Is it really okay to rent?

Author: ME

Published at: 8/26/2016 10:58:16 AM

 

Is It Really Okay To Rent

 

We crunch the numbers to see what will leave you better off - renting or buying.

 

There’s a lot to love about owning your first home. There’s no landlord calling to check out the place every six to 12  months. No lingering concerns about a forced relocation if the property is sold, and best of all you can decorate your home however you like.

 

But how does home ownership stack up against renting as a financial decision? Let’s take a look.

 

You are paying yourself, not a landlord

 

First up, you’re going to pay for somewhere to live. That’s a given. Every dollar you pay in rent goes into someone else’s pocket. It temporarily buys you a place to live but it gives you little financial benefit in the long run.

 

If you have to pay for a roof over your head you may as well pay ‘rent’ to yourself, which is one way of looking at a home loan. Sure, home loan repayments can be more than you’d pay in weekly rent but at some point you will own the place outright. As a tenant, you’ll still be renting further down the track with nothing concrete to show for it.

 

You benefit from ‘leverage’

 

One of the big pluses of home ownership lies in ‘leverage’. It means by borrowing through your home loan you can buy a far more valuable asset than you could manage with just your own money. And it can really put you in front over time.

 

Let’s say for instance, Jill and James each have $100,000. Jill uses her money as a deposit to buy her first home costing $500,000. James keeps his money in a savings account.

 

We’ll assume Jill’s home rises in value by 5.6% each year – that’s the average annual price increase across Australian cities over the last 10 years[1]. At that rate, Jill’s home will be worth almost $1.9 million in 25 years. Yet she only chipped in $100,000.

 

By contrast, James invests his money in a savings account earning 3% interest annually. If he doesn’t dip into his stash, after 25 years James will have accumulated about $203,000. That’s just one-tenth of the wealth Jill has built up. Be aware however that recent average annual price increases may not continue into the future.

 

A home loan is a form of forced saving

 

By paying off your home loan you’re making a steady investment in your home. Some commentators suggest you could be better off renting and using the money saved on home loan repayments to invest in other assets like shares. It’s an idea that may work in theory. However as a long term tenant, maintaining the discipline to invest each month, every month, for up to 25 years could be difficult.

 

The bottom line

 

There are pluses - and minuses - to both renting and home ownership, and it’s all about what is right for you at a given point in time. Yes, renting offers flexibility and freedom from the costs and effort of home maintenance. But from a financial perspective, the process of paying off your home is likely to be a good way to grow personal wealth.



[1] CoreLogic RP Data Hedonic Home Value Index, January 2016, 1 February 2016

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