Rent vs Buy: An Australian "Cost Comparison"

[dan c]

Those of us who rent invest our spare cash, not spend on luxuries.

I'd like to see the numbers on this. I'm sure there are some swithched on people on this forum who have worked out the difference between their rent and estimated mortagage payments, and invest the difference. But there would be, I would think, a vast majority who don't.

Obviously buying a home to live is a lifestyle choice as well as an investment decision.

Agree 100%. And it's usually a longer term investment as well. I like not having to ring the property manager every time I want to hang a picture on the wall.

I'm sure with a longer term outlook, increase in rents and modest capital growth, the decision to buy looks better than it does compared to a one year snapshot.

 

[MellyBelly]

Rent Vs Buy? Good question, and a question that has been argued for many years. Same as there are both camps to "negative gearing" and "positive gearing"

I thing it all comes down to the individuals DNA. Are you living in the moment or are you willing to take a risk - buying an investment for possible future gain.

I have been living in the moment for the past 16 years and enjoying it very much. I have taken reasonable risks, bought investments, am enjoying the gains too (albeit on paper like most property investors)



There is no doubt you will live comfortably and will be better off in the short term, if you decide to rent. Having more money in your savings account, allows you to spend on other luxuries of life today.

Why in the short term? I do have plenty of money in my savings account, but that is just part of my overall investment strategy - also have some low risk investments/emergency cash/being able to grab investment opportunities as and when they arise. If I spend some of the money on luxuries then it's because I earned it.




With the purchase of my own home, I was able to secure 2 more investment properties and piggy back from there. If I had been renting, I still would be in my same position, as I was many years ago.

I've been renting for many years. And I've been investing and saving too.


Yes, there were risks, but in the last 100 years, property has been a consistent winner, the chances of you losing money is very slim, especially if you do some research before hand and not purchased on the fly.

Tell that to property investors in Japan, US, Ireland and Dubai

By investing, yes, it can be risky, BUT you have the chance of increasing your wealth from it. Renting - well you won't, really!

I've been renting. I can buy the house I rent and the house next to it, really.

Yes, I could have increased my wealth even more by borrowing, leveraging off my existing assets and taking on much bigger risks. Thanks but no thanks. I'd like to sleep at night knowing that even if my investments lose 80% or more of their value, we can still live comfortably and provide our children food, clothing and shelter. I have experienced severe downturns in my investments too, but have never lost sleep. I have no debt.

Will you be able to cope in the event of a severe downturn in housing/economy?

 

[devo76]

It might not detract from the argument but a key part of the equation is saving the difference. It's a fact( not guessing) that most do not. This to me is the one and only point that sways the argument. If you save the difference that might be better. If your an average Joe . Probably not but how you invest the difference or how your ppor performs varies things further..

guessing what someones behaviour may be does not detract from the argument tho. the point is if you rent and invest you are better off... at worst buy a house and let it out and rent your own place.

i am currently in a rental - $510/wk, i know the house cost the owner over $800k to develop. And boy it feels good when the gardener turns up to sort out the garden. The agents keep forgetting that lawns and gardening are in the rent... on the last inspection they advised me to clean up some weeds on the side of the drive, so i must lodge a complaint and tell the owner to put some sunscreen and a hat on and sort it out.

I recently did the numbers on the sale of my PPOR. I thought I had made a huge profit but when you sit down and put in all the bibs and bobs it is a bit of an eye opener.

anyway i am keeping na eye ont he market but for now I am focussed about lifting value of the land i have, then ineed to come back and sort a PPOR out for the missus, hopefully before the next property run!

 

[wylie]

I've been renting. I can buy the house I rent and the house next to it, really.

Yes, I could have increased my wealth even more by borrowing, leveraging off my existing assets and taking on much bigger risks. Thanks but no thanks. I'd like to sleep at night knowing that even if my investments lose 80% or more of their value, we can still live comfortably and provide our children food, clothing and shelter. I have experienced severe downturns in my investments too, but have never lost sleep. I have no debt.

Will you be able to cope in the event of a severe downturn in housing/economy?

