to rent or buy your home, such as interest rates and whether or not you're prepared to take a bullish approach to investing."

Mr Borg says the common practice of buying a small home first, holding it for two or three years, then buying the home you want could often be a bad financial decision.

This is because owning a home for a short time still incurs costs such as stamp duty, mortgage guarantee insurance and buying and selling costs.

"Patience is a virtue when it comes to buying a home.

"If you only have a small deposit, chances are you will be better off investing your money wisely while you rent and save for a greater deposit."

Don't ignore super
According to Marinis Financial Group financial strategist Theo Marinis there is a financial case for paying money into superannuation rather than off a mortgage.

"When you own your own home you are servicing that debt with after-tax dollars. That's what we call bad debt," Mr Marinis said.

"You get a lot more money into super because your tax rate in super is lower than your personal tax rate in most cases."

But owning a home was about emotion, he said.

"The reality is that most people want to buy their own home, even though they are financially better off not buying a home - myself included.

"Even though theory tells me I shouldn't own my home, I do.

"You don't just do things because it's financially the best thing to do. It's about balancing the lifestyle requirements."

Mr Marinis said many people were not comfortable putting all their money in higher growth alternatives such as shares.

He said the new superannuation rules - which come into effect on July 1 and make withdrawals from super tax-free for people over 60 - made super a more attractive place to put money rather than a mortgage.

Take the example of a 55-year-old on the top marginal tax rate of 45 per cent who pays $1,500 a month off a mortgage.

The mortgage is paid in net income, or after-tax dollars.

If there was no mortgage, that $1,500 would become $2800 if salary-sacrificed into superannuation because salary sacrifice works with pre-tax dollars.

It's a strategy that could be used for people nearing retirement who have a mortgage.

If possible, they could arrange to stop making mortgage payments and instead inject the money into their super, Mr Marinis said.

"Then, at 60, they can withdraw it tax-free and then pay the debt off.

"The higher the tax bracket, the better off you are."

Targeting shares
According to BankSA general manager Chris Ward, investing in shares or managed funds instead of a home could be "an excellent way to build long-term personal wealth".

"However, buying property remains the investment of choice for the majority of Australians, and with good reason," Mr Ward said.

"It provides long-term security, leads to the ownership of collateral that can be used for future borrowing, and means you are able to make changes to the home."

Buying a home also introduced and strengthened financial discipline.

According to United Nations statistics, Australia has one of the highest home ownership rates in the world.

Although renting is the preferred option for some and a necessity for many others, about 70 per cent of Australians own or are buying a home.

 

[PrideofSA]

Yeh there is no clear answer, as I've heard great arguments from both sides of the debate. I think it really depends on your circumstances and what you are comfortable doing.

If you are renting a house for say $400 week, you could buy a house for $400a week, so obviously that money is better off paying off a house. However if you rent cheaper at say $200 per week, you would be better off saving the other $200 per week and putting it into another form of investment.

The positives with renting is that you do get a better place for the money you pay, but at the end of the day it's not yours.

The positives with buying a home is that if you aim to pay it off as quickly as possible, you can access the equity down the track as security for future borrowings for investment properties.

Yeh I'm unsure on which way to go as of yet.

 

[deeman12]

If your renting your best finding a house mate spliting the costs and if staying with your parents is possible it is a very good way to save some money

 

[Leper]

One thing to consider is making your first property an investment property whilst you rent (or still living with mummy and daddy). As well as some financial / tax advantages it gives you the flexibility of renting when you're still young and (possibly) trying to work out where you want to live.

Or better still, buy an investment and piss off overseas and work for an employer who houses and feeds you whilst you make a shit load of tax free $$

 

[Mr.X]

It depends on the size of your deposit.

Buying is only really beneficial if you have at least a 20% deposit for whatever property you're purchasing. You'll need to be able to cover stamp duty, conveyancing and any repair costs on top of that.

Anything less is over-committing. Best to invest the spare funds somewhere else while continuing to save.

 

[local]

Read a interesting article a few months back which stated that the amount you pay in mortgage today will be the same as paying rent in 10 years time. As long as interest rates don't go through the roof.

Interesting article wish I had the link.

 

[kolchak]

It's better to own your own home, especially if it's raining.

 

[SolidTiger]

It depends on the size of your deposit.

Buying is only really beneficial if you have at least a 20% deposit for whatever property you're purchasing. You'll need to be able to cover stamp duty, conveyancing and any repair costs on top of that.

Anything less is over-committing. Best to invest the spare funds somewhere else while continuing to save.

You can also claim the conveyancing and repairs to the investment property on Tax. So you can get some of those costs back.