To Rent or to Buy?

Pros of Buying

1. The appreciation of house prices over the long run

It’s hard to miss the news of rapidly rising house prices over the past 5 years. Between 2013 and 2018, the median Sydney property rose more than 70% and other major cities like Melbourne and Brisbane have also seen steady gains.

While house prices have consistently risen over the long-term, as seen above, they can also have periods of weak growth or even downfalls. During the financial crisis, house prices in the US fell by an average of 33.8%. Before you become a house owner, also understand and be prepared for periods of house price weakness.

2. Buying gives you benefit of leverage

Leveraging involves using borrowed money to invest. It enables the investor to put more money into purchasing an asset such as a property than they otherwise would have been able to, thus, creating the potential for gains. In other words, borrowing money enables you to get a home much sooner than if you were to save for the whole lump sum.

In Australia, banks typically lend a majority of the total value, meaning home buyers carry high leverage. Let's take a look at an example case. It is typical to pay 20% upfront as deposit and have your bank cover the remaining 80%, given to you as a mortgage loan. Let us suppose the property you've been eyeing is $500,000, so you decide to pay $100,000 as deposit and lend the remaining $400,000. If after a year, you look to upgrade a home and sell this property for $550,000, the property itself has risen 10% in value but your return on investment is 50% since you have made $50,000 profit on the $100,000 original deposit. That is the value of leveraging.

Cons of Buying

1. Interest Repayments

Monthly interest repayment can be quite significant, depending on your family's needs and requirements and the mortgage you take out. The constant stress burden of a mortgage loan will naturally restrict your family's consumption, many goods and services you enjoyed before on a regular basis will become guilty pleasures. Home buyers need to be prepared for the possibility of living standards lowering and before considering entering the property market have an accurate depiction of their financial state.

2. Ownership Costs

Buying and selling isn't cheap. According to the Reserve Bank of Australia (RBA), buying and selling costs such as agents, marketing fees amount to 4% of the final sale price. This is just the beginning, not to mention long run ongoing costs including: council rates, stamp duty, depreciation in value and body corporate fees.

Pros of Renting

1. Frees up your savings

By choosing the renting life over home ownership, you are not letting go of all your savings on a deposit and all the costs associated with buying a home. Money that is freed up can be spent or used to diversify investments and perhaps gain even greater return on investment than if you bought a house. Perhaps, you are at a point in your life when you're not ready to have all your savings and income go towards a house deposit and mortgage payments. Does travel or study beckon?

2. Flexibility

As a tenant you can freely relocate from home to home and area to area once your lease expires. As apposed to buying, moving areas come with significant mental and financial costs.

Cons of Renting

1. Lack of stability

Renting is constantly associated with a security issue such as when the landlord decides to kick you out. Being a home owner, you have the flexibility to renovate the property and keep all your furry friends by your side.

2. Rental costs are inflexible

Past indicators have shown that the cost of renting will increase over the years due to inflation and rises in the property market. If we do an experiment, one individual buys, takes out a mortgage and pays monthly interest and loan repayments. Another individual choose the renting life. You will find that initially, mortgage repayments may be higher that rental bills, but over the life of the loan, the interest charged reduces as the principal is gradually paid off. The home buyer will pay off their mortgage in under 30 years and be free from monthly payments to continue living in their home. The tenant on the other hand will always have rental payments. When they hit retirement and income is significantly reduces, rental increases will become a massive burden and increasingly harder to absorb.