Cheaper to Rent? No way!

[Jodie701]

I've read some comments made my people who suggest it's cheaper to rent then to own a PPOR. I really don't understand this way of thinking.

Rent continuously goes up and up (never down over the long term). IE in 10 yrs time your rent may be double what you're paying now for the same house, while on the other hand your PPOR payments tend to stay the same. Even if IR go up in 10 yrs it still wouldn't double your repayments because by then you've repaid a fair chunk off so there would be less interest to pay.

I understand that if you're just starting out, then building up an IP portfolio first can help you get your own home quicker or get a bigger/ better one, but still its worth having a PPOR at some stage.

 

[want2bewealthy]

I agree, now, but it took a while and rents to climb until I became a believer, rate cuts were the clincher.

I like your way of thinking long term and locking in a price, I now 'rent' one of my investment properties because it costs me the same to do that, I use the IO loan and cant be bothered with an offset account just yet, I figure that it saves me money for other investments and my rent will never go up, beats renting someone else's house..

 

[sphinx]

You don't understand probably because you have never done the numbers in detail.

Property prices usually need to appreciate 5% annually to "break even" (either buy vs. rent OR buy IP vs. not buy IP). I don't want to go into the details of the calculation.. but the gist is that you have to realistically consider interest payments, transaction costs, rates, maintainance cost, vacancy period and the "investment opportunity loss" on your initial deposit ....etc. etc.
With historical low or maybe even lower mortgage rates, this number is now hovering perhaps around 4%. ... some super optimistic investors (assuming all best scenarios in all those owning cost) may argue that 3% will break even. ... whatever.. the point is that house prices need to appreciate at least moderately to make property "investment" meaningful. It is not that Buying is ALWAYS better than renting or not investing in IP. Buying a house for "consumption" (not investment) purposes is another matter.

After you understand this, the question is that whether property prices will appreciate 5% annually in the short term (so you can determine when to buy..now or 1, 2 3 years later) or in the long term (so you can determine whether to buy at all EVEN you use a buy&hold-very-long strategy).

Now some people may tell you buy now because "property prices ALWAYS double every 7 years..so 10% a year is the norm" or a "booming market is coming" because of whatever "positive" interpretation of the current global financial crisis or "Australia is different".

Just two simple facts for you to think:

1. over the past 100-120 years.. house price appreciation in Australia are only "just" tracking CPI in the long run (no doubling every 7 years except in bubble periods). And all bubble burst eventually. Current house prices have deviated from this long term trend for 40%. And it always overshoots when it comes down. I think it is a very courageous decision to buy at the peak, and even worse, on the way down when the bubble is just starting to burst. Buy and hold-very-long strategy will not work if history is any lesson (long term trend can hardly break the 5% break even threshold). You can make money in property only if you are a speculator getting in and out of bubble at the right time.

2. what about "housing undersupply" here being "different"? person per bedroom and person per house figures are all at historical low... and the lowest in the world. Many places in US was also under severe housing "undersupply" until person per house figures jumped a bit over there.. then it all becomes severe oversupply. They didn't build a lot of empty houses. They built a lot of houses based on the "demand" under the assumption of person-per- bedroom/house numbers would not increase. Massive empty houses appear when people regroup in a economic downturn. A slight downward change of these numbers in Australia will generate large oversupplies in a very short period of time.

 

[Aaron Sice]

and the "investment opportunity loss" on your initial deposit

sorry - if you've invested the deposit in a house, how is there an opportunity lost?

that's a theoretical - and fickle - argument.

you can't keep wondering about what else you could have done with that money. you invested it as you chose to - why pine (sp?) over what else it could have bought you?

let's not get this into a D&G thread.

 

[Rob Williams]

One point that usually gets overlooked when this argument comes up (as it so often does) is LEVERAGE.
The comparison usually gets limited to a 1:1 ratio of PPOR:IP.
But, if you own multiple IP's and are only able to do so because you rent, not buy, then the figures look a little different.
As I've said on other threads, when my rent goes up $20pw, my tenants rent goes up $20pw x 7 which is a total of $140 pw increase. Less the $20 extra I pay for my own place, I'm still $120 pw up on the deal.
Now, if I had 10 ....

