Renting Makes More Financial Sense Than Homeownership

[lenovo]

Renting Makes More Financial Sense Than Homeownership

By Jack Hough

Sep 26th, 2008

I have something un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.
Stocks vs. Houses: Returns

Shares of businesses return 7% a year over long time periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation or "real" returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.) Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book, "Stocks for the Long Term," he finds that real returns averaged 7.0% over nearly seven decades ending 1870, then 6.6% through 1925 and then 6.9% through 2004.

The average real return for houses over long time periods might surprise you. It's zero.

To read the whole article click the link:
http://realestate.yahoo.com/promo/r...Ec2VjA2ZwLXRvZGF5BHNsawNyZW50aW5nLWJldHRlcg--

 

[boomtown]

L-E-V-E-R-A-G-E


Any other questions?

 

[craigb]

Lenovo, i like reading other opinions, it is interesting to me what goes on in peoples head, the way they think.
rent v's ownership though ?? your tax free capital gain on the place you rent is nill.
i personally can't tag a bedroom or paint a share?, if share is $30 i can't build on it to make it $40.
It sounds to me that you have never owned a house, or been lucky enough to pay a mortgage, if you spent $20k on a depisit 10yr ago your home could be val at $400, 000
and your property expenses at about $140 wk, so what rent are you paying now??

 

[craigb]

further more, had you purchased a home 10 years ago today you could have $200,000 equity to play with, and another $10,000 to purchase share's every year, and the advice your boss is giving you, does,nt sound real solid if he is doing a 9-5 er.
just ask why are you still working then if this stratagy is so good???
i am happy to take financial advice from any one who shows me their "not" financialy illiterate!

 

[RumpledElf]

And if you didn't purchase 10 years ago because you were still in high school or uni, you purchased last year because that's just when you were in a position to do so? For most people who have never owned a house before, renting makes more financial sense by quite a large margin, especially if you really want to live in a particular area. Hopefully this turns around soon. The 'ownership premium' of being able to decorate how you want, not get turfed out of a rental with short notice and put up your own picture hooks is an emotional issue not a financial one.

Personally I own because it is vastly cheaper than renting and made a very risky decision to do so. I don't invest my spare cash in shares though, it tends to get eaten by hardware and software. The house has increased after renovations and several years by about $30,000, which I have to admit is more than I expected, and just scraped in on giving me the 40% equity downpayment on the IP.

I'm a bit of an outlier though, not very many people quit secure jobs in the city to live out in the sticks with very little income doing potentially high risk and late payoff projects. Which is why we bought the second house - it looked to be a good solid moneyspinner to help us along. Being a member of *cough* that other forum certainly doesn't preclude me from trying to make money out of real estate by rather specufestery means ...

 

[chilliaa]

Sorry guys but there is a quite a bit of statistical evidence that really supports this case.
Phill Rudd did the same analysis for Australia and shares came out on top.
Note: this only applies to PPOR and NOT to investment properties.

 

[myla]

hello,

phil ruvthen from IBIS World i think you mean,

there is no doubt the strategy works but its the implementation that doesnt work,

ABS records these sorts of figures, ie. difference between home owner wealth and renter wealth,

with this sort of discussion going on for say 5yrs now it will be interesting to see the data in another 5 yrs as many are looking at this path

thanks
myla

 

[investwest]

I dont know, I find it hard to believe.

Sorry guys but there is a quite a bit of statistical evidence that really supports this case.
Phill Rudd did the same analysis for Australia and shares came out on top.
Note: this only applies to PPOR and NOT to investment properties.

Is there anyone out there, who has been renting for the past 10 yrs, who can vouch for that. We bought our block 8 years ago and then built two years later, we now have $350,000 in equity in the same property, if you were to rent our house you would be paying $550 per week which is close to $200 more than our mortgage, for us we were better off buying.

 

[Peter Parker]

Is there anyone out there, who has been renting for the past 10 yrs, who can vouch for that.

Yes.

Phil Ruthven is technically correct, but in practice for the majority of people he's wrong.

Why?

People's money habits.

It's not even an issue of shares versus property, but what the renter does with the money not spent on interest/rates/maintenance that really makes the difference.

A P&I mortgage is about the only form of forced saving that appeals to the masses.

The financially savvy person who saves 20 - 50% of their income almost certainly will be better off by renting + buying IPs/shares with the surplus rather than buying their PPOR and no other assets for all the reasons Ruthven points out.

But if the average Joe does not save the difference, they'll be massively worse off, and in 20 years time they will wish they'd bought their PPOR (even if it doesn't appreciate much) for the forced saving it provides.

