Rent or Buy – how to determine what’s right for you

Financial Autonomy - Blog
Rent or Buy – how to determine what’s right for you

The great Australian dream of owning a home once drove a fairly predictable housing pattern –  Aussies would rent for a little while, save for a deposit then dive into home ownership at the first opportunity.
Housing status spoke volumes. Homeowners were successful while renters were either young or couldn’t get it together financially.
How times have changed. Rising house prices and a need for lifestyle flexibility now have many questioning if they want a huge mortgage or if they’re simply better off as tenants.

Let’s take a look at how you might decide if renting or buying is the right option for you.
We’ve created a Rent vs Buy Scorecard that you can download to help you make the best decision. 

The case for renting

Location is the number one reason I hear from people who have chosen to rent long term.
They want to live in the inner city, close to work and the general buzz of a high-density location.

Skyrocketing prices in city areas have bumped prices way out of their league though and the trade-off for purchasing in a more affordable area is a long work commute.

When we look at maximising happiness and general convenience, renting for location makes total sense. Reduced commute time frees you up to pursue other interests, socialise, or just enjoy a little more downtime. Being closer to your community creates a sense of connectedness too – which is a well-established source of happiness.

No maintenance costs
The second case for renting I hear most often comes from those who have owned in the past – no maintenance! These considerable costs are constantly ignored in house price data.
Houses wear out. Dishwashers die, fences rot, plumbing breaks, carpets get threadbare and don’t forget the garden. Setting aside 1% of the property value per year for maintenance costs is a common rule of thumb.
It doesn’t end there though – you have recurring costs of council rates, insurance and if you’re an apartment owner body corporate fees too.
Renting means these ongoing expenses aren’t your problem, you just pay your monthly rent and the landlord handles the rest.
Flexibility is a big reason people choose to rent rather than buy. Your ideal home as a single in your 20’s is likely quite different from a dream home in your 30’s or 40’s with a growing family. Then later in life, when the kids have left the nest, you may decide to downsize.
Buying and selling is expensive. There’s stamp duty, agent fees (usually around 2% to 2.5% of the sale price) and legal costs. In Melbourne, for example, the median house price is around $800,000 – that’s a little over $43,000 payable in stamp duty alone.
Renting allows you to adapt your living arrangements with far less financial friction.

The case for ownership

Wealth building
Most real estate wealth is created thanks to rising properties prices – appreciation – over time. At least in the recent past, buying rather than renting has proven to be a wise financial decision.
But will this price growth rationale continue to be valid?
With official interest rates now at 1.25% and forecast to drop lower, it’s difficult to see how falling interest rates can continue to provide much scope for inflating house prices.
Given the ongoing costs of homeownership listed above, you need growth of at least a couple of percent just to break even.
Then there’s the wealth generating power of gearing – which is borrowing to invest – and nothing is more gearing friendly than residential property.
For a relatively small deposit, banks will lend you most of the property purchase price. These borrowings magnify any property price growth and are the primary reason successful property investors have enjoyed success. Playing the long game, mortgage repayments will likely end up less than rent, given rent tends to creep up over time, whereas your mortgage slowly goes down  – assuming no spike in interest rates.

(For a real life example of the power of gearing, check out My 68%return. The power of gearing – how smart borrowing can accelerate your journey to financial autonomy.)

Financial discipline
Building financial discipline is a surprisingly powerful benefit of home ownership. Many clients I’ve worked with found repaying a mortgage builds into their lives the habit of continually investing in their financial future. Of course, renters still need to pay their rent every month but the money builds their landlord’s future, not their own.
A home to call your own
Home ownership isn’t all about the financial considerations. Your home is your sanctuary to escape the world and important for your overall well-being. It’s the place you raise your family, make memories and grow old.
Sure, you can have a ‘homely’ home as a renter, but as an owner, you have autonomy. From putting hooks in the walls for family photos to total renovations, being an owner allows you to create a sanctuary you can’t be moved on from if the landlord decides to sell.
Rent + own – best of both worlds?
One popular strategy is to rent where you want to live and buy an investment property where you can afford. Those who advocate the ‘renter + owner’ strategy say this approach takes optimal advantage of the tax system.
The reality is there are tax breaks on both owner-occupied homes and investment properties – they’re just different. I think the renter plus landlord strategy can be worthwhile, but the decision shouldn’t be  made based solely on tax considerations.
Rent or buy, which is the right way to go? I think it’s largely a life stage decision. I’m in my late 40’s and with a family of 4, I’m glad to be a homeowner but I don’t regret at all my time as a renter in my 20’s.
Always remember, there is never a single “right” way. Ignore the trends and choose the path that’s right for you! I’ve created the Rent vs Buy Scorecard to help you make that decision – you can grab it here.

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