Rent Vs Buy
Published 4:16 am 2 Dec 2020
Knowing when to rent and when to buy property in Australia is a decision that requires careful research and analysis. It’s important to understand the pros, cons and costs of both options, so you make the best decision for you. DG Institute Founder and CEO Dominique Grubisa explains the key things you need to know.
Renting vs Buying
- Homeowner vs renters statistics 2019
- Pros and cons of buying an investment property
- How to buy distressed properties
- Pros and cons of renting
- Costs of renting vs buying
Homeowner versus rental statistics across Australia
According to the most recent figures from the Australian Bureau of Statistics, 66% of Australians either own or are paying off their home. The breakdown in different Australian States and Territories is provided in the table below.
|New South Wales||64%||34%|
|Australian Capital Territory||64%||34%|
Significantly, one in five Australian homeowners also own or are paying off one or more investment properties that they rent out to tenants.
The pros and cons of homeownership vs renting
Homeownership and renting both have their own pros and cons. Let’s look at the property first.
The pros of buying property
- The potential for capital growth to increase your wealth Australian property prices have a long-term record of growth. History shows homes in good locations increase in value significantly over the long term. However, it’s important to understand that there may be shorter-term periods where prices stagnate or even decline in some markets.
- The potential for capital growth to increase your wealth: This gives you more disposable income to either spend on the things you want and to create more wealth. If you choose to rent instead, you will always have that ongoing cost.
- Owning your own home allows you to live rent-free: This gives you more disposable income to either spend on the things you want and to create more wealth. If you choose to rent instead, you will always have that ongoing cost.
- You can make changes to your own home: You can do what you want with your home. On the other hand, if you rent, instead, you’ll need to ask your landlord if you wish to make any changes.
- Buying an investment property allows you to generate rental income: You can use the rental income to pay off your loan. An investment can also provide you with tax benefits because you can deduct investment property expenses from your taxable income.
- Stability: When you buy your own home, you can’t be evicted at the end (or before the end) of your short-term lease like you can when you’re renting. Instead, you choose if or when you move.
The cons of buying property
- More money upfront You need a significant deposit to get a home loan with the best possible terms and conditions. Ideally, you need to have at least 20%. If not, you’ll likely have a higher interest rate and have to pay the cost of lenders’ mortgage insurance.
- Being charged interest on the amount you borrow It’s important to understand that a home loan is usually a long-term financial commitment. Standard home loan terms are 25 or 30 years. You’ll pay interest on your loan for that entire time, though the amount you’ll pay will be largest in the early years when your loan is at its highest.
- Ongoing costs You’ll have to pay ongoing expenses like repairs and maintenance on your home, as well as council rates. If you buy a unit/apartment or townhouse, you’ll also have to pay ongoing body corporate/strata fees if you buy a unit/apartment or townhouse. You usually won’t have any of these costs if you rent instead.
How to buy distressed, under market value property
One way to lower your upfront and ongoing property ownership costs is to buy what are called ‘distressed properties’. These are properties that need to be sold quickly. You can often get them for under market value for a variety of reasons, including:
- Forced mortgagee sales due to homeowners not making their loan repayments
- Marital breakdowns
- Deceased estates
Often the reason for the ‘distressed’ sale may not be advertised by the seller, so it’s important to try and identify these properties yourself if you can.
The pros and cons of renting property
Now let’s take a look at the benefits and drawbacks of renting rather than buying.
The pros of renting
- Lower upfront costs: All you’ll usually need to pay is a rental bond, rather than having to come up with a deposit as you would for a home loan to buy a property. You will also have additional fees if you buy a property like stamp duty and solicitor’s costs for conveyancing.
- Rent in some areas being cheaper than home loan repayments: This can be the case if you need to borrow a lot to buy. You can use a mortgage repayment calculator to work out your loan repayments on different amounts.
- Flexibility: Most rental leases are short-term (i.e. six or twelve months). If flexibility to move is important to you, renting can be a good short-term option. It may not make sense to buy a house short term.
- No ongoing costs: You don’t have any ongoing costs like repairs and maintenance or council rates if you choose to rent. You also won’t have any ongoing body corporate/strata fees if you rent a unit/apartment or townhouse instead of buying it. Instead, your landlord usually pays all these costs.
The cons of renting
- Not increasing your wealth: There’s an old saying that ‘rent money is dead money’. If you’re paying rent instead of paying off your own home, you aren’t building your wealth. Instead, you are building your landlord’s wealth.
- Lack of stability: You can be forced to move regularly with short-term rental leases. You don’t have to move unless you want to if you buy a home instead.
- Not being able to freely make any changes to your home: When you rent, you need your landlord’s approval to make changes. They can say no to your request.
- Being subject to regular home inspections: Your landlord or their property manager will conduct regular inspections of your rental property. They will want to make sure you’re keeping it clean and that you haven’t caused any damage.
Can you rent to buy houses?
One trend that is becoming increasingly popular is rentvesting. This is where you buy an investment property and rent it out while also renting your own residential home. Rent vesting can give you the best of both worlds:
- you will build up equity in your investment property as you make your loan repayments, and as your property increases in value over time.
- you will also generate rental income from your tenants, which you can use to help you make your loan repayments.
The cost of renting vs buying
Whether it will cost you more to rent or buy depends on:
- Where you want to live
- The type of property you want to live in
For example, it may be cheaper to rent or buy a unit, apartment or townhouse than a free-standing house in the same area.
- Market rent prices in that area versus property prices (and the repayments on how much you’d need to borrow to buy).
You may be able to find cheap rental properties, but they may not be where you’d like to live or the type of property you’d like to live in. Rent costs will also usually increase over time with inflation and will never end like home loan repayments will once you have paid off your mortgage.
However, as mentioned earlier, if you rent you won’t usually have the following costs like you would if you buy your property instead:
- Council rates
- Repairs and maintenance
- Body corporate/strata fees
How to do the sums to work out whether to rent or buy
It’s essential to do the financial calculations before you make a decision on renting vs owning a home. If you want to buy, you’ll need to make sure you can afford your home loan repayments. Home loan repayments in Australia are currently at record lows, which makes repayments more affordable.
Buying a house or renting, which is better?
There is no definitive answer to that question. Ultimately, the decision whether you should own or rent your home is often a financial one, and it depends on your specific circumstances.
However, it’s important to understand that if you rent long term instead of buying, you won’t be building up any property wealth. Property has long been considered a great way to generate wealth and to be “the great Australian dream”.
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