The 'Rent as opposed to buy debate'

[BayView]

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

Totally correct Alex,
we get $350 p/week for our PPoR in Dromana, and we will be renting a joint for $200 when we get back. That's about a $100 excess coming our way, before we even talk about all that lovely depreciation and tax deductions.

My mind boggles every day at the opprtunity out there.

 

[quoll]

I will be advising my kids to rent and invest in shares or managed funds first. Once they save some cash and build up a nice deposit they can buy an IP if they want.

The way kids are now they might just be living at home until mid twenties so I hope they save and invest while enjoying cheap lodging.

cheers
quoll

 

[alexlee]

Again, in my personal case, in the last 7 years that I've been renting, I've had the flexibility to work overseas. It so happened to have been at a time when the AUD was relatively weak (I averaged about $2.70 to a pound the first time, and about 75 yen to a dollar). I've plowed the savings back into Australian property, and have had good gains.

Renting and investing is a great opportunity, but only if you have the discipline to use it correctly. I was saving 40-50% of my after tax income when I was essentially making triple what I made in Sydney.
Alex

 

[VYBerlinaV8]

YM - the issue I think is that if you look at $ in vs $ out on a week by week basis, it's probably cheaper to rent, but this doesn't tell the whole story. IP owners get a range of tax breaks, which mean the actual dollars in and out changes substantially. Consider also the issue of asset value growth - owning an IP means you can borrow against the equity to generate still more $$.

As others have said, it's worth trying it in the real world to understand how the whole picture fits together. Consider also that $ in and out may not balance on the day you buy and first rent your IP, but that over time rental income increases, whereas loan payments decrease (in real terms).

What property investors are doing when they accept short term (taxable) losses, is buying a future profitable investment position.

 

[quoll]

In the current climate ....

Back in good ol' 1992 when rent was $120wk on a $60k house. Buying houses made sense.

We were renting back then and decided to buy PPOR because our rent WAS paying the mortgage payments.

Currently that doesn't happen so we wouldn't have used that reasoning to justify the purchase of a PPOR today. The PPOR has an emotional element attached to it. Some first time IP buyers have emotional attachments to their IP's.

The spreadsheets are never going to model all of the possible scenarios, there are just to many different styles of investing and people have so many options on how they borrow and how much if any they borrow to leverage into investments.

I keep thinking about Microsoft shares, they still haven't paid a dividend! People and funds are only buying them for capital gain.

Just trying to throw a few more arguments and examples into the pot.

cheers
quoll

 

[yieldmatters]

Your thinking is so narrow.

You're thinking is too complicated!!
All I am saying is in a strictly financial terms a renters loss / win is a landlords win / loss. Its factual - I'm not debating anything here.

 

[Twitch]

Landlord wins, renter wins, government loses (NG impact).

 

[yieldmatters]

Landlord wins, renter wins, government loses (NG impact).

Only if you lie about your expenses. The government can't wipe out any more than 100% of your loss. If they can - let me know how to do it! Maybe that's a new thread??!!

Over lets say a 20 year term if the renter wins (including capital gains) then the landlord has lost - albeit a subsidised / shared loss due to tax impacts - but still a loss.

(I keep having to highlight the word IF to stay out of trouble)

 

[GoAnna!]

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

Is that true? Surely most people would finance their first investment property with equity drawn down for their home? I bought PPOR first, improved PPOR, bought new PPOR but kept first one, then did improvements to second PPOR then began borrowing againts PPOR for ips.

Obviously finally you are better off staying at home and buying an investment property (or 3), then renting and investing in shares of property and the worst is to buy a PPOR.

But as others have said it ignores human nature (I personally like living in my own home and knowing no-one can ask me to move along), and most people need forced saving to save as much as they would like to think otherwise. So perhaps that makes buying an ip and renting preferable to buying renting and purchasing shares.

 

[adam31]

Pardon my ignorance, but I don't know anyone who has been on the same lease for 5-10 years. Lots of assumptions made, he who assumes comes last

 

[austini]

Hi Gang,

In our case we have moved a lot over the years due to work etc. If only I had read an article like this 25 years ago instead of being brainwashed by parents etc that rent is dead money then we would be hundreds of thousands of dollars richer. Transaction costs plus losses on PPOR's because we had to move a few times after only a couple of years in a new PPOR cost us dearly.

It took a long time to learn but at 47 years old now my wife and I happily rent BUT ensure we invest the money saved by renting.

The rent we pay for the current riverfront apartment wouldn't even cover half the interest repayments based on current values let alone the principal and expenses etc.

There is no one right answer for all but certainly for transient people who are on the increase renting is quite often the sensible option.

Cheers - Gordon

 

[GoAnna!]

Has anyone worked out the point at which the rent becomes more expensive than PPOR ie rent is higher than interest payments. Obviosuly it could vary enormously. Does 7 yeasr soudn around correct?