 

[Aaron Sice]

1. over the past 100-120 years.. house price appreciation in Australia are only "just" tracking CPI in the long run (no doubling every 7 years except in bubble periods). And all bubble burst eventually. Current house prices have deviated from this long term trend for 40%. And it always overshoots when it comes down. I think it is a very courageous decision to buy at the peak, and even worse, on the way down when the bubble is just starting to burst. Buy and hold-very-long strategy will not work if history is any lesson. You can make money in property only if you are a speculator getting in and out of bubble at the right time.

a very good point.

however, i think the idea behind buy and hold long term is timing of the buy - your profit is made when you buy, not sell. this indicates that "down" periods are the best time to buy, to take advantage of any appreciation later and to sell when confidence is restored.

however, if you can lock in a good IR and keep increasing rents over the long term, then it becomes "passive" cash flow as the rental income starts to replace you selling your time every day.

you raise a very valid point. but there are valid arguments against as well. it really does come down to your investment strategy and what you want out of it i guess.

 

[want2bewealthy]

Ive got plenty of time on my side, what else am I going to do with my money? I could use it down the pub or on a new car or plasma TV? which sounds like a better idea? thats the bottom line.

 

[steveadl]

What Jodie is saying in simple terms is true. You buy a house, that's it - over time interest gets eaten away and debt is gone. On the other hand rents will continue to rise.

Yes when you get into every detail about opportunity cost etc then it's not so simple. But let's be honest, with the exception of the SS crowd, how many renters out there are analysing each choice, working out the interest earned on the difference etc. That also assuming the investment you put all the extra deposit and weekly cash goes well too and doesn't tank.

Plus whilst renting may increase your casfhlow for investing, it doesn't always. The house I'm going to build in the location I plan to build would probably cost $700-800pw currently - that's a whole lot of cash gone each week, and that sort of desirable house will likely experience rental increases at much larger than CPI. Sure I could rent a $300pw house elsewhere and the figures look much better, but then I'm substituting where/what I want to live in and what price do you put on that?

 

[oracle]

1. over the past 100-120 years.. house price appreciation in Australia are only "just" tracking CPI in the long run (no doubling every 7 years except in bubble periods).

You are missing the point sphinx. As Rob mentioned in his earlier post. Its about leverage. If I have 5 mil. worth of assets with high LVR and low holding costs (That is how I invest) even a CPI increase makes the returns way better on my small deposits. Such deals keeps getting better in terms of ROI year after year as the magic of compounding kicks in.

You don't understand probably because you have never done the numbers in detail.

Have you done the numbers yourself? My advise is you do the numbers on deals successful property investors make.

After you understand this, the question is that whether property prices will appreciate 5% annually in the short term (so you can determine when to buy..now or 1, 2 3 years later) or in the long term (so you can determine whether to buy at all EVEN you use a buy&hold-very-long strategy).

It doesn't matter if the property value increases in the short term or not. Nobody can successfuly and consistently guess this. How often do you see really successful people (from property/shares) come on news channels and tell people what to do and where the prices of shares/property is going in short term? It always the theorists economists who are on TV shows predicting/speculating. How many of them can truely say they are financially independent?

Cheers,
Oracle.

 

[Collector]

Cheaper to rent than buy? I think not

Depends on the property and location.....


That is it is cheaper to buy in Sydney west suburbs that rent - higher yields


But it is cheaper to rent in Sydney north suburbs than buy - lower yields

So I guess it all depends on where you want to live - Blacktown or Willoughby



Rents don't always go up

http://www.vision6.com.au/em/message/email/view.php?id=446158&u=12069

 

[J Martin]

sorry - if you've invested the deposit in a house, how is there an opportunity lost?

that's a theoretical - and fickle - argument.

you can't keep wondering about what else you could have done with that money. you invested it as you chose to - why pine (sp?) over what else it could have bought you?

let's not get this into a D&G thread.

I think the better word is "opportunity cost".

 

[tubs]

Rent continuously goes up and up (never down over the long term). IE in 10 yrs time your rent may be double what you're paying now for the same house, while on the other hand your PPOR payments tend to stay the same. Even if IR go up in 10 yrs it still wouldn't double your repayments because by then you've repaid a fair chunk off so there would be less interest to pay.

