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This was one post I couldn’t wait to write, as I know countless people grapple with the decision on renting vs buying a property.
Owning your first home is a pivotal moment in any person’s life. This is one purchase that is accompanied with a sense of achievement. I still remember my level of excitement when purchasing my home back in my 20s; a small one-bedroom flat in a suburb of Mumbai. A few decades later, I got to relive those same emotions when we purchased our first single-family home in Australia in the early 2000s.
But as I mentioned in an earlier post, I wasn’t initially sold on home ownership when moving to Australia. If it wasn’t for the well-timed government incentives for first-home buyers, coupled with my new career as a residential homes consultant, I don’t think I would have pushed for owning a home as early as we did. That made me think about others who are currently renting, but evaluating the feasibility and attractiveness of home ownership.
Purchasing a home has obvious merits, many of which have been reviewed at length on other websites, blogs, and publications (here’s just an example). However, with any choice, there are trade-offs that, depending on your individual circumstances and priorities, may tip the scale in a certain direction. That reflection process and internal assessment is the sole determination in your home ownership decision. Put another way, there should be no room for unnecessary external stimuli, such as FOMO or what your neighbour thinks about real estate.
To help frame the renting vs buying debate, have regard to the following considerations:
What are your life priorities?
Are you planning to relocate either to another state or country at some stage? Have you just started a new relationship? Are you planning a wedding or starting a family in the near future? These are some of the questions you should ask yourself when evaluating home ownership versus renting.
Home ownership represents permanence and stability, and if that is not in alignment with your personal goals, it may not be the most versatile purchase. You can of course sell a property to see out your personal plans, however there’s typically a time investment to sell a home, and you are invariably victim to the current state of the market. The unpredictability in your life pathway may tip the renting vs buying debate in favour of renting.
Owner costs exceed rental costs
Furthermore, whatever that sales consultant or banner advertisement may suggest, the monthly home ownership cost typically exceeds rental costs. I was always left angry and frustrated by the misrepresentations made from builders that owning a home presents a lower monthly cost than renting. That is categorically false and is based on a limited view of the overall financial picture.
For example, the typical ‘sales pitch’ is to question why you would be willing to spend $400/week on renting, when you could spend $350/week on a mortgage. That $350 estimate was typically based on a few hefty assumptions that don’t work out in practice. For example, it doesn’t include additional costs such as utility rates, property taxes, council dues and insurances. That estimate also typically undervalues your mortgage cost, as it is determined based on an interest only repayment loan. If this home is to serve as your primary residence, you should instead consider what your total monthly principal and interest (P&I) repayment obligation would be, given you would try to reduce your loan balance as quickly as possible.
Most homeowners will try to dismiss this comparison by arguing that you can deduct a large share of these costs, which you can not do if you were renting (please note that this may differ from country to country). That is true and a huge tick in favour of home ownership. However, deductions are only effective in the calendar year after they are paid, after the time you complete your tax return. There are still cash outflows during the year, and will only serve to place undue strains on your monthly budget if you do not have sufficient headroom. This brings me to the second important consideration in your comparison.
Renting Vs Buying: Which One Better Aligns With Your Financial Position?
Owning a home requires a significant financial investment. The free availability of credit means you don’t need to cover the full cost of the home. Access to credit has been and remains the key driver for property market growth. However, despite access to a mortgage, you should consider whether your personal financial position supports a home purchase.
Ask yourself if you’re comfortable trapping most of your monthly income/savings in the home, in exchange for realising a fraction of it every year through potential tax deductions (once again, varies by country by country). Now the same question can be asked for the renting scenario, particularly if you pay away a high percentage of your monthly income on rent. However, the difference between the two scenarios is that while your rental outgoings may be high, they are effectively capped each month. Also, you can relocate to a cheaper rental property fairly quickly and easily, something that may prove difficult in a home ownership scenario.
If your budget doesn’t have sufficient headroom to accommodate for variable costs associated with home ownership, you will put yourself into unnecessary financial stress that will invariably impact other aspects of your life. Having an unsettled financial position places pressure on the ‘renting vs buying’ decision, particularly as a bank would be less inclined to provide a mortgage if there’s uncertainty over your ability to repay the debt.
Consider the opportunity cost of buying a home at this time. Are there any other financially driven goals that you were hoping to achieve? For instance, were you planning to start your own business or go back to school for your graduate degree? These investments in yourself will require some portion of your internally generated capital, and that may potentially be hampered by your home ownership. Further, if you were to have your cake and eat it too, the additional debt that you take on may unnecessarily trigger or influence your mortgage covenants.
Do you enjoy DIY tasks?
In speaking to my son in the past few days, he mentioned that he had a few things breaking down in his rental apartment. His sink pump stopped working. The dishwasher wasn’t properly drying the plate-ware. There was a crack in one of the bathroom pipes that needed attention. All of these problems were resolved within the same day by the maintenance company that oversees my son’s apartment complex. More importantly, he did not have to pay anything extra out of pocket to have these issues resolved.
As a homeowner, you have to get comfortable with some level of home maintenance and repair. Some of you may be naturally inclined to this type of work, and will relish the opportunity. However, if you are like me, your talents and passions are located elsewhere, yet you would still dread making the call out to a professional. As soon as I see the type of repairs needed that I can not action myself, I see dollar signs, both in terms of the initial call-out fee and the high hourly rates that most tradespeople charge for repairs.
You can certainly mitigate your cost exposure through insurances, however you can’t expect all costs to be covered. Depending on your excess/deductible, you will likely be on the hook for a portion of the repair expenses. Further, the older your home, the higher the probability there would be potential problems arising, but that doesn’t necessarily mean that new homes are exempt from maintenance issues.
My Thoughts on the Renting vs Buying Debate
Now the above may be surprising to some of you that have read my other posts, as this one is suggestive of me ‘bashing’ home ownership. This is certainly not my intention. I simply wish to highlight that it is worth the time and patience to explore what home ownership would mean to your lifestyle. Over the years of owning my homes, I willed myself to learn DIY skills, if only to curtail my external outgoings. In the early years, there were also times where unanticipated costs placed pressure on our lifestyle, but we were willing to temporarily sacrifice other life pleasures for the sake of recognising our home ownership dream.
Weighing up the pros and cons, it is no question that we made the right move in transitioning from renting to being home owners. It certainly came with its own stress and headaches, but that pales in comparison to the comfort and security that I have in my own home. However, the point is that the decision felt right for me, my family and our collective circumstances.
When doing your own assessment, if you feel the burden is too significant to take on at this stage of your life, then that should be a sufficient indicator for you to pause or defer your decision. What’s important to note is that you’re not cancelling your home ownership dream, but merely putting it off until a time where you are able to assume this undertaking.
If you’re personally making the ‘renting vs buying’ decision at the moment, I hope you were able to take something out of this post. If you have any questions, please feel free to outline them in the comments section below, or feel free to contact me directly via the Contacts box.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.