| by Kenneth Chase | 29 comments

Buying a Home vs Renting (Financially Speaking, Which is Better?)


“Renting is dead money”. That’s the often-repeated refrain of real
estate agents and people who have a mortgage. But is renting really that bad financially? In this video, I’ll run through a simple
scenario comparing renting vs buying, but first, let’s see what some cherry-picked
experts have to say. Phil Ruthven, founder of business information
company IBISWorld, has plenty of money, but has chosen to rent over the last 30 years. He recently told the ABC, “I simply did the arithmetic to work out
how you might approach retirement being either an owner or a renter. You retire on three times the amount of money
that a person who owned a home would if you rented or leased a home for most of your life. You could buy a home and still have heaps
left over to live very comfortably if you have rented for 20 or 30 years like I did.” Accounting firm EY undertook a study earlier
this year comparing renting vs buying and came to a similar conclusion. EY Chief Economist Jo Masters had these words
to say, “We really wanted to question what we found
was quite a wide-held belief that renting is dead money and that the only way to get
ahead is to buy a property. More often than not, over a 10-year period,
the renter comes out financially better off.” So to test their findings, let’s work through
a simplified scenario ourselves. Imagine there are two people, Mr Black and
Mr Brown. They have identical salaries and living expenses. They live in the same suburb, own the same
car, and live the same distance from work. They are both good savers and have saved up
exactly $150,000 each. Mr Black goes all in and decides to buy a
house in Brisbane for $650,000. (I’m using the details of an actual house
that is currently for sale in Brisbane for $659,000 currently rented out for $400 per
week until 2020, but let’s assume Mr Black can get the house for slightly cheaper and
can move in straight away). He uses his $150,000 as a deposit and gets
a loan for $500,000 over 30 years at 3% interest rate. Now that’s a really good rate. To keep things simple, however, I will assume
that the interest rate will not change over time, and I will not factor in things like
inflation, or salary increases. Yes, in reality, interest rates will probably
decrease in the short-term, but who knows where they’ll be in 10 or 15 years time. So let’s not speculate. Mr Brown rents the house down the street (a
near-identical house with the same number of bathrooms and bedrooms and all the rest
of it). He can rent the house for $400 per week (which
as I said before is the actual current rent). As we’re not factoring in inflation, we’ll
keep the rent the same throughout the entire period. Mr Brown chooses to invest his $150,000 and
plans to add to it regularly. Let’s say he’s a fairly conservative investor
and spreads his investment out over a number of different asset classes — cash, bonds,
and a market-tracking ETF in the share market. Let’s say he averages the same rate as the
mortgage rate, 3%. That’s a very conservative estimate, but
let’s see where it gets us. Using an online mortgage calculator for Mr
Black, for a 30-year loan at 3% interest rate and zero fees (I pretended that he actually
found a bank with zero fees), he’ll have to pay back $2,108 per month. Mr Brown’s monthly rental expenses are about
$1,734. However, houses need maintenance, and this
house in Brisbane isn’t exactly new (It was built in 1980). So let’s use the commonly quoted 1% Rule
(that is, 1% of the purchase price of your home should be set aside each year for ongoing
maintenance). This means Mr Black would have to set aside
about $6,000 a year, or about $500 a month for maintenance. Let’s be kind to him and only use half of
that, so $250 per month. Mr Brown has no maintenance costs as he is
renting. Let’s assume that Mr Brown and Mr Black
use an identical amount of electricity, water, gas, mobile phone and internet, so let’s
not factor those in. They also have an identical amount of contents
insurance, so let’s also not factor that in. However, Mr Black has to pay home insurance. I got a real quote online for the building
only using the actual details of the house in question. It works out to be about $88 per month, but
let’s round that down to $80 per month as I may have gotten a few of the details wrong. Mr Black also has to pay council rates. Using actual rates data from each suburb,
Mr Black will have to pay about $160 per month in rates. So the total housing expenses for Mr Black
will be about $2,598. Remembering that this is a very conservative
estimate that favours Mr Black. He’s getting a really good deal here. Mr Brown has total housing expenses of $1,734. Let’s assume that Mr Brown is a very good
saver. Every extra cent that Mr Black spends on his
house, Mr Brown will add to his investments. So that means Mr Brown will be adding $864
per month to his investments. Using an online compound interest calculator,
over 30 years at 3%, Mr Brown will end up with about $872,000 in savings. Mr Black over 30 years will own his house
valued at $650,000. Remembering, I haven’t taken into account
inflation. Yes, house prices could rise above the rate
of inflation, but that’s not a guarantee (as we all saw post 2008 in the United States
— be careful when you hear somebody say that house prices will always go up). So with all things being equal using very
conservative estimates favouring Mr Black, Mr Brown comes out ahead by more than $222,000. Remembering, I halved the amount of maintenance
Mr Black had to pay. I rounded down all the other expenses, and
I grossly undervalued Mr Brown’s investment potential. In reality, investment returns of 5 or 7%
would not be unlikely, especially if he put more of his money into the share market. Just for arguments sake, I’ll bump up his
average returns to 5% instead of 3%. With regular savings, he would end up with
over $1.3 million (not taking into account inflation, and increases in salary etc.). So financially speaking, renting is not dead
money, well no more than mortgage interest paid back to the bank. Of course, this all depends on where you choose
to live. I’m sure you could find an inner-city apartment
with much more earning potential than say a suburban house. To be fair, my little example doesn’t necessarily
mean that buying a house is bad. Having a mortgage can have a number of benefits. First of all, as many people often say, a
mortgage forces you to save. Mr Brown was a good saver, but many renters
in his situation would spend that extra money on non-essential goods and services like eating
out, or getting massages. So yes, as a renter, you need to be very strict
on your spending habits in order to save like Mr Brown did. Secondly, owning a home has many intangible
benefits like the security of not being kicked out by a landlord, and the flexibility to
renovate your home. But renting also offers some benefits, like
flexibility in where you live. In the end, it’s ultimately up to you what
you do regarding buying a house or renting. If you want to buy, buy! But don’t go around telling your renting
friends that renting is dead money, because you’re just repeating a myth spread by the
property industry. If you want the stability of a home, get a
mortgage! But if you want to have more flexibility,
and you’re good at saving, maybe renting is the way to go. I’ll finish with some sage advice from American
businessman Robert Kiyosaki (I have a link to his books in the description below), “My rich dad, my best friend’s dad, taught
me the simple definition of an asset and a liability. An asset puts money in your pocket. A liability takes money out. Many so-called experts will point to things
like paying down principal, tax breaks from mortgage interest, and appreciation as reasons
why the house is an asset, but paying down principal is simply saving and savers are
losers. The tax breaks for your mortgage do not offset
the costs that go out of your pocket each month, and if you’re banking on appreciation,
you’re basically gambling, as homeowners in the Great Recession painfully discovered. This is not to say you shouldn’t buy a house. I’m simply trying to help you see that it
is not an asset. Rather it is your home, and should be enjoyed
for that, not as your ticket to a secure retirement.” Anyway, that’s it for me. Thanks for watching.