I have one property I paid less than $40k for, spent about $30K on reno and it lets for $250pw. They would now be way way better off had they purchased. But then again they may only stay a year and then move to another location....

 

[wylie]

Yield, we have never lied about our expenses as we have too much respect for the big stick the ATO can hit us with.

I just don't understand how you can possibly fathom that because we have rented out houses for 25 years and are negatively geared, but have increased our bottom line by a LOT OF CAPITAL GAIN, that we have LOST.

Maybe I am just thick, but you seem to have lots of theories that just doesn't work in the real world.

It can be win/win I suppose. We have certainly won, don't know nor really care about those who rent our places as that is their business.

Wylie

 

[yieldmatters]

Has anyone worked out the point at which the rent becomes more expensive than PPOR ie rent is higher than interest payments. Obviosuly it could vary enormously. Does 7 yeasr soudn around correct?

It's complicated because it depends how aggressively you pay down your principle. But a renter could save the equivalent amount (i.e. a PPOR principle repayments) and invest it in something equivalent to the home loan rate and theoretically be in the same (or better) position. But then there is risk / tax etc etc ... its complicated.

Regarding somebody elses comment about too many assumptions - the "rent vs buy" thing is forward looking so it is all assumptions. The slightest change in your assumptions can swing the decision either way. If you want to talk factual data we have to look at history and over the last 5 to 10 years at least the CG has made buying a big winner over renting in pure financial terms (mind you - most of that value is still locked in the house so not guaranteed)

 

[yieldmatters]

Yield, we have never lied about our expenses as we have too much respect for the big stick the ATO can hit us with.

I just don't understand how you can possibly fathom that because we have rented out houses for 25 years and are negatively geared, but have increased our bottom line by a LOT OF CAPITAL GAIN, that we have LOST.

Maybe I am just thick, but you seem to have lots of theories that just doesn't work in the real world.

It can be win/win I suppose. We have certainly won, don't know nor really care about those who rent our places as that is their business.

Wylie

I'm not saying you lost! You assume to much about me. I believe I even said you won earlier in this thread!

And it can be win / win if you include all factors outside of strictly financial ones. The people who rent your places probably suited them at the time for their lifestyle.

 

[adam31]

Yeild from what i have read i assume you don't own a house. Why do you look forward to make assumptions, it has all been done before. Are you trying to recreate the wheel?

 

[yieldmatters]

Yeild from what i have read i assume you don't own a house. Why do you look forward to make assumptions, it has all been done before. Are you trying to recreate the wheel?

I didn't start the thread.

 

[Lukey13]

In terms of putting money into rent as opposed to PPOR repayments (whether IO or PI) wouldn't it depend on how you used your PPOR equity also? For instance, pumping money into paying off a PPOR which you're just going to "sit on" seems to be a bit different to paying for a PPOR which you would then draw equity from to finance the purchase of an IP. Even if you were paying IO on the PPOR, you could still be using equity from the CG to fund IP. So essentially your PPOR is an investment in itself.

Another comment I'd like to make is that there seems to be a recurring theme of the "emotional benefits" from purchasing a PPOR. Just to draw an analogy... whoever said that emotional benefits aren't worthwhile? For instance, having children is most definitely a poor financial strategy as compared to not having children. For those who won't obtain personal gain from having children, there's no point. Just like those of us who have no personal desire to own a PPOR. Though, most people I've spoken to about owning their PPOR cite the number one benefit of that intangible feeling of safety, satisfaction and accomplishment (however you want to describe it - these are just a few words that spring to mind).

 

[steveadl]

Is that true? Surely most people would finance their first investment property with equity drawn down for their home? I bought PPOR first, improved PPOR, bought new PPOR but kept first one, then did improvements to second PPOR then began borrowing againts PPOR for ips.

In theory yes, but what Alex is saying is that in practice, a vast majority of the population don't buy an IP or invest the difference. They may occasionally upgrade their PPOR so in the end they live in a million dollar house they otherwise would not have had, but they have no other investments.

I've heard people quote from sources here a few times as well, that the small percentage of the population that does have the IP is just because they kept their old PPOR, but later sold it anyway when the money got tempting. Again, end result = very few assets, and just a big (but valuable) PPOR.

 

[GoAnna!]

It's complicated because it depends how aggressively you pay down your principle. But a renter could save the equivalent amount (i.e. a PPOR principle repayments) and invest it in something equivalent to the home loan rate and theoretically be in the same (or better) position. But then there is risk / tax etc etc ... its complicated.
QUOTE]

Not exctly what I meant. I was interested in historical data. My house for example would have loan repaymnets of around $260pw had I borrowed 100% and not paid a cent off. The rent on my place woudl be around $700 pw. At some point rent would have equalled interest repayments.

I am not talking about capital growth.