Rent vs Buy: An Australian "Cost Comparison"

[MellyBelly]

A

Yields are too low at present but are set to take off with income increases and high inflation on the back of the mining boom phase II.

Not so sure about Melbourne though. Retail, tourism (whatever little there is) and international education industry have taken a hit and is only going to get worse. Unemployment rates will climb higher in Victoria not lower.

 

[lizzie]

Whose renting at 500 p/w and owner paying out $ 800 p/w?

ausprop - post # 15

I agree that the majority of australians aren't property investors either. that means their ppor is their only property asset the majority have when it comes time to retire ... but if they rented and didn't buy their ppor, the majority would have no assets at all (asides from some piddlings super).

if they don't invest while paying off a ppor, then the chances of them investing when renting - for the majority, and you are not part of the majority - is almost non-existant.

whether they are buying or renting, they would rather spend the spare money on the annual (or bi-annual as some i know) o/seas holiday, new car, pool, boat, jetski, eating out etc etc.

i too like these things, but i have invested first and can now spend in the knowledge that i am not eating to goose, but rather the endless supply of golden eggs.

 

[lizzie]

but futher to michaelw's post ... it's also naive to think that people "have" to stay in the house they first bought.

what a savvy percentage do nowadays is buy what they can afford, value add, let time do it's thing, sell and upgrade. repeat.

means we've gone from small deposit on a $150k house in 1998 to a $1.6mil house with ocean views and (if we wanted to pay it off) no mortgage.

the only reason we don't pay our mortgage off is that it is locked in at 5.19% and we've got the money invested on call at a higher rate.

 

[our obsession]

...another rent cheaply here. (By rent cheaply-I mean cheaply, $20 p/w).

4 b/r, fully furnished, office, separate living areas, dble garage, walk in pantry, 2 x toilets, heating, cooling-our very own double sized dam as our private pool for fishing, windsurfing, skinny dipping..pergola area, and oh yeah, 1600 hectares to play in...

Yes, of course it's woop woop, but we love the woop woop lifestyle, and it does not prevent us from doing, travelling, being whateverthehekkitisthatticklesustodo...go, do, see, experience, be...but woop woop life is very beautiful. The other upside is a greater capacity to avail our finances required to dip into investing.

Hi, my name is Our Obsession, I buy houses...and a little land...

Win/win.

Possibly wont always rent, but who knows...

 

[bene313]

How interesting. Houses I am used to hearing being rent for circa $400/week valued at 500k.

At $1M, madness!

You are looking at 500k houses.

Try looking at a house which is 1m or even 2m and that is block value only - so the house is old and run-down. How much would this rent for?

The answer is about the same as your 500k house, but in a far better location.

 

[bene313]

Yields are too low at present but are set to take off with income increases and high inflation on the back of the mining boom phase II. Prices might take a breather for a year or two before that rental yield hits the tipping point.

Indeed prices will take a breather. With all that inflation there is only one thing we can expect to happen............

 

[HiEquity]

Its not mensa, if there was no inflation then you wouldn't buy. So long as inflation exists, then buying will always beat renting in the long term.

Not if you can buy twice as much property by renting than you can by buying and having that non-deductible debt hanging over you. Even if it's a small amount it will impact your debt servicing, with a relatively low avoided rent cost due to the relatively low yields around on resi. And not when you can buy better quality property investments by not having to live in them. Such as a bank branch with an 8%+ net yield, for example.

In the long term, the superior cashflow and growth from buying a greater exposure of better quality property investments can make you far more wealthy than simply buying your own house and an IP or two. Things are never that simple...

 

[CuttingHorseFan]

I have recently re-entered the rent market and intend to stay there for at least another 5-6 yrs.

.... A few things I am doing or putting into practice in the immediate future to ensure the renting strategy works for me:

1. Use IP offset accounts to store surplus cash.
2. Ensure one or more IPs are suitable for as a future PPOR if circumstances/desires change.
3. Don't tie up all existing capital in IPs, preserve a decent amount in other asset classes. (I.e. share portfolio)
4. Continue with my somewhat nomadic career choice. This ensures periodic movement which offsets renting instability, new opportunities, seeing the world etc.... Besides, I actually enjoy what I do. (most days)
5. Return to a PPOR only when doing so becomes economically viable... Ie. own outright and still have the required passive income stream.