29 Comments

mr android

Oct 10, 2019, 3:37 am Reply

Great video, mate!

Northern Beaches Guy

Oct 10, 2019, 3:56 am Reply

Stamp duty would be another 15K for the buyer!

nixymagoo

Oct 10, 2019, 3:57 am Reply

Renting is common place every where but the west. Take into account in your 30year loan. The interest per annum, people generally calculate this as interest on the whole loan but its not, its the % every month per year on what you owe. Plus renovations every 7 to 10 years, white goods for renters at a cost to you, servicing white goods for renters at a cost to you, rates, water, depreciation damage or structural fail to you ect. You end up breaking even. Even when if you pay it off you still need 15 grand every year to live in it if you retire.

Josiah Bomford

Oct 10, 2019, 4:15 am Reply

Nice!

Sam

Oct 10, 2019, 4:28 am Reply

Love your videos

Empress Irish

Oct 10, 2019, 4:31 am Reply

I once heard from a financial analyst from the country where I live, that buying a house is good when you're paying full outright and then convert it to an asset generating property.

Shaun Craike – Smart Investing

Oct 10, 2019, 4:49 am Reply

The problem with this video and the point you are making is 90% of the population are terrible at saving. Least with a home loan paying principal and interest you effecting being forced to save by paying down the loan.

Credit to you for covering these points at the end.

Also a $650,000 house renting for $400/week is an extreme example. In most parts of Australia a $400/week rental will be worth around $400,000.

songforguy1

Oct 10, 2019, 4:59 am Reply

I certainly would not be buying going into a global recession. All the same this guy has a 5% rule that's worth a look. https://youtu.be/Uwl3-jBNEd4

Brendan Pietsch

Oct 10, 2019, 5:10 am Reply

So you start renting at 20. Pay rent for your whole like at $350 for 60 years. Average age 80

You buy a house for 500k and get 25 mortgage. Pay it off after 25 years. House in 60 years time is now worth 1 million.

