The 'Rent as opposed to buy debate'

[Red Star]

Did anyone read this article entitled 'Does renting make more sense' which makes the case and crunches the numbers for renting as opposed to buying.

Does Renting Make More Sense?

What are you thoughts? I thought it made a really interesting read and I wondered if anyone had gone down that road..?

Thanks Shona

 

[alexlee]

IF you have the discipline of saving the extra that you 'save' by renting and are ok with not owning the home you live in, renting and investing makes sense.

I've been doing it, but that's because I've been living overseas. Now I'm buying my PPOR because I feel like one.
Alex

 

[The Y-man]

Done both - rented for a long time (bought IP's instead) and now have PPOR.

Numbers aside, I think it is a valuable learning experience to be a tenant.

Cheers,

The Y-man

 

[Twitch]

These comparisions always come down to the assumptions. Very revealing are these two in that particular example
1) Growth p.a. for house is asusmed to be 6.5%
2) Growth p.a. for shares is assumed to be 14.3%

No surprise therefore what pops out the winner

 

[alexlee]

My own theory for why renting and investing is better than buying the PPOR is that you get emotional about your PPOR. Once you're in a PPOR, you start thinking about things you want to change and improve, instead of using that money to buy other investments. Over time, that means you end up with more gross assets if you rent and invest vs buy PPOR first.

Human nature is VERY hard to get around.
Alex

 

[Andrew_A]

These comparisions always come down to the assumptions. Very revealing are these two in that particular example
1) Growth p.a. for house is asusmed to be 6.5%
2) Growth p.a. for shares is assumed to be 14.3%

No surprise therefore what pops out the winner

Interesting assumptions.

For a one sized fit's all approach in Brisbane I would start with 12% (CG + Yield) for shares and 7% (CG) for your PPOR.

 

[natmarie73]

My own theory for why renting and investing is better than buying the PPOR is that you get emotional about your PPOR. Once you're in a PPOR, you start thinking about things you want to change and improve, instead of using that money to buy other investments. Over time, that means you end up with more gross assets if you rent and invest vs buy PPOR first.

Human nature is VERY hard to get around.
Alex

I would agree with that! My first property was my PPOR and I think I spent around $20,000 over the 4 years I lived there on making it look nice, planting a garden etc when I could have used that money for a deposit on an IP. When it came time to move on, I couldn't stand the thought of tenants wrecking my lovely garden so I sold it.

 

[alexlee]

I was speaking to a friend who had recently bought his PPOR, and he asked how he should invest going forward. I said, first thing is to discipline yourself not to spend more money on your PPOR. He said 'I can do that' and in the next breath said 'you know the wife has been talking about enclosing the balcony as an extra room because right now it's just wasted space.....'

Discipline is easier when you don't put yourself in those situations in the first place. I also think people who have only ever owned a PPOR (or moved PPORs) get far too emotionally involved with property in general. As someone who owned IPs first, I'm looking for a PPOR with one eye on its future value as an IP.
Alex

 

[BayView]

I heard a stat some time ago that said that the average home owner had a net worth of around $400k.

The average nett worth for the renters was around $50k.

I am assuming the stat is including home contents, cars and maybe super as well.

With the exception of super (and the house of course), the other things aren't assets or worth anything.

So, I guess in theory renting should be more sensible, but in reality the discipline required to invest the difference is much harder to do for most.

So for most; renting doesn't make sense.

 

[steveadl]

The article is a good illustration, but the problem is human nature doesn't allow (in the majority of cases) the person to continually week in, week out, save that difference and invest it.

There's always an excuse or a lapse - that's assuming there was any intent to do so in the first place. When they go on their annual holidays, will they still be putting that few hundred into the savings, or will they let it go for a couple weeks to enjoy themselves more in Hawaii etc? There will always be excuses, which is they beauty of the PPOR for the ordinary (and undisciplined) person as a savings vehicle.

As a side note, I'd like to see a comparison in that article of another person investing the difference in IP's as well, instead of just index funds.

 

[alexlee]

'Most people' should just max out their super contribution, work until they're 65, and keep upgrading their PPOR . The frightening thing is that just doing THAT will make them better off than most people in retirement.
Alex

 

[Debt Junkie]

I said, first thing is to discipline yourself not to spend more money on your PPOR.

Unless it adds value and can then be drawn down to get into your first IP faster ...