I find this whole topic very interesting and agree that the switched on people will be investing, but would guess that the majority of renters are not investing, at least the younger ones who are renting because they cannot afford to buy.

I take on board the comments about a downturn, but I look to a house purchased about 10 years ago as an example. We paid $170K for an IP. It was rented at $190 per week from memory. So we really have not had to prop it up too much (and I am hopeless a maths, but you get the idea).

It is probably worth mid $600K now (and we will pay capital gains tax on it, but let's assume it was our PPOR). There is no way that we would have made anything like the profit this will bring if we had to pay rent and invest the rest. When we bought it the rent we were getting was about the same as the repayments, possibly a little more, but nothing like the difference if we bought the same house now.

Buying for us is forced saving, not because we are spenders. Far from it. But during the time we have had this house our children have gone from 11, 8 and 4 years old to 21, 18 and 14 and those are expensive years (and we do not indulge them).

For us, with this being an IP, it has actually put money in our pockets each week that we would not have had.

Had the market dropped 80% straight after, we would certainly have been in trouble, but I have always slept well at night. I like to fly by the seat of my pants . Having supportive parents in the background helped a lot, and without that knowledge that help was there if we tanked, we would probably have been less gung-ho. Banks always lent us the money though, so it is not like we were being reckless.

I know this is simplistic, and only the way I view things, but it is said many times that people "live up to their salary" and I believe for the majority of people, that is probably true.

I believe the people here on SS are not like the majority of people, and that is why many are investing outside and doing very well. This is just my opinion and I know there are differing opinions.

For our family, we would not have been able to make the gains that time has given us with this one example by saving/investing AFTER paying rent.

 

[MellyBelly]

I take on board the comments about a downturn, but I look to a house purchased about 10 years ago as an example. We paid $170K for an IP. It was rented at $190 per week from memory. So we really have not had to prop it up too much (and I am hopeless a maths, but you get the idea).

It is probably worth mid $600K now (and we will pay capital gains tax on it, but let's assume it was our PPOR).

My brother-in law did just that They bought their first house for $ 180k in 1998. It is fully paid off, guessing around $600k now. They lived in it until 2008. Second townhouse is an investment property - interest only, think they bought it for around 300k, probably worth 500k now. Then they bought land and built a house in 2008 (think 90% mortgage) and have been living in their new house since. They've done pretty well with their investments.

 

[HomeBuyerStrike]

It might not detract from the argument but a key part of the equation is saving the difference. It's a fact( not guessing) that most do not. This to me is the one and only point that sways the argument. If you save the difference that might be better. If your an average Joe . Probably not but how you invest the difference or how your ppor performs varies things further..

I don't think this is entirely true, it could be argued that your disposable income or your reduced financial stress is of more benefit than what you plough into housing. To use an extreme example, if you had been ploughing all that money into housing in some of the collapsed markets you would have been wiped out. Things like spending on sports or private health care, private education for children, or time off to spend with family provide huge financial and non-financial benefit. Personally, I am recently not saving as I am diverting my resources elsewhere to provide for my future (studying).

 

[Steve Basin]

http://www.bullionbaron.com/2010/11/rent-vs-buy-australian-comparison.html

I for one am happy to do without a mortgage and rent for a lot less than it would cost to buy the equivalent in my area. That said I've got the discipline to use the savings in other investments rather than to squander it.

Those of us who rent invest our spare cash, not spend on luxuries

That is very well, and if it works for you that is great. The reason I added my comment:

"There is no doubt you will live comfortably and will be better off in the short term, if you decide to rent. Having more money in your savings account, allows you to spend on other luxuries of life today."

is because "7pm project as outlined by hobo -jo" mentioned

"They honed in on what families with a tight budget/low income could do with the extra dollars saved by renting (e.g. like going on holidays, paying for private education for the kids), when ultimately it's probably these groups of people that would benefit most from the forced savings of a mortgage"

I was simply responding to this report.

I know a famous property investor, Chris Gray, that doesn't own a PPOR, instead opting to rent, yet is a prolific property investor.

