Should you Buy or Rent?
It’s the age old question. Should you buy or rent? Now, I’m an Aussie and our housing situation is very different from say the US or Europe. But many of these realities are true the world over. So, should you buy or rent? Let me lay down my cards on the table and say I think you should buy, if you can. That’s not always possible. But here’s why I think you should aim to buy and not rent if you are able.
You need a home before you retire.
You don’t want to be retiring without a roof over your head. Trying to pay rent without a job is not fun, and doesn’t leave much for a decent retirement. Yes, some do manage it, but it’s a huge struggle. So at some point you are going to want to buy and pay off a home in full before you retire. That should be your aim. Now that’s a whole lot easier in rural areas to the big cities. But where ever you want to end up, you want to own the roof you live under. So should you buy or rent? I’d say buy, at some point before retirement.
House prices may fluctuate, but over the long term they appreciate in value, sometimes by quite a lot. So a house is a great investment and a long term wealth generator. And should be consider as part of any mix of investments. You won’t lose out by owning your own home, or investing in one either. It’s a good investment over a long term horizon. Another reason to buy and not rent.
Houses often appreciate far quicker than you can save.
This is why many struggle to get in the front door. Prices go up faster than you can save. Sometimes even faster than you can save a deposit. Imagine you have 50k. You invest that in shares and get a healthy 10% return. You’ve just made 5k per year. You may have more that you’ve saved too. But that home worth say 500k, appreciated just 7%, that’s 35k appreciation. Do you see a problem? You save 5k, and the house goes up 35k. Even a 10% deposit has gone up 3.5k. What if the price went up 10% or more. Houses are a leveraged investment, backed by cheap interest. Your non leveraged investments won’t keep up. So best to join them if possible. So should you buy or rent? Invest for yourself or grow someone else’s?
Houses are the cheapest leveraged investment.
Home loans are the cheapest loans you can get. Yet homes appreciate historically as well as any other investment. So this is the cheapest way to borrow to invest. That’s a wise financial investment. More than that your home isn’t subject to capital gains tax. Wow, an untaxed, cheap leveraged investment. Not to mention one of the safest too. A no brainer really. And it’s a long term investment. Slow and steady. You won’t find too many people who regretted buying a home in the last 100 years. So should you buy or rent? I think you should aim to get yourself a home. And aim to have it fully paid off before you retire. You may even want to have investment homes at some stage too. So what next?
A few stories.
Two friends of mine. One bought a really small townhouse, at the same time as my other friend choose to rent a larger family home, closer to the city. 15 years on and friend 1 owns a really big, nice home that would be worth 7 figures now. And it’s mostly paid off. Friend 2, still renting, a more modest home, further from the city.
Two more friends. One bought a small unit with their family of 4 crammed in. Friend 2 rented. 10 years on. Friend 1 upgraded to a really nice family home, in a great neighborhood. Still paying it off but it has appreciated massively. Friend 2 is just now looking to buy a unit, but struggling to get in the door, even for that!
And here’s my story. We bought a home as soon as we could. A small 4 bed home on the City fringe. We lived further out than our friends. But we paid it off quickly. We then upgraded our home to the one we always wanted and wished for. We also kept the other one as an investment. Both homes have appreciated significantly. Now we could have bought in better locations and seen better appreciation. But we are happy. We have a great home. It’s basically fully paid off (we keep a small mortgage as this is cheap money we could redraw if there’s a great opportunity or need). And we have an investment as we build towards our retirement goal.
So should you buy or rent? Buy!
Save a deposit.
You have to have a deposit. 5% at absolute minimum, preferably 10-20% if possible. But your are better having a home than not. So save as much as you can to get that deposit. Scrounge, save, give up some things, earn more, get a side income. Whatever you can to get that first deposit. This is by far the hardest step. Overcome this hurdle and you are on your way.
Buy a home you can afford.
Buy a home you can easily afford, not the one you wish you want! Don’t borrow the max a bank will give you. That’s going to lead to stress and pressure and slavery. Instead borrow what you can afford to pay off faster than the minimum payment. You want to be able to get ahead of your schedule as quickly as possible. This means you will pay less interest overall and also gives you some slack if you find yourself without a job or hitting some unforeseen financial pressures. You’ll also be ok should interests rates rise. And you can start investing in income producing assets.
Less than desirable.
This will likely mean that your first home is going to be less than ideal. It may mean being on the fringe of the city or in a small apartment or a suburb that isn’t the one you intend to live in forever. That’s ok. Get in the door, pay it off as quickly as possible and then upgrade modestly down the track. The buy low, pay off quick and upgrade if needed option is the way to go. The amount of interest you save will be amazing. And sooner than later you’ll have the home you want with a smaller loan than your friend who went straight for the bigger home straight up.
Buy and rent?
Some choose to buy a home and rent it while you rent as well. This has great tax benefits, negative gearing. And in Australia, if you live in it first for 12 months, you can rent it for 6 years and still not cop capital gains (talk to your accountant for more details on this). What an amazing deal. So this is also a great option. Particularly if you plan to work temporarily somewhere for a few years. Or if you live in a less than affordable city, but could move later on. It also means that the first house that is less than ideal is being lived in by someone else. A great way to start off. This will probably be a matter of personal circumstance if you choose to go this way.
You could buy in a regional area and look to upgrade to the city later on, though beware the capital appreciation difference between a city and regional area. You may find it’s a big bridge to gap. You could rent out additional rooms in your first home to help pay it off quickly. You could buy a home with a friend to knock it off quickly and then both upgrade. You can get creative with this to get started. There are lots of ways to get into home ownership if you take some time to think about it.
Should you rent at all?
We all begin with renting. Share renting is a great way to be able to save up big for that first deposit. You may be able to continue to share rent out your first home to help pay it off. But overall I’d suggest renting only for as long as you have to. Buying your first home early is a great way to generate wealth over the long term. Like all thing with investing, the earlier you get started the better the returns.
I could go on and on. But you get the picture. Buy a home, buy it as early as possible, buy low and upgrade down the track. This should be your first priority. But not your last. Once you have a home with a modest mortgage, then you want to start investing into assets that generate income that buy more assets that generate income, etc. So should you buy or rent? What do you think?