The other day as I sat with some family friends who are nearing retirement, they mentioned they wanted to sell their house to get rid of their mortgage and just rent the rest of their lives as it is just too expensive to own your own home. This got me thinking about whether it is better to rent or to own.
Renting Vs Owning
The argument being that renting is cheaper than buying so therefore it is better to rent, or that renting is dead money making your landlord rich so it is better to own your own home. Both have their pros and cons and really in the end it comes down to every body’s personal situation.
For the renters, you have the right to live in the house without any of its financial requirements such as insurance, maintenance, rates and mortgage. When interest rates rise, renters are only minimally affected and rental values are typically 5% of the house value where as interest is usually approx 8%. Therefore a $300 000 property would typically rent for $300pw whilst the interest on it alone would come to $370pw. With many home owners paying literally hundreds of thousands of dollars to the bank in interest it is easy to see the appeal in renting.
From the home owner’s side however some people are happy to pay extra in return for security in knowing they can’t be evicted, they won’t have property managers inspecting every 3 months, they can do whatever they like to the property, they can add value to the property and most importantly house prices typically double every 7 to 10 years. So what does this mean? To keep it simple, if you had a $300 000 house with a $370 pw mortgage, it would rent for $300 pw. However in 10 years time you have a $600 000 house with a $370 pw mortgage which would rent for $600pw.
So how does this help you? Obviously renting is cheaper in the short term, however in the long term if you can afford the higher payments now, you are patient enough to wait 10 -20 years and you can hold off using the equity you have gained then obviously owning is a far better choice.
There is one catch however, with house prices in desirable suburbs so high, most people can’t afford to own where they want to live. This is where Gen Y has shown us the way. Gen Y investors are renting in desirable suburbs whilst investing their money in areas that give good returns but are not necessarily where they would want to live. They get all the freedom of renting, with the wealth building benefits of home owning. A win win situation.