There is no right and wrong here, like I said it what's most comfortable for you, your DNA.

 

[tom32]

It might not detract from the argument but a key part of the equation is saving the difference. It's a fact( not guessing) that most do not. This to me is the one and only point that sways the argument. If you save the difference that might be better. If your an average Joe . Probably not but how you invest the difference or how your ppor performs varies things further..

I agree. I rent and do not "save" as much as I do than if I was forced to pay off say a 600k PPOR loan over the next 25 years.

My wife is keen as mustard to buy a house but she often does reflect on the difference between us renting and our friends who have bought in similar salary ranges to myself in the suburb we rent, i.e. engineers, construction trades etc. We go out for dinner and don't even think about the bill they will be disecting who drank what etc. We go on holidays and compared to our savings it looks like a small outlay. However here is the kicker the truth is though if we take this attitude throughout life we end up waking up one morning eating catfood when I can no longer work which is a long way off now but it will happen. Super sure ain't going to cut it.

That said if you don't get the capital gains you could still be eating catfood in retirement either way. One hiccup over that 25year period, and you are in all sorts of trouble particularly toward the front end. I do see however that the vast majority on this site who have bought investment property over the last 10 to 20 years have done exceedingly well buying within their means and of course the PPOR with the tax break on savings is really an even better "investment" than IP's in my opinion but what of the next 20 years.

I guess another consideration for those of us involved in the capacity building segment of the economy, we make lots of hay while the sun shines but we are hit hardest when recessions occur. If anyone should be defensive in their strategy it is those who have a job in a cyclical industry. This has always been one of my considerations in the choice of renting over buying but as I say above when you have saved enough it swings over the buying, just assuming minimal to no capital growth.

 

[tom32]

I know a famous property investor, Chris Gray, that doesn't own a PPOR, instead opting to rent, yet is a prolific property investor.

I am always lost as to how this works out?

Surely any equity you hold is best held on your PPOR where it is untaxed? If you have zero capital / equity sure the PPOR is not helpful but presumably by successful you mean he has got some serious equity built up?

Your IP's you want 100% LVR and your PPOR you want 0% LVR would be the ideal scenario as I see it? Of course it is likely your PPOR equity is being used as collateral for these IP's but this does not effect the tax situation. I know you cannot just cut equity across form one to the other but sometimes I actually suspect going through with a sale realising capital gains at the reduced rate to achieve this situation may be worth it for some? Indeed I see calculators in the spreadsheets area of this site that appear to calculate this very advantage.

Hopefully I do not even have to say that of course it is better again to have 0% LVR on all but it isn't a perfect world for most of us...

 

[HiEquity]

I find the comments on how "most people won't save the difference" a bit frustrating. The topic should be about "what is the best investment strategy available" not "what works for most people".

To me it's clear that if you're starting from scratch, have a reasonable income and want to be aggressive you can achieve safer leverage into more growth assets if you rent somewhere cheap and buy up big with fully deductible debt into growth IPs with good cashflow. You simply cannot leverage into the same volume of assets with non-deductible debt hanging over you and it is the total overall exposure and cashflow that will drive your wealth in this game. If you want to be ahead of the pack and are willing to sacrifice your personal lifestyle, this is the path to follow. Just don't sell anything so you don't have to pay CGT, agent's fees and stamp duty on the way back in to the market.

It's also clear that if you don't leverage into growth assets and instead spend the difference, then not buying your own home will result in a very poor financial outcome.

If you want to achieve the same results as everyone else then just do what everyone else is doing... The "rent and invest big" path is not well trodden but those who have followed it have typically done much better than those who take the "safer" option of buying their own PPOR. If you have a large deposit then just use it for buying more quality IPs. Considerations of how much you like to live in a home you own etc are unrelated to financial outcomes, which is the subject matter at hand...

Others still, like myself are at a stage of life, where not only do I own my PPOR outright, I will not expose that title to any lender. Some may say that is a poor and sub-optimal use of your net total equity. Perhaps, however it is another layer of stability and protection for my family.

