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Reproduced with permission.
The question of whether to rent or buy has been a topic of discussion for many years, more so now that property prices and, therefore, mortgage costs are rising So what are the advantages and disadvantages of renting and buying?
Buying – advantages
> You become wealthier on a yearly basis. As you pay the principal off the loan, your equity, or the proportion of the property you own, increases. More importantly, as the value of your property increases, so does your net wealth.
> You are more in control of how long you can live in your home. Providing you continue to make the appropriate mortgage repayments, nobody tells you that you have to shift. You can stay in your home for as long as you like.
> Your mortgage repayments remain about the same over the life of the mortgage but will be affected by interest rates which will move up and down slightly.
> When you first take out a mortgage, you may take it for up to 25 to 30 years. The reality is that as your wages increase, you will probably be able to pay it off in 15 years.
Buying – disadvantages
> Mortgage repayments are usually higher than rent
> In addition to mortgage repayments, you also have to pay for repairs, maintenance, rates, taxes, insurance, etc. All these extra costs add about 20 per cent of whatever the rent would be on the property. (See example below for further clarification)
> Buying and selling costs restrict you as to how often you can move. It costs approximately 6 per cent of the purchase price to pay fees, such as government and bank charges, and 4 per cent of the sale price in selling costs, such as agent’s fees, advertising and bank fees. If you sell a property for $300,000 and buy another one for $400,000, it will cost you about $34,000 in fees
Renting – advantages
> Initially, the weekly rental is usually less than the mortgage repayments. This is especially true if you compare the rent paid to a principal and interest loan
> You can shift homes on a frequent basis. Once the lease is over or by negotiation with your landlord, you can shift whenever you like
> You can rent where you’d like to live but you may not be able to afford to buy in the same location. Many people would like to live in one of our expensive inner-city or beach-side suburbs in our major capital cities. You have a better chance of doing this if you rent rather than buy
> No repairs or maintenance costs. Landlord pays for all the expenses
Renting – disadvantages
> Your time in your home is determined by the landlord and the lease. Once the lease is over, the landlord can tell you to move on
> If you don’t do the right thing, you can be evicted. Break one or more of the lease conditions or residential tenancies laws and you could be out of your home
> The landlord and/or property manager has the right to come into the property, given the correct notice. A landlord/property manager is able to do regular inspections of their property; this can be as often as once every two to three months
> Rents will continually increase. As costs and wages increase, so do rents. Rents increase at approximately 7 per cent a year. Put simply, if you are paying $300 per week to rent a property today, you will be paying $600 per week in 10 years to rent the same property
> You can’t renovate the property, unless the landlord agrees
> You will always pay rent – a mortgage will be paid off in 25 to 30 years
So what is the difference between renting and buying for cash flow and net wealth?
Assumptions:
> You are a first home buyer, 25 years old and based on life expectancy tables, you should live until 75
> I have used a $300,000 unit in my example
Renting
> An investor expects a 5 per cent return from a $300,000 unit
> Rent on a $300,000 unit @ 5% = $15,000 pa or $288 per week
> Rent increases on average at about 7 per cent a year, which means it doubles every 10 years
Buying
> A first home buyer requires at least a 5% deposit = $15,000
> First home buyer borrows $285,000 @ 6.5%, interest only for 30 years = $21,617 or $416 per week
> Home ownership expenses, such as rates, taxes, insurance, repairs, etc, average approximately 20% of the equivalent rental income = $58 per week
> I have calculated capital growth of about 7% per annum, which means it doubles in value every 10 years
This simple example above shows that you that it costs $9,600 pa or $186 per week extra in the first year if you buy the unit rather then rent it. This assumes that you have a $15,000 deposit and the FHOG & FHOB pay for all other buying costs. Now let’s look at the long term picture.
In summary, if you are now 25 years of age, by the time you are 75, you would have paid a total of $5,655,000 in rent over 50 years and your net worth is $0, if you didn’t buy any other assets.
However, if you bought the unit, you would pay $649,000 in mortgage repayments over 30 years and $1,131,000 in home ownership expenses over 50 years, totalling $1,780,000, making a difference of $3,875,000 in cash payments.
So there you have it – $13,475,000 difference. The home owner has $9,600,000 million in equity plus $3,875,000 better off than the renter because they made the decision to buy the unit rather than rent it.