DJ

 

[Debt Junkie]

These comparisons always come down to the assumptions. Very revealing are these two in that particular example
1) Growth p.a. for house is assumed to be 6.5%
2) Growth p.a. for shares is assumed to be 14.3%

In all honesty, there's no way I would choose to leverage into shares to the same extent that I leveraged into property ... and I doubt the bank would let me either! So that makes a straight percentage comparison a bit pointless ...

DJ

 

[steveadl]

'Most people' should just max out their super contribution, work until they're 65, and keep upgrading their PPOR . The frightening thing is that just doing THAT will make them better off than most people in retirement.
Alex

One problem would be that by the time they retire and have upgraded 3 or 4 times - they're used to that really nice house. They don't want to downgrade to a smaller house to access the extra money, and most would'nt have a clue how to access the value without selling.

As a side note, I think a lot of it comes back to more financial education. More articles like this over the coming years might at least start stimulating people's interest into looking into the matters. Although they have to be somewhat interested in planning for their future to begin with - a lot of the people around me are not.

 

[WinstonWolfe]

A cursory analysis of the assumptions has me cynical.

i.e. how on earth does one justify
"But this doesn't include hidden expenditure of $427,500, which is all the stamp duties, insurance, maintenance costs, alterations and rates."

That's over $20k a year, even allowing for stamp duty and cpi.....don't think so....

Just running some figures myself, I can't get that expenditure above $90k ($4k pa indexed plus 10k stamp duty)

It is likely the $427,500 includes interest.

Anyone interested in modelling the assumptions????

 

[alexlee]

Unless it adds value and can then be drawn down to get into your first IP faster ...

DJ

That requires a whole new level of discipline. Usually people who buy their PPOR first and then do things to it end up getting VERY emotionally attached to it. Borrowing against your beloved PPOR is usually not on the cards.
Alex

 

[steveadl]

In all honesty, there's no way I would choose to leverage into shares to the same extent that I leveraged into property ... and I doubt the bank would let me either! So that makes a straight percentage comparison a bit pointless ...

DJ

That's the issue I still struggle with. I have no problem leveraging into property as you will always have the land, and insurance will always replace the building.

With shares, even the strongest of companies can run into problems that leave them stagnating for years, and unfortunately every now and again one of them goes completely bust. Won't do your investments much good, and with leverage can magnify the problems. Heck, even when the company doesn't do anything wrong, the market can still pummel it and keep you in the red for a year or three ie corrections etc.

I'm not saying I don't/won't leverage further into shares, but it's defintiely not as comfortable as leveraging into property.

 

[jrc]

I've run the figures for my PPOR. Assuming an average return on investments of 8% p.a. and house prices rising 6% per annum, I'm just in front buying in a regional area. To me there are good psychological reasons for buying (being able to hang pictures, plant trees, not be on a holding over period) as well as the forced saving aspect. If you have the discipline to invest elsewhere good luck to you. In the places I've worked I've rented for about 2/3rds of my working life. The rents were not substantially different to principal and interest repayments.

 

[VYBerlinaV8]

When I began saving for my first home (yep a PPOR) with my new wife when we were 23, everyone said "you're too young to worry about it, should you focus on enjoying life".

When we bought our first home in a rising market, and justified buying a largish home through borrowing against future value everyone said "if you rent and invest you get better results - the studies all show it".

When we bought IPs instead of traveling through Europe for months at a time without working, everyone said "you guys are throwing away your youth".

Now, of course, it's "you guys are/were lucky".

I put the whole rent and invest thing in the 'great idea but successful for few' basket, simply because most people I know don't have the financial discipline to make it work. Lots of people have quoted the rent and invest idea to me simply because they didn't want to admit to themselves that they had no real plan going forward, and wanted to tear me down. I should be a millionaire in 3 years or so - I wonder what they'll say then?

 

[Debt Junkie]

That requires a whole new level of discipline. Usually people who buy their PPOR first and then do things to it end up getting VERY emotionally attached to it. Borrowing against your beloved PPOR is usually not on the cards.
Alex

And so we're back to the beginning ... the key thing is the discipline, also mentioned by VYBerlinaV8.

What's the point of having a PPOR with a bucketload of equity if you're not willing to use it?

However, if I were starting out today, no PPOR, no IPs, I'd live at home with the folks and buy IP No.1. If I had to move out, I'd rent and buy and IP ...

DJ