Hi Player

Hope you are well!

This is off topic but I would not agree with this statement. I have concluded that having every property mortgaged can give you more security from creditors than having unencumbered properties. Of course the key is to keep the PPOR with a different funder and keep it at relatively low leverage so as to give that funder nothing to worry about but I feel there is more risk when potential creditors / litigants can see you have unencumbered assets than when they can see everything is mortgaged. It's nice to have a bank between you and a vexatious creditor if you take my meaning - they are very good at protecting their interests and you may as well have them on your side in such a situation. Not to mention the safety of having a buffer just sitting there for emergencies, established when things are going well, rather than when you need it (when it may not be forthcoming!). Just a thought...

 

[HiEquity]

I am always lost as to how this works out?

Tom, just never sell your IPs and the CGT-free advantage of the PPOR falls away. If you assume (and do) that, then owning your own PPOR has very few advantages from a financial POV. Of course there are more than just financial considerations at stake but there is a core assumption here that financial outcomes are what we are talking about - everything else can be valued individually against how much it's going to cost your net worth and cashflow.

 

[dan c]

I agree. I rent and do not "save" as much as I do than if I was forced to pay off say a 600k PPOR loan over the next 25 years.

My wife is keen as mustard to buy a house but she often does reflect on the difference between us renting and our friends who have bought in similar salary ranges to myself in the suburb we rent, i.e. engineers, construction trades etc. We go out for dinner and don't even think about the bill they will be disecting who drank what etc. We go on holidays and compared to our savings it looks like a small outlay. However here is the kicker the truth is though if we take this attitude throughout life we end up waking up one morning eating catfood when I can no longer work which is a long way off now but it will happen. Super sure ain't going to cut it.

That said if you don't get the capital gains you could still be eating catfood in retirement either way. One hiccup over that 25year period, and you are in all sorts of trouble particularly toward the front end.

The difference is that if you bought a PPOR and paid it off over that 25 years, you have an asset to sell. Where as if you rent all your life, and don't invest the difference, you don't.

 

[Jonril]

In my opinion the consensus is the "rent vs buy" argument is a much of muchness one in regards to investment over the long term.

The real indicator of how well off you will be in my humble opinion is (in order of importance);

1. Your personal investment/business savvyness.

2. How well you can manage investment risk.

3. Access to OPM/equity.

4. Your tendency of being a "prodigious accumulator of wealth" or "average accumulator of wealth" or "under accumulator of wealth" as per the habits described in "The Millionaire next door" book.

5. Dumb luck.

6. Applied innate talents eg: sport/arts/science (outside the business/investment sphere)

7. Damn If only I had seventh point I could write a self help book

Sorry for going off topic a bit but I believe as stated at the beginning of my post it's a much of muchness argument all things considered

 

[Player]

.............Hi Player

Hope you are well!

This is off topic but I would not agree with this statement. I have concluded that having every property mortgaged can give you more security from creditors than having unencumbered properties. Of course the key is to keep the PPOR with a different funder and keep it at relatively low leverage so as to give that funder nothing to worry about but I feel there is more risk when potential creditors / litigants can see you have unencumbered assets than when they can see everything is mortgaged. It's nice to have a bank between you and a vexatious creditor if you take my meaning - they are very good at protecting their interests and you may as well have them on your side in such a situation. Not to mention the safety of having a buffer just sitting there for emergencies, established when things are going well, rather than when you need it (when it may not be forthcoming!). Just a thought...

Hi Mr. Equity, doing very well and trusting the same for you and yours mate

Your post above is correct. From an asset protection perspective (trusts aside) it can provide a type of hedge proportionate to the LVR one has on the PPOR and the funds drawn into an offset. I have toyed with this idea also. As you also mentionthe title must be with a bank that has no other of your business or you may find yourself dancing and singing to their tune

I just wonder if a mere offset can't be looked thru by a court at law when facing bankrupcy. In a similar flavour if one is sole appointor and/or trustee or sole director of the trsutee Co of a trust and also a beneficiary, then the veil may also be looked through. I am not a legal person, so others may comment.