Still happy renting? Good luck with that over life.

wahh Taoo

Oct 10, 2019, 5:50 am Reply

U missed stamp duty buddy

Dustin Goldsworthy

Oct 10, 2019, 6:02 am Reply

Issues with this.
Rent goes up over time.
Houses will go up over time if they didnt they would get cheaper meaning investers would buy more for rental.
Stock markets sometimes stay flat for 10 years look at japan etc. Etfs invest in property go figure.

And finally the rich rent because renting massive houses is cheaper than buying them. For average people renting is dead money just like rates, taxes and interest. See most wealthy people…

chris luscombe

Oct 10, 2019, 6:18 am Reply

tax on investment returns?

Vegan Games

Oct 10, 2019, 6:55 am Reply

Renting also has the benefit in that you can move much easier. Which allows you to switch jobs easier. Which then allows you to advance in your career better/get a better wage. If you work in the city, renting could gets rid of the commute compared to suburbia. It all depends on the individuals circumstances at the end of the day.

David Szabo

Oct 10, 2019, 6:57 am Reply

I'm paying off a mortgage, including rates & insurance I'm still $180 p.w. better off than if I had to rent in my estate in North Brisbane.

Thamus Jones

Oct 10, 2019, 6:58 am Reply

And if Mr Black's house price regresses to the mean Mr Brown will be even better off, there is a fair chance this will happen given we have the biggest mortgage debt of any country in the world and no manufacturing sector to speak of.

Jegan Murukesh

Oct 10, 2019, 7:08 am Reply

You are amazing !! I proudly share your videos to my friends who argue renting is shit .

Andy Geee

Oct 10, 2019, 7:11 am Reply

Of course the third option is an unconventional home, whether that be off-grid RV/caravan or liveaboard boat, depending on where you live.

Andy Geee

Oct 10, 2019, 7:16 am Reply

If the home owner is single then they can also rent out the spare rooms,.. .then again, the singleton can also rent out a single room in a shared house rather rather than the whole house.

Ricky Smith

Oct 10, 2019, 7:18 am Reply

I rather buy a $300,000 house pay of it in cash and semi-retire. Save 20 years of my life being in the rate race.

cryptoslice

Oct 10, 2019, 10:26 am Reply

strongly agree with this video. only advantage houses have is better loans then loans for shares meaning you can get returns on money you dont have, of cause you can lose money on money you dont have too. its a shame loans for shares have high interest rates and are margin loans.

Adam Wood

Oct 10, 2019, 10:43 am Reply

Final quote, why is paying down a principal a savings loser?

Thomas

Oct 10, 2019, 11:26 am Reply

Oh, you didn't know? Property doubles every 10 years. Sure diddily does. They need to teach this to children in prep, maybe even kindergarten, so it's drilled into them by the time they turn 18.

Snow Leopard

Oct 10, 2019, 4:14 pm Reply

What about all the moving costs every few years and bonds being stolen, I mean withheld by rental managers?

Locke Perkins

Oct 10, 2019, 8:59 pm Reply

A good rental price usually pays the fair market value of a house in 15 years. For a $650K house that comes to about $3,600 per month or $900 per week. DRA makes a good point about questioning conventional wisdom and I'm sure there are lots of situations in which renting would be preferable to owning. But I think the case is likely to be less clear cut for most people as they will have trouble finding a house that rents at less than half the normal rate for a 30 years in a row.

Jeff MT09

Oct 10, 2019, 2:29 am Reply

With Australia’s bail in laws, I’d be extremely worried having my money stolen by the banks!

Yiling Cao

Oct 10, 2019, 4:21 am Reply

$400 pw for 30 years? no increase?

NUFCMVFC

Oct 10, 2019, 5:20 am Reply

Rrenting better with house prices in a Bubble, and with having to bear the cost of construction defects…

Chris H

Oct 10, 2019, 12:11 pm Reply

If there is capital growth in the future, buying is better than renting!

If there is no hope of future property capital Growth, then renting is better option!

Full stop.

goo ster

Oct 10, 2019, 2:55 pm Reply

? Renting is completely dead money. I've never met a renter who chose to so they can invest the difference ? They rent because they cannot afford to buy and given the choice they'd buy in a second. Simple as that.
Also completely neglected to mention the innate insecurity and additional costs associated with living in someone else's home. Let's see if Mr. Brown will be in the same house in 30 years after the owner turfs him out for complaining about a broken hot water system ??‍♂️

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