I'm right behind you on this one. And have argued it before.

You're spot on, because interest rates channel up and down, but rents (generally) rise. So if you graphed one against the other you'd have repayments channeling up and down, and rents cutting through this increasing (diagonal line). Then of course, at the end when the PPOR is paid off, you're paying ZERO instead of rent (which will be considerable by then).

I wonder if I can find that thread.

 

[sphinx]

1. About leverage. I find slightly amusing that people here talk a lot about leverage on the way UP, but not on the way DOWN. But they do laugh at share investors who use margin loans. Using leverage in a type of investment which barely tracks CPI in the long term... I don't see any smart in that. (Then I concede if people now switch their arguments back to talking about "location" speculation or short-term speculation or anecdotes of "successful" investment. You can find those anecdotes and hindsight "investment lesson generalization" even in casinos.)

2. About what then do I do with my "money" conundrum.. I don't want "dead" money in the bank!!! Dead? You know what. high rates online savings or high rate short term TDs are 1-2% above inflation... which performs better than property in the long run (all cost considered). Currently, "Government guaranteed " bank bond returns 8-9%.

So again, taking on debt for investment with CPI-level return in the long run??? What is the logic in that! If you want high return, plenty of things have a better risk/return ratio than property. (Then why people buy them? I think you can see it as a consumption, not an investment if you want to spend (not invest) money on the feeling and benefits of owning one's own home.. or for a few brave soles who want to speculate in short term, leveraged.)

3. About rent going up.. .so what? The potential capital loss may outweigh the rent increase ..in multiple folds. the 5% figure is all-costs-considered, including rent. Rent is not dead money. Rent is often much cheaper than interests repayments + the owning cost AND the RISK you bear!


So what do you do in such an environment if you have already invested in property or an owner occupier? The ideal scenario: Sell your property and then rent the same place and let the one who naively buy it bear the risk of the current financial storm and additional costs and the worry. ... anyone here on the wrong side of the transaction?

 

[eternit]

1. About leverage. I find slightly amusing that people here talk a lot about leverage on the way UP, but not on the way DOWN. But they do laugh at share investors who use margin loans. Using leverage in a type of investment which barely tracks CPI in the long term... I don't see any smart in that. (Then I concede if people now switch their arguments back to talking about "location" speculation or short-term speculation or anecdotes of "successful" investment. You can find those anecdotes and hindsight "investment lesson generalization" even in casinos.)

2. About what then do I do with my "money" conundrum.. I don't want "dead" money in the bank!!! Dead? You know what. high rates online savings or high rate short term TDs are 1-2% above inflation... which performs better than property in the long run (all cost considered). Currently, "Government guaranteed " bank bond returns 8-9%.

So again, taking on debt for investment with CPI-level return in the long run??? What is the logic in that! If you want high return, plenty of things have a better risk/return ratio than property.

3. About rent going up.. .so what? The potential capital loss may outweigh the rent increase ..in multiple folds. the 5% figure is all-costs-considered, including rent. Rent is not dead money. Rent is often much cheaper than interests repayments + the owning cost AND the RISK you bear!


So what do you do in such an environment if you have already invested in property or an owner occupier? The ideal scenario: Sell your property and then rent the same place and let the one who naively buy it bear the risk of the current financial storm and additional costs and the worry. ... anyone here on the wrong side of the transaction?

Just wondering why post on a property investment forum if property investment is such a bad investment?

Is it to warn property investors how bad their investment are?

 

[steveadl]

You know what. high rates online savings or high rate short term TDs are 1-2% above inflation... which performs better than property in the long run (all cost considered). Currently, "Government guaranteed " bank bond returns 8-9%.

3. About rent going up.. .so what? The potential capital loss may outweigh the rent increase ..in multiple folds. the 5% figure is all-costs-considered, including rent. Rent is not dead money. Rent is often much cheaper than interests repayments + the owning cost AND the RISK you bear!

Never heard of anyone saving their way in online savers to becoming rich. I have however heard of many people doing it via property.