There is no right strategy here. I have never had a home loan (PPOR non-deuctible debt). I started investing early and negative gearing was my friend (still is my companion albeit not on my overall position), moved into properties as titles released and well tincture of time did it's trick.....right now life's good

It is still a position I hold and it suits me. It doesn't suit most others who would possibly do backflips to have clear titles they could leverage against. Different stage of life and having migrant parents of Southern European extraction has led me to adopt this paradigm. I know others of this demographic who gear up and leverage up regardless of upbringing and others still who barely own their own home let alone invest. They are too busy filling the pockets of Mr Harvey and Mr. JB HiFi. My stance or your stragey isn't right or wrong, except our circumstances, mindset and need for SANF makes it so.

Others sleep better knowing they have debt leveraged against PPOR's. Horses for courses. I'm glad you brought it up though.

 

[CuttingHorseFan]

To me it's clear that if you're starting from scratch, have a reasonable income and want to be aggressive you can achieve safer leverage into more growth assets if you rent somewhere cheap and buy up big with fully deductible debt into growth IPs with good cashflow. You simply cannot leverage into the same volume of assets with non-deductible debt hanging over you and it is the total overall exposure and cashflow that will drive your wealth in this game. If you want to be ahead of the pack and are willing to sacrifice your personal lifestyle, this is the path to follow. Just don't sell anything so you don't have to pay CGT, agent's fees and stamp duty on the way back in to the market.

**

I'm doing a variation on this. No PPOR these days for me ;-)
First IP down CF+.
I rent in a great part of Syd and live rent free as I homestay host.
So not following traditional norms.
Also as I ping around the country with work a PPOR doesn't work for me. And I can always live in my own IPs at any time no dramas as I'll never sell for the reasons quoted.
Down the track if I ever 'settle' *GAWD NO!!!*, I should be able to buy a very nice home, but for now 'getting ahead of the pack'.
So not all renters are loosers on can't buy or...whatever.
Many models out there ;-)
My goal is to have IPs dotted around the place so when I want to work in a different cap city I can just 'rent my own place' utill I get bored and want to move again...I'm a gypsy - what can I say!

 

[bene313]

I'm doing a variation on this. No PPOR these days for me ;-)
First IP down CF+

Ditto. The investments are cashflow pos after tax. Paying peanuts for rent in a blue chip suburb.

Meanwhile many of my mates are getting slammed by mortgage repay'ts.

Still, gotta remember - the PPOR is a lifestyle decision. Albeit an expensive one.

 

[bene313]

I find the comments on how "most people won't save the difference" a bit frustrating. The topic should be about "what is the best investment strategy available" not "what works for most people".

Exactly. This an investors discussion board.

 

[hobo-jo]

This is what I love about Somersoft, I get home to pages full of quality discussion/debate. While I'm negative on property prices and property as an investment (over the short to medium term) I know I can come here to get some quality replies that will challenge my line of thought. While users on here don't always agree I know that (in general) the debate will be fair, open, honest and intellectual. It's a real shame that this quality of posting isn't often seen on the "property bear" forums I sometimes visit.

You could also throw $3000.00 per annum at the rental given that you have to move about every 12months if you are a renter. Before you ask what removalists I use as thats pricey, I do value my own time and frankly I would be rather working than moving. I f'ing hate moving! Plus usually you end up paying rent on two places for a week or two in the transition as well.

I hate moving as well, but in my opinion adding moving costs is a bit of a cop out for something you could do yourself. A majority of moving is simply a time expense and there are far more time expenses to do with buying a property than renting one, for example add up the hours you might spend in negotiation with an agent to work out a price, then contract signing, mortgage application process, etc. Buying would be much more a time hog than being forced to move if renting. I think forced moving every 12 months is probably too regular to be realistic.

Using the above stats, with rent increase input of 2.5%, 8% CG increase of property and a 7 year time frame, the wealth comparison comes out at

Whoah! Did you say 8% CG? If I thought that was a realistic growth figure we would see every year over the next 7 then I would be loaded up with property! I think there is potential that in 7 years prices may still be lower than the peak nominal prices we've seen over the last 12 months.

