The 'Rent as opposed to buy debate'

[alexlee]

That’s what most people end up doing, though. Million dollar PPOR, zero debt, no other investments. Doesn’t make sense to me, but…..

I’m surprised (or maybe not) that the article didn’t mention the importance of the personal savings rate. I mean, the key plank of my strategy has always been to save a lot of my after tax pay. If you can do that in the first couple of years, everything just falls into place.
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 ...

 

[yieldmatters]

On a straight mathematical (no emotion) basis renting is cheaper than buying. So is the landlord then making an economic loss?

I know .. tax benefits, capital growth etc etc

 

[buzzlightyear]

On a straight mathematical (no emotion) basis renting is cheaper than buying. So is the landlord then making an economic loss?

I know .. tax benefits, capital growth etc etc

You've got it...... And they say bad things about you.....

 

[steveadl]

On a straight mathematical (no emotion) basis renting is cheaper than buying. So is the landlord then making an economic loss?

I know .. tax benefits, capital growth etc etc

Well if you're talking about a "straight mathematical (no emotion) basis" then it depends, but no - a lot of landlords are making an economic profit (ignoring cap gains).

 

[yieldmatters]

You've got it...... And they say bad things about you.....

you see - I do listen ... but can't help the odd stir.

 

[skater]

I know .. tax benefits, capital growth etc etc

Maybe he's learning at last.

 

[burty85]

I have always wanted to buy my PPOR, but also wanted IP's as well but had no idea about how any of it worked until lately... i did end up getting my PPOR at the start of this yr and have already spent over $10,000 shed, landscaping etc, now i look back and think that $10,000 could have been spent on getting my first IP, now have to wait till next yr to even start looking...
I have to agree that renting is cheaper, but lacking that discpline to put away the extra cash is very hard and since i got my PPOR it has now got me a large equity base that i would have never had if i was renting....

 

[WinstonWolfe]

Another inconsistency just found:

"If lease costs are assumed to be 4.5 per cent per annum of the value of the home being leased (with the home value and therefore lease costs increasing over the 15-year period at 4 per cent per annum) then the lease paid over the 15 years will be $427,975."

Here it says the leased home value grows at 4%pa (as does rent), but the PPR house was grown at 6.5%cg (475k to 1.23M).


Growing rent at 4% while property prices grow at 6.5% is unsustainable over 15 years; and obviously underestimates the true cost of renting.

 

[WinstonWolfe]

THe example also seems not to take into consideration that the house buyer has accumulated equity in the house, because the loan is P&I.

 

[yieldmatters]

Growing rent at 4% while property prices grow at 6.5% is unsustainable over 15 years; and obviously underestimates the true cost of renting.

It is unsustainable because the market yield will become ridiculously low (i.e. the price of the house just keeps pulling away from rent).

The question for me though is whether rents will accelarate or house prices will slow. One way or another it has to correct - yields can't keep dropping forever.

 

[WinstonWolfe]

And yet another flaw.....

there appears to be no limit on how much the renter invests in shares each year, via a super fund....the limits of superannuation contributions are not considered......this will obviously reduce the CGT burden on share growth.

 

[Mofra]

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,

Many financially savvy people are constantly borrowing back up to 80% LVR on their property portfolio and gearing into the markets - it is becoming more common every year. I know being a property forum they'll be howls of derision if I push the point of equities being a safer investment than property so I'll just leave it at that

 

[Mofra]

And yet another flaw.....

there appears to be no limit on how much the renter invests in shares each year....the limits of superannuation contributions are not considered......this will obviously reduce the CGT burden on share growth.

There is also no assumption of a margin loan doubling the equities portfolio either, dividend re-investment (or coverage of said margin loan) or franking credit taxation benefits.

FWIW I fit into the category of renter who invests in property, shares, managed funds & lower risk (net credit spread) derivatives trading so I am probably the demographic the original article was alluding to.

 

[WinstonWolfe]

Here's my attempt to replicate this scenario.

A few inaccuracies but still shows the advantage of renting, if you are prepared to lock your money up in super until you retire...

THough only takes a 1.5%pa increase in property growth to swing the example in favour of buying PPR.

 

[BayView]

On a straight mathematical (no emotion) basis renting is cheaper than buying. So is the landlord then making an economic loss?

I know .. tax benefits, capital growth etc etc

Here we go again.

ok; none of the properties I own have made an economic loss.

The values have all gone up, since I've owned them, and the cashflow is positive.

With the exception of the current PPoR (now a rental as well) that had a cash input (we paid for it outright with the profit from the last PPoR sale), all the other properties have been paid for with equity only.

So, Yield; you're the Stats Guru and Economist - what's that rate of return?

 

[yieldmatters]

Here we go again.

ok; none of the properties I own have made an economic loss.

The values have all gone up, since I've owned them, and the cashflow is positive.