Even take pensioners. Two 60yo couples neither very good with money: one couple bought a PPOR, one saved money and rented their whole lives. 40yrs later both couples are living on a pension, at least one couple has their own house due to the forced savings. Yes we know couple 2 could have invested the difference - in theory it works well, but if you don't actually do it, where do you end up?

If your investment horizon is short, then yes you may see a potential capital loss. Since we're talking about people's decision to buy a PPOR, this is not much of an issue - holding for 10+yrs, a capital loss is in the vast minority. Unless of course you plan to buy and sell PPOR's every 2yrs at the same rate you might changes rental properties you live in?

 

[oracle]

1. About leverage. I find slightly amusing that people here talk a lot about leverage on the way UP, but not on the way DOWN. But they do laugh at share investors who use margin loans. Using leverage in a type of investment which barely tracks CPI in the long term... I don't see any smart in that. (Then I concede if people now switch their arguments back to talking about "location" speculation or short-term speculation or anecdotes of "successful" investment. You can find those anecdotes and hindsight "investment lesson generalization" even in casinos.)

You still don't get the point about leverage do you? Let me give you a practical , real life example.

Median priced metro residential property: $350,000 (Purchase price)
Deposit 5%: $17,500
Outgoings: Cashflow neutral as explained above
Min. long term capital growth : 4% = CPI

Value end of 1st year: $364,000
ROI on $17,500 end of 1st year: $14,000 or 80%

Fast forward 5 years
Value end of 5th year: $425,828.52 (at 4% compounded)
ROI on $17,500 end of 5th year: $75828.52 or 433.30% (in 5 years)

Nothing fancy...I have not included the rental increases over the 5 years yet. Sure, there will be hicups on the way in terms of occasional tenant issues, high interest rates etc. But all of those risks can be managed. Nothing impossible..

But the point is I can borrow 95% and enjoy capital growth (event if it is just 4%) and make extraordinary returns. I doubt that I can borrow the same amount with 5% deposit with shares/managed funds/gold/term deposit (you name it). Moreover, with the above investment classes you need to be really smart and time the market cycle to get extra ordinary results.

You can say whatever you like. I know what I am doing and everyone has the choice to do what they want. You claim TD are better then property investing. Let me ask you something.

1) TD are usually guaranteed return with minimal risks? Correct?
2) Isn't 101 of investing tells you that investments with minimal risks are the worst when it comes to ROI over the long term? Am I missing something?

So what do you do in such an environment if you have already invested in property or an owner occupier? The ideal scenario: Sell your property and then rent the same place and let the one who naively buy it bear the risk of the current financial storm and additional costs and the worry. ... anyone here on the wrong side of the transaction?

Personally, I can never agree with you on this one in a 100 years

Cheers,
Oracle.

 

[steveadl]

You still don't get the point about leverage do you? Let me give you a practical , real life example.

Median priced metro residential property: $350,000 (Purchase price)
Deposit 5%: $17,500
Outgoings: Cashflow neutral as explained above
Min. long term capital growth : 4% = CPI

Ah Oracle, but you haven't accounted for the fact that this property will actually fall dramatically in value and only be worth 40% of what you bought it for in 5yrs time.

 

[Rob Williams]

Ah Oracle, but you haven't accounted for the fact that this property will actually fall dramatically in value and only be worth 40% of what you bought it for in 5yrs time.

OMG! Neither have I. I'm screwed.
Call my broker and REA. Sell everything!!! Sell, Sell Sell !!!

 

[oracle]

Ah Oracle, but you haven't accounted for the fact that this property will actually fall dramatically in value and only be worth 40% of what you bought it for in 5yrs time.

Steve, I am happy to bet my odds against property never dropping 40% as evidenced in any given 10 year period in the past 40 to 50 years. And as long as enough people share the same opinion I can guarantee you that it will never happen in the future as well.

Cheers,
Oracle.

 

[steveadl]

Steve, I am happy to bet my odds against property never dropping 40% as evidenced in any given 10 year period in the past 40 to 50 years. And as long as enough people share the same opinion I can guarantee you that it will never happen in the future as well.

Cheers,
Oracle.

I like those odds too Oracle. Kudos.