There is no doubt you will live comfortably and will be better off in the short term, if you decide to rent. Having more money in your savings account, allows you to spend on other luxuries of life today.

Or as discussed the saved dollars could be spent on other investments that are primed to perform better than property in the short to medium term rather than spent on luxuries.

I take on board the comments about a downturn, but I look to a house purchased about 10 years ago as an example. We paid $170K for an IP. It was rented at $190 per week from memory. So we really have not had to prop it up too much (and I am hopeless a maths, but you get the idea).

It is probably worth mid $600K now (and we will pay capital gains tax on it, but let's assume it was our PPOR).

So approximately a 5.8% yield 10 years ago...what would it rent for today out of curiosity?

To me it's clear that if you're starting from scratch, have a reasonable income and want to be aggressive you can achieve safer leverage into more growth assets if you rent somewhere cheap and buy up big with fully deductible debt into growth IPs with good cashflow. You simply cannot leverage into the same volume of assets with non-deductible debt hanging over you and it is the total overall exposure and cashflow that will drive your wealth in this game.

Great post HiEquity!

This raises an interesting point, buying a PPOR with a mortgage that's non-deductible could be a real set back, this is something I've come to realise.

My current plan entails investing in high growth assets to secure a large enough capital base to purchase a PPOR outright (when they are reasonably priced, realistically I probably have enough now). Once the PPOR is purchased outright I will borrow against the equity for investment/business purposes so that I have no outstanding debt which isn't tax decuctible.

 

[JIT]

I did the rent cheap as and invest in RIPs thing (some held in a trust, some held in my name) over the last 5 years.

It has enabled me to create a 7-figure net worth in a relatively short space of time.

Am now looking for a PPOR though.

Having an asset with that CGT-free status is just too hard for me to resist!

Plus, I'm still eligible for what's left of the First Home Owner's Grant in VIC (if I buy under 750k).

Also of interest, if one had bought earlier RIPs in a trust, there is a thing called the ''re-financing principle'', where one can borrow against the equity in these RIPs to effectively convert non-deductible debt to deductible debt in one big hit.

Ideally the trust would be earning +ve income from other sources eg. shares, to offset the deductible interest bill created in the trust.

I don't think one should wait too long before getting a PPOR though, the CGT-free status can allow for selling and leap-frogging into a bigger and better PPOR much quicker.

The stumbling block with getting a PPOR early, is that riddled with all that expensive non-deductible debt, most people aren't comfortable gearing up further, even if it is for deductible debt.

The pay of your PPOR loan first mindset seems to take over.

 

[lizzie]

My brother-in law did just that They bought their first house for $ 180k in 1998. It is fully paid off, guessing around $600k now. They lived in it until 2008. Second townhouse is an investment property - interest only, think they bought it for around 300k, probably worth 500k now. Then they bought land and built a house in 2008 (think 90% mortgage) and have been living in their new house since. They've done pretty well with their investments.

so - from you figures - they've made a profit of around $67,000/yr average by paying not much more than they would have paid in rent. a total of $800,000 that they now have complete control over.

that's an entire other income. even with saving the small difference if they rented and investing would they have been able to achieve the same results?

using the example given of the pros of renting at $500/wk, owner paying out $800/wk ... that is a difference of $15,600/yr, say invested at 10% compounding would - in the first year bring in an extra $1,560 ... by year 10, if saving 15,600/yr the amount of savings/equity would rise to $197,300 (approx) and an income of $19,730.

now, my maths is very poor so please correct me if the figures are wrong.

for ease i have assumed rents haven't risen and the landlords costs have remained the same. however, one could guarantee that the rents would rise over a 10 year period and that the landlords costs would remain relatively stable as the major expense would be their mortgage that, even on interest only, would remain the around the same (yes, council/water rates etc do go up but are not a significant part of costs compared to mortgage repayments).

i'm not saying it can't be done, because JIT has done it ... but i am with the majority of people here who would say that the "average" australian wouldn't invest.