I acknowledge that for a lot of people, they tend to live, work, play in the same area for large durations (or their entire life). But for the rest of us, who tend to enjoy traveling, moving to different parts of the country or world, enjoy the challenges of changing career directions every few years to keep things fresh and exciting etc.. etc... Renting can actually be not only cost comparable, but also more beneficial from an asset building perspective.

I hear ya and I get it ;-) I love being a corporate nomad. L8r for me a PPOR. Did it some time ago but life has changed and I'm loving not doing the Bourgeois thing and I love my life and what I do....investing is just an outcome not the journey so happy life.

Gee-hope i did the quote thing right this time

 

[jaycee]

Originally Posted by CJProperty
How interesting. Houses I am used to hearing being rent for circa $400/week valued at 500k.

At $1M, madness!

You are looking at 500k houses.

Try looking at a house which is 1m or even 2m and that is block value only - so the house is old and run-down. How much would this rent for?

The answer is about the same as your 500k house, but in a far better location.

Exactly.. on average the %age returns seems to decrease the more upmarket / luxury price yo ugo with resi propoerty - People like Dazz and Auspropo have mentioned this quite a number of times in other posts when relevant

 

[CuttingHorseFan]

Yup - it's the 'law of dimisnising marginal return'
I love living on the Upper Nth Shore and paying nix in rent

 

[Luv2Travel]

To me this argument seems to be that the lower the yielding property the better off it is that you rent. However, what if you buy a property that is in an area which is close to neutral if you were to rent it out instead of live in it. Ok, so you have non deductible debt and expenses, however the rental income (i.e. you are effectively paying yourself - you don't have to pay rent elsewhere) is also tax free. So if it's neutrally geared i.e. any tax benefits are lost, then why wouldn't you buy instead of rent? Your mortgage payments stay the same/decrease as the value increases, however if you rent, your rent will increase over time and you will be paying this forever.

I can certainly understand why some would choose to rent if they are getting a $1M property for $400/week, however from my own personal experience I think I have been better off buying. From 10 years ago I have not put in any extra capital (except the buying and selling cost) and am paying less in mortgage payments than if I was to rent the same property due to the growth in my first home and could upgrade. Throw in other costs like maintenance, rates and body corporate and it's probably slightly out of pocket, however I'm receiving tax free capital growth for when/if I decide to sell and upgrade (or rent myself and buy extra IP's from my tax free capital gain).

 

[Brett IP]

To me this argument seems to be that the lower the yielding property the better off it is that you rent.

No arguing here, just people sharing opinions and experiences

I see what you are saying though Biggles, and as others have said its all the magic of time & inflation. You are out of pocket at the start, but 5/7/10/15 years down the track you are well ahead as the span between the debt & the value grows wider & wider.

It just depends on the state of the market as to when the benefits start to outweigh the costs, financially speaking.

 

[Luv2Travel]

No arguing here, just people sharing opinions and experiences

I know.

I see what you are saying though Biggles, and as others have said its all the magic of time & inflation.

Ok, forgetting inflation, let's take a hypothetical scenario today (figures probably not realistic in todays market but I'm just trying to prove a point on a postively geared property).

Property purchased for $300,000.

Rental Income $24,000

Outgoings $20,000

Profit $4,000

Tax on that @ 30% $1,200

I make a $2,800 cash gain during the year. I also rent something exactly similar in the same town for $24,000, therefore my net out of pocket is $21,200.

Now let's say I live in the property and don't rent elsewhere. I'm out of pocket all the outgoings $20,000.

Then over time, the property increases in value, my gain is tax free if I live in it. Also the major holding cost i.e. interest is either staying same or decreasing, however if I was renting that would continue to go up.

I know it's simplistic, but am I missing something? It seems to me that the reason to rent would only be if you were living in a low yielding area.

 

[Brett IP]

It is a very simplistic way to look at it but yeah, in general, if a property was not yielding much capital growth, just like in present times, then you would be chucking away the difference between the "interest" on the repayments and the possible rent you could be paying.

Another positive is when the market increases you have such a large principal amount (the amount the house is worth) that will increase with it, percentage wise, courtesy of using OPM.

 

[MichaelW]

Not so sure about Melbourne though. Retail, tourism (whatever little there is) and international education industry have taken a hit and is only going to get worse. Unemployment rates will climb higher in Victoria not lower.