Peter

 

[Rob Williams]

I'm a renter. Made the decision some years ago to maximise my leverage by renting and having all of my cash and borrowing in IP's.
There are some downsides, but they tend to be more emotional considerations that don't really bother me too much. For example, not being able to do what you like to the place (I don't want to do anything, anyway), regular inspections (so what). I sure there are others, but I'm over them.
I could buy the place I live in, but I can rent it cheaper. I can also move from an ocean view apartment one year to a CBD apartment the next, if the mood takes me. All of my debt is tax deductable. I have $0 "bad debt".
Sure, rents will keep going up, but my strategy allows me to hold 6 IP's, so their rents will go up, too. If mine goes up, say, $20 pw, then I apply that increase to my IP's, I'm actually better off by $100 pw.
This strategy does not suit everyone, but it sure works for me and I'm way closer to pulling the eject lever on the Rat Race because of it.
I doubt I'll ever own a PPOR again. Over time, I might build a share portfolio (for some diversification) and use the franked dividend income to pay my rent in a nice apartment or townhouse.
We all have different circumstances, objectives, risk profiles and lifestyles. The strategy or combination of strategies that works for YOU is the BEST one.

 

[Sunfish]

If you are young and mobile renting makes a lot of sense but once you settle in a town to "raise the family" the argument swings heavily towards buying.

I bought my house in the burbs over 25 years ago, so it would be paid off now had I done the "conventional" thing. All holding costs other than the mortgage will be included in your rent so I don't see long term savings. The best part though is that the "city" has come to me. We have just about everything within walking distance and soon we will Myers and a cinema to complete it.

The inability to get a long-term lease and thus be contemplating moving regularly puts me off too.

 

[eggnog]

Just thought y'all would like to know that theres a feature article in this months API on renting + investing vs homeownership

 

[Liverpool St]

Renting Vs Buying

I could buy the place I live in, but I can rent it cheaper. I can also move from an ocean view apartment one year to a CBD apartment the next, if the mood takes me. All of my debt is tax deductable. I have $0 "bad debt".
.

Works for me too. I have a couple of IP in Sydney plus 5 interstate but rent here in the city. Any equity in the properties I invest. When I retire I will shift into one of the properties. At 57 I've had PPOR's - never again.


LS

 

[The Fence]

What if some of your shares happened to be Enron...or HIH...etc etc.....

Someone said it before, implementation......

Rent is dead money, no investment at all.....wasted cash....

PPOR is CG free investment giving a lever for further investing....

But...if ye all must rent...then thou LL's will profit....

 

[Alex P Keaton]

Just thought y'all would like to know that theres a feature article in this months API on renting + investing vs homeownership

thanks, um i wander if there are any september issues left, or do you mean october.

 

[Alex P Keaton]

Rent is dead money, no investment at all.....wasted cash....

I dont agree

Rent is not dead money!!


You dont have to pay all the other costs that are involved with owning ppor. You can save the remainder and use for further investments.


As a first home buyer I will be tennanting my ppor for 6 months, then I'll move in for a couple of years, so as to claim fhb grants. By then the rental returns will be a lot more than what i will be paying in mortgage repayments (because I put in a large deposit) So in a few years time I will have at least neutral cashflow, and I will move out and convert to an ip, and rent somewhere myself.

So whilst im renting a place to live i will be putting away cash into my offsett account and gradually over the years my ip will become cashflow positive. By then I should have enough equity to buy ip # 2. I wouldn't be able to do this if I remained in the property I bought. I will be able accumulate more ips if i rent.


So rent money is not always dead money. It depends on the individual. If the person rents and just spends his money on crap then yep it would be dead money, but if invested wisely it isnt.

 

[The Fence]

As a first home buyer I will be tennanting my ppor for 6 months, then I'll move in for a couple of years, so as to claim fhb grants. By then the rental returns will be a lot more than what i will be paying in mortgage repayments (because I put in a large deposit) So in a few years time I will have at least neutral cashflow, and I will move out and convert to an ip, and rent somewhere myself.

If I take this paragraph literally.......somehow I don't think you are going about this the right way according to Tax laws in this nation....


I say again, rent is dead money.....the "other" costs you mention are rates and insurance, maintenance and possibly interest.....they are due on IP's too...sure you can claim but IP's incurr CGT.....

I guess for you starting out renting will make sense, but I don't see it if you are able to put down a large deposit....use the rent you might otherwise pay to pay down your PPOR loan and away you go....

Still reckon your strategy is a recipe for ATO scrutiny tho....

 

[Strannik]

PPOR is dead money, rent isn't

if you by IP for the same money you would've bought your PPOR for, and then rent it out, at the same time renting another house paying the same rent as you get, you will be much better off by the end of the year due to your property expenses becoming tax deductible.

keep in mind that the article is written by US journo, for US market, where the rules (and the IR) are quite different to Australia.

 

[eggnog]

thanks, um i wander if there are any september issues left, or do you mean october.

sorry, meant octobers issue.

 

[Liverpool St]

Rent Vs PPOR

Rent is dead money, no investment at all.....wasted cash....

....

And the interest on the non deductible debt isn't ??????????

LS