With the exception of the current PPoR (now a rental as well) that had a cash input (we paid for it outright with the profit from the last PPoR sale), all the other properties have been paid for with equity only.

So, Yield; you're the Stats Guru and Economist - what's that rate of return?

I'm talking hypothetically as usual I'm sure the stuff you bought in the past has been fine.

But IF somebody accepts that over a particular period (lets say 20 years) that renting is cheaper than buying then the landlord has to have made an economic loss. They are on the other side of the transaction! Somebody always buys - its just in this case it wasn't the person living in the house. Tax deductability will dilute this loss - but it is still a loss - unless of course your marginal tax rate is greater than 100% OR if you lie about your expenses!

It is hard to say if renting is better because we don't know what will happen. If rents go up then PPOR wins. If CG continues to grow eek: ) then PPOR wins. Plus there is all that emotional stuff that almost everybody (even me) would pay a premium for. It is very sensitive to assumptions. (I have a good spreadsheet on this one as well!)

 

[wylie]

But IF somebody accepts that over a particular period (lets say 20 years) that renting is cheaper than buying then the landlord has to have made an economic loss. They are on the other side of the transaction! Somebody always buys - its just in this case it wasn't the person living in the house. Tax deductability will dilute this loss - but it is still a loss - unless of course your marginal tax rate is greater than 100% OR if you lie about your expenses!

What a load of cobblers!!!! Have you never heard of a win/win situation.

We have been negatively geared for the past 20 years and if you saw our balance sheet and compared our assets 20 years ago with our assets now, and still think we have been making a loss, then I'll take a loss any day of the week.

And if my tenants feel that they have had a win, well, jolly good on them. If they have been using my "low" rents to fund other investments, good luck to them. Bet most of them haven't though.

For goodness sake, give up this rubbish, go away and buy a house so you can see how it really works. Burn your textbooks, because houses and land can't read.

Wylie

 

[yieldmatters]

What a load of cobblers!!!! Have you never heard of a win/win situation.

We have been negatively geared for the past 20 years and if you saw our balance sheet and compared our assets 20 years ago with our assets now, and still think we have been making a loss, then I'll take a loss any day of the week.

And if my tenants feel that they have had a win, well, jolly good on them. If they have been using my "low" rents to fund other investments, good luck to them. Bet most of them haven't though.

In a rent vs buy equation its never win / win in a pure financial sense. Maybe in another sense there is a win / win - freedom to move etc

Regarding your situation - that fits well with my argument - you clearly won as the CG has blown away everything else. The tenants would have been better off buying if they could as they would have got the CG.

But if the tenants had won then you would have lost. My point is it's the flip side of the same coin.

Again - I am talking purely financial. There are many other more important things in life. Some might prefer to rent because don't want to be tied down. Some might prefer to buy because they want stability and financial discipline.

 

[BayView]

Posted by Yieldmatters:
"Regarding your situation - that fits well with my argument - you clearly won as the CG has blown away everything else. The tenants would have been better off buying if they could as they would have got the CG.

But if the tenants had won then you would have lost. My point is it's the flip side of the same coin.

Again - I am talking purely financial. There are many other more important things in life. Some might prefer to rent because don't want to be tied down. Some might prefer to buy because they want stability and financial discipline".

Again Yield, your lack of real world knowledge is shining through. All hypothetical arguments that we have repeatedly shot down in flames for the last month. Here's another go;

You're assuming that the renters couldn't buy; look at Alex Lee; he's a renter and still owns property. There will be others for sure.

If the Tenants win we still can win as well.
Here's an example; the second IP we ever bought (still) has the same Tenants in it. A young couple, earning decent dollars.
I went around there one day to fix a loose bathroom tile, and saw a copy of "Rich Dad Poor Dad" on the coffee table. I made a comment about it to the young guy, and next thing we are in a full-blown discussion about investing.
He and his fiance had been renting from us for about 18 months at this stage, and I suggested the scenario of staying as renters and buying an I.P. I explained how it was going to work out far easier to do this than own a PPoR, due to the rent return, tax deductions and depreciation etc.
So, they saved for another year, then bought a nice, but smaller house which will eventually be their PPoR.

I think I won, and so did they.

Owning a PPoR doesn't tie you down either. We have a PPoR, and have used it to accelerate our wealth through using the equity. But now it is being used as an IP while we are over here in the USA.
When we return, we are going to continue to rent ourselves; we are going to be one of those minority renters who invest the difference. The only difference for us is we own our PPoR outright, not starting from scratch as many renters have to do.
We have the freedom to go where we want, when we want and live anywhere. The PPoR can be used as a pos cashflow I.P whenever we want. In my view, that's not being tied down.

Your thinking is so narrow.

 

[alexlee]

In my own personal case, I've gained from the flexibility as well as (compared to buying) low cost of renting, AND I've gained from the capital gains on properties I've accumulated over the years. Since, as an investor, I'm not limited geographically, I've bought in places where the yields are higher than what I rent myself.
Alex