I hear ya, but I think you'll find the wealth effect has a way of rippling out to all the states. As the economy kicks off it will restore confidence and retail and property will kick in. Property development is a big driver of GDP in Sydney and Melbourne and will have a big income effect for anyone in the sector. I'm in Brisbane now, but am getting lots of cold calls from agencies who think I'm still in Sydney wanting to sign me up for Asia/Pac Supply Chain Manager roles on huge six-figure incomes. Its good for the ego... But the point is, that you don't have to be in Brisbane or Perth or Karatha or Gladstone for that matter to feel the effect.

Indeed prices will take a breather. With all that inflation there is only one thing we can expect to happen............

Spot on, high inflation means incomes increase quickly, and obviously the price of goods and services are rising quickly (the definition of high inflation) so expect those property prices to take off chasing incomes and yields. Interest rates will spike with them but there's a proven lack of correlation between interest rates and capital appreciation of properties. But property prices do tend to lag the business cycle a bit. The economy kicks off, then property kicks off.

Not if you can buy twice as much property by renting than you can by buying and having that non-deductible debt hanging over you. Even if it's a small amount it will impact your debt servicing, with a relatively low avoided rent cost due to the relatively low yields around on resi. And not when you can buy better quality property investments by not having to live in them. Such as a bank branch with an 8%+ net yield, for example.

In the long term, the superior cashflow and growth from buying a greater exposure of better quality property investments can make you far more wealthy than simply buying your own house and an IP or two. Things are never that simple...

Yeah of course. In fact I'm renting right now too. If the argument is all around the PPOR then it makes sense financially to rent that and buy an IP instead due to the tax lerks. But most don't have the discipline. Buying a PPOR typically means sacrificing 30-40% of your income for that "nice" place you want to live in. If you're buying an IP you might buy that cheap unit in crapsville on a good yield and sacrifice 5% of your income to do so. This breaks cardinal rule number 1, pay yourself first. Its easier to buy all the doodads and nice stuff and then invest what's left. At least when you have a mortgage on your PPOR you have to pay yourself (or the bank, which is in effect paying yourself as its securing your asset) first.

Cheers,
Mike

 

[bene313]

There's a lot of comments from people about how they bought a PPOR 10 years ago and have been better off than renting because of the capital growth.

That's fine, but the last 10 years were some exceptionally good years for property. What about the next 10?

 

[wylie]

I've been in the IP game for over 30 years and I would say that the most recent ten were not much different to the ten before that, and the ten before that, and the ten before that......

I know it might be different from here on in, but it might not.

 

[vbplease]

Bene, 2points.

Capital growth is one side of the equation.. Many are expecting rents to increase in the short term, which brings the gap closer.

I'm not sure of the percentage of people that pay off their home in 10yrs.. I think it's better to consider the capital growth in 20.

 

[hobo-jo]

let's take a hypothetical scenario today (figures probably not realistic in todays market but I'm just trying to prove a point on a postively geared property).

Property purchased for $300,000.
Rental Income $24,000
Outgoings $20,000
Profit $4,000

Tax on that @ 30% $1,200

I make a $2,800 cash gain during the year. I also rent something exactly similar in the same town for $24,000, therefore my net out of pocket is $21,200.

Now let's say I live in the property and don't rent elsewhere. I'm out of pocket all the outgoings $20,000.

I know it's simplistic, but am I missing something? It seems to me that the reason to rent would only be if you were living in a low yielding area.

An 8% gross yield is not common within metropolitan areas. Most metropolitan properties are low yielding. If your example was reality in the area that I live then I would buy, don't get me wrong, I would prefer to own if the cost was reasonable to do so.

Not sure how you've come up with your outgoings though given that interest alone on $300k at 7.25% would be $21,750 and you have neglected to include any of the other purchasing costs that I outlined in the original post.

I've been in the IP game for over 30 years and I would say that the most recent ten were not much different to the ten before that, and the ten before that, and the ten before that......
I know it might be different from here on in, but it might not.

Look at credit growth over this same time frame.

 

[MellyBelly]

means we've gone from small deposit on a $150k house in 1998 to a $1.6mil house with ocean views and (if we wanted to pay it off) no mortgage.

Everyone has varying degrees of success with their investments. I have also had spectacular returns on some of my investments. I've just turned 40, have no debt, can buy a couple of houses outright if I want to. So despite not investing in property here I haven't